Impact of banking capital regulation on economic fluctuation.

Based on the background of the implicit deposit insurance system in China, this paper includes risk-sensitive capital adequacy requirement and punish function of regulatory authority in bank profit function, and proposes a new theoretical model to probe into the inherent mechanism of how capital regulation affects macroeconomic fluctuation under new Basel capital accord. The theoretical analysis shows that an increase in the risk-sensitive capital adequacy requirement or punitive measures will make the optimal loan supply less sensitive to changes in the interest rate, and will move the IS curve toward lower left and make the IS curve steeper when the financial market is incomplete, which can reduce the balanced output of economy. The GMM of a dynamic panel data model is adopted to empirical study, the results show that capital regulation in China has a credit shrinking effect and a negative impact on economic growth for the period 2001 to 2008, which aggravates macroeconomic fluctuation especially in a recession. [ABSTRACT FROM AUTHOR]