Social Sciences in China (Chinese Edition)

No.3, 2016

 

Banking Capital Supervision and Systemic Financial Risk Transfer—An Analysis Based on the DSGE Model

(Abstract)

 

Wang Qing and Tian Jiao

 

Following the global financial crisis of 2008, the prevention of systemic financial risk became the major concern for supervisory departments. Basel III responded to the challenge, but its efficacy in China remains to be seen. The DSGE model, which is based on the characteristics of the Chinese economy and finance, comprises four major sectors: residents, banks, enterprises and government. Using the calibration parameters of Chinese data estimation from 1998-2014, under the exogenous shocks of total factor productivity, housing demand, money supply, the benchmark interest rate, the default rate on consumer loans and the default rate on enterprise loans, we analyze the operational mechanism of systemic financial risk transfer when banks are capital constrained. We find that under capital constraints, owing to the pro-cyclical nature of capital supervision, there was no effective improvement in the real economy after systemic financial risk went through three stages of risk transfer. Basing on banks’ average rate of capital adequacy, increasing the regulatory capital requirements slightly and strengthening supervision of undercapitalized banks will help to control financial transfer risk.