Journal of Finance and Economics
ISSN (Print): 2328-7284 ISSN (Online): 2328-7276 Website: Editor-in-chief: Suman Banerjee
Open Access
Journal Browser
Journal of Finance and Economics. 2016, 4(3), 97-102
DOI: 10.12691/jfe-4-3-4
Open AccessArticle

An Empirical Study on the Capital Buffer of Rural Commercial Banks in China

Chen Zhu1 and Liping Chen1,

1Nanjing Normal University, Nanjing, Jiangsu, China

Pub. Date: July 01, 2016

Cite this paper:
Chen Zhu and Liping Chen. An Empirical Study on the Capital Buffer of Rural Commercial Banks in China. Journal of Finance and Economics. 2016; 4(3):97-102. doi: 10.12691/jfe-4-3-4


As the product of China's unique economic system and economic transformation, China's rural commercial bank is a special kind of banks which is a combination of the rural credit cooperatives and stock system reform. In recent years, due to the Chinese government's emphasis on "three rural issues", the rural commercial banks have experienced a rapid development in the asset size, the number of institutions, and so on. However, rural commercial banks are facing the market competition pressure and limited capital source, and therefore, experts and scholars have been concerned about how to supervise this kind of special banks. In this study, 44 of the panel data of rural commercial banks in 2010-2014 are collected and a dynamic model is adopted to analyze the behavior of capital supervision of 's rural commercial banks. The research results show that rural commercial banks have taken strict measures to supervise capital by maintaining a high capital adequacy ratio to avoid shocks of external exposures. However, the non-performing loan rate is much higher than the counterparts’, 3 times higher than that of city commercial banks in , which means there exist serious credit risks. Accordingly, this study suggests that rural commercial banks should have a correct understanding of credit risk and its control, keep the balance between immediate interests and long-term goals, make full use of peers and macro economic indexes to forecast risks, give the early warning information and guard against risks.So far few studies in China have adopted a dynamic model to deal with rural commercial banks, so the findings in this study are more valuable and can provide more constructive suggestions to help implement the Chinese government document issued recently to speed up the innovation of rural financial system.

Rural Commercial Bank capital buffer capital adequacy ratio non-performing loan ratio City Commercial Bank

Creative CommonsThis work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit


[1]  André, C.J., M. Pereira., R. Saito, 2015. How banks respond to Central Bank supervision: Evidence from , Journal of Financial Stability, 19: 22-30.
[2]  Ayuso, J., D. Pérez., J. Saurina, 2004. Are capital buffers pro-cyclical? Evidence from Spanish panel data, Journal of Financial Intermediation, 13:249-264.
[3]  Berger, A.N., 1995. The relationship between capital and earnings in banking, Journal of Money Credit Banking, 27 (2):432-456.
[4]  Blum, J., 2002. Subordinated debt, market discipline, and banks’ risk taking, Journal of Banking and Finance, 26:1427-1441.
[5]  Borio, C., Furfine, C., P. Lowe, 2001. Procyclicality of the Financial System and the Financial Stability: Issues and Policy Options. BIS Working Paper, No.1:1-57.
[6]  Crockett, A., 2002. Market discipline and financial stability. Journal of Banking and Finance, 2002, 26(5).
[7]  Cui J., 2015. An empirical study on China's commercial banks’ capital buffer model, Economic Problems, 3: 35-40.
[8]  Estrella, A., 2004. The cyclical behavior of optimal bank capital, Journal of Banking and Finance, 28:1469-1498.
[9]  Fonseca, A.R., F. González, 2010. How bank capital buffers vary across countries: the influence of cost of deposits, market power and bank regulation, Journal of Banking and Finance, 34 (4): 892-902.
[10]  Francis, W., M. Osborne, 2009. On the behaviour and determinants of risk-based capital ratios: revisiting the evidence from UK banking institutions, In: FSA Occasional Paper, 31. FSA, London.
[11]  Huang X., Xiong Q.Y., 2013. Bank capital buffer, credit behavior and macroeconomic fluctuation, International Finance Studies, 1: 52-65.
[12]  Huang X., Xiong Q.Y., 2014. The economic explanation of the bank capital regulation as a tool of the counter cyclical adjustment, Financial Review, 1: 54-73.
[13]  Jokipii, T., A. Milne., 2008. The cyclical behaviour of European bank capital buffers, Journal of Banking and Finance, 32: 1440-1451.
[14]  Jokipii, T., A. Milne, 2011. Bank capital buffer and risk adjustment decisions, Journal of Financial Stability, 7 (3): 165-178.
[15]  Ke K.L., Feng Z.X., Chen W.P., 2012. A study on countercyclical behaviour of bank capital buffer ----Evidence from listed banks in China, Economic Theory and Economic Management, 3: 70-79.
[16]  Lindquist, G., 2004. Banks buffer capital: How important is risk? Journal of International Money and Finance, 2004, 23(3): 493-513.
[17]  Li X.Q., Wen B.H., Yuan M., 2014. The non-linear effects of China’s monetary policy on the countercyclical of bank capital buffers: ----Empirical analysis based on the STAR model, Finance Studies, 6: 17-32.
[18]  Li W.A., Wang Q., 2012. Capital growth and financing behavior of Chinese commercial banks under the supervision and restriction, Finance Studies, 7: 15-30.
[19]  Milne, A., 2004. The inventory perspective on bank capital, In: Cass Business School Research Paper.
[20]  Milne, A., E. Whalley, 2001. Bank capital and incentives for risk-taking, In: Cass Business School Research Paper.
[21]  Nier, E., U. Baumann, 2006. Market discipline, disclosure and moral hazard in banking, Journal of Financial Intermediation, 15 (3): 332-361.
[22]  Shim, J., 2013. Bank Capi~l Bufer and Portfolio Risk: The Influence of Business Cycle and Revenue Diversification, Journal of Banking and Finance, 37(3):761-772.
[23]  Stolz, S., Wedow, M., 2005. Banks’ regulatory capital buffer and the business cycle: Evidence for German saving and cooperative banks. Deutsche Bundes bank Discussion Paper Series 2, 2005, No.07/2005: 1-42.
[24]  Tian X.Y., 2013. The cyclical characteristics of capital buffer: based on the data of China’s listed banks, Macro Economic Research, 11: 54-59.
[25]  Wong, J., K. Choi., T. Fong, 2005. Determinants of the capital level of banks in Hong Kong, Hong Kong Monet, 6:14-37.
[26]  Xu Y.C., 2011. Bank capital regulation and risk behavior under the capital restriction, Economic Review, 1: 46-54.
[27]  Yang J., Shao H.H., Liao C.J., 2015. An empirical study on the buffer action of capital under the circumstance of bank competition, Economic Science, 2: 82-93.
[28]  Yuan S.F., Wang X.F., Wang J., 2015. Research on capital buffer mechanism of China's commercial banks from the perspective of liquidity, Shanghai Finance, 6: 55-59.
[29]  Zhong Y.H., 2014. An empirical analysis on the factors affecting the core capital adequacy ratio of commercial banks, International Finance Studies, 1: 64-73.