A Study Of The Formation Mechanism On Commercial Bank Liquidity Risk

Just past the U.S. subprime mortgage crisis led to banks and other financial institutions bankrupt, bring to the devastating impact of the world. The liquidity risk of banks led by the financial crisis in history has occurred many times. Because of its harmful,bigger and more widespread concern was aroused. It is pointed by Diamond and Dybvig (1983) that: the nature of banks is to convert assets of low liquidity into debts of high liquidity and thus create liquidity for the whole society. However,at the same time, banks have become the key entities exposed to the Liquidity of the entire society, causing liquidity risk as the inherent problem of the banking system. On the other hand,liquidity risk is the ultimate form of risks of banks. Other risks of the banks (such as credit, market and operational risks) can ultimately burst out in the form of liquidity risk. Therefore, the study of the formation mechanism for commercial banks liquidity risk have important both theoretical and practical significance.This study focus on the following issues: what is the formation mechanism of commercial bank liquidity risk? The main essence of liquidity risk's formation is liquidity shortages, but for China's current macro-economic background—excess liquidity, Liquidity risk will occur? If this happens, what is the evolution of mechanism from the excess liquidity to the liquidity shortage? In times of crisis, how to make the central bank's liquidity assistance to avoid moral hazard and adverse selection problems as much as possible? How the banks themselves to strengthen the scientific management of liquidity? They are the main issues to be examined this article.The author studies the liquidity risk's formation mechanism and liquidity risk management, which involves the central bank liquidity assistance and commercial banks internal risk management. For the former,this paper starts from three types of liquidity and corresponding risk: Monetary liquidity, funding liquidity and market liquidity and their respective counterpart risk. Constructing the liquidity risk framework by these three risk,on the basis of this framework, the author study the formation mechanism liquidity risk. For the bank's liquidity risk management, the research started in two objects that are the central bank and commercial banks. In this paper, the main research contents include:①Building bank's overall liquidity risk framework combined with correlative literature. The overall framework includes three types liquidity risk of bank. According to the root causes of liquidity risk that is information asymmetry and incomplete markets, analyzing the mutual linkages and influence among three types of liquidity risk, and providing research ideas and foundation for further research.②In shortage of monetary liquidity , analyzing their respective formation mechanism of funding liquidity and market liquidity risk, and constructing models of two types of risk. Finally, for the interaction between funding liquidity and market liquidity, using DCC-MGARCH method to verify the dynamic relationships between them combined with the actual data in China. The results showed that there is dynamic obvious correlation between them.③I f the banks have excess monetary liquidity, it can easily lead to bank liquidity crisis. The excess liquidity causes asset bubbles, and finally the external shock causes the asset bubble burst, which leads to commercial banks liquidity crisis events. This paper traces the source of the reason for excess liquidity, and brings forward the formation mechanism of asset bubble based on the principal-agent theory. Bursting of the bubble caused by an external shock devaluates bank assets, which produce a large number of credit defaults, resulting in bank liquidity risk. This part expands the DD model, and makes empirical test to the relevant content of the theory combined with China's actual data. Finally the author puts forward appropriate monetary policy recommendations to avoid over-inflated asset prices.④t he study on the management of liquidity risk includes two aspects: One is the research on the central bank's liquidity assistance to commercial banks when liquidity crisis happens; another is to study the bank's internal daily liquidity and its risk Management. The author constructs a commercial bank liquidity risk management framework, and focuses on some guidelines for liquidity risk management. All of them are ready to provide the reference guide for liquidity risk management of the Chinese banking.The main innovations are the following:①The author uses the framework as the research base and research perspective for the formation mechanism of commercial banks liquidity risk. Assuming monetary liquidity shortage in the banking system, she builds the models to abstract their respective formation mechanism of funding liquidity risk and market liquidity risk. In comparison,previous literatures to analysis of the mechanism of commercial bank liquidity risk are not started from a single viewpoint of the bank funding liquidity or market liquidity. ②F rom point of view of principal-agent problem, the study mainly emphasize on how the loan pricing is affected by principal-agent problem, and how the lower loan pricing to incentive managers to over-lending, which is how to trigger manager's moral hazard. When the main macro-economic background and the micro-economic motivations are effectively combined, the author find bank managers'moral hazard is induced by the bank's high liquidity. Along this idea, this paper advances the mechanism of the formation of asset price bubbles and provides a reasonable theoretical support for the formation of monetary liquidity risk.③The author builds the game model between central bank and commercial bank, using the model to analysis of bank managers'moral hazard and adverse selection problems. The author builds the revenue function of commercial banks under the central bank intervention or non-intervention assistance of strategy, and gets the commercial banks'optimal decision select strategy through revenue function under maintain their liquidity. Finally, on basis of the above analysis, the author makes the policies of correction mechanism.