Asymmetric Procyclicality of Chinese Banking and the Countercyclical Buffer of Basel III

Abstract EN

Since the global financial crisis of 2007-2008, the importance of the procyclicality in the banking sector has been highlighted.

One of the Basel III objectives is to promote countercyclical buffers and reduce procyclicality.

We apply time-varying copula combined with GARCH model to test the existence of asymmetric procyclicality of Chinese banking.

The results show that the procyclicality of Chinese banking is asymmetric, where the dependence between loan and economy growth is more correlated during the decline stage than the rise stage of economy.

Based on this asymmetry, we suggest that the authority can use high frequent index for signalling the start point of releasing countercyclical buffer and accelerate the releasing pace to avoid the supply of credit being constrained by regulatory capital requirements in downturns.