Transformations  in
Business & Economics

BANK HETEROGENEITY, FINANCIAL REGULATION, AND LEVERAGE PROCYCLICALITY³
Zhongwei Chen, Kunlin Zhu, Chao Yue

ABSTRACT. Bank leverage procyclicality has a bearing on macroeconomic fluctuations and prudent bank operations. To explore influence factors of bank leverage procyclicality based on the financial data of Chinese commercial banks in 2011-2018, fixed effect models were established to analyze the leverage procyclicality in Chinese commercial banks, the influence of bank heterogeneity on leverage procyclicality, and the moderate effect of financial regulation on bank leverage procyclicality. Results show that leverage procyclicality is evident among Chinese commercial banks and is obvious under the shrinking condition of balance sheets. The leverage procyclical effect of state-owned banks is stronger than that of other banks. Financial regulation plays a significant moderating role in bank leverage procyclicality. The regulation of leverage ratio reduces the procyclical effect of banks with high leverage ratios. Lessening bank liquidity or elevating loan provision rate enhances the leverage procyclical effect of banks. Therefore, different regulatory measures should be taken according to the development phases of an economic cycle. Differentiated leverage regulatory standards should be set for banks of different types. The supervision of bank liquidity should be enhanced, and a forward-looking loan provision system should be formulated to promote the steady and healthy development of commercial banks. Conclusions can provide a reference for financial regulators to implement different regulatory policies for commercial banks and perfect financial regulatory standards.

KEYWORDS:  bank heterogeneity, financial regulation, leverage, procyclicality.

JEL classification:  E60, G17, G18.

³ Acknowledgement:  This study was supported by Young Core Teachers Training Program of Henan Higher Education Institutions of China in 2018 (No. 2018GGJS112) and The Annual Planning Project of Social Science of Henan Province in China (No.2019BJJ062).