Risk Management Of China's Banks In Process Of Interest Rate Marketization

Nowadays, China is in a critical period of financial reform, in which interest rate marketization is one of the most important issues. One relative issue is how to guarantee the reform which initiated since 1978 not to be affected by some misactions of interest rate marketization, and guarantee the financial system, especially banks system can support economy growth effectively and sustainablely. As for banks plays a very important role in China's financial system, in order to keep economic growth and financial reform running smoothly simultaneously, it is pressing to study the banks risk management in the process of interest rate marketization. Account for there exist many literatures on banks risk and some certain kind of them are provided by practitioners, masters, scholars and academicians, this dissertation does not intend to study widely, only selects several topics closely relating to current situation of China banks system in the process of interest rate marketization for furtherly study, they cover some insider micro-risk management techniques and their innovation applyings such as value at risk(VaR), and also include the common problems confronted by banks. For example, how to deal with non-performing loans(NPLs)? How to pricing deposits and loans? How to manage the credit risk of individual consumer loans? How to adjust interest rate and use interest rate strategy circumvent risk. Meanwhile, it also includes macro-financial policies, especially interest rate policy's effect on banks, the path of financial reforming and so on. Base on these questions, this dissertation attempt to study them combined by qualitative analysis and quantitative analysis, of course, interest rate is the main theme to unite all these questions into a whole. There are many methods and techniques about risk management, and the innovation mementum is strong yet. This dissertation discusses some typic methods such as Duration, Gap, points out the advantages and shortcomings of them. Accounts for most of them are applied in company clients, hovever, individual loans are emerging fastly in China, but the risk management relating to them doesn't keep the same pace with their growth, maybe it implies tremendous risk as company loans after some certain time, so we elaborately study this topic as precaution, the risk management ideal implied in which is the same to the company loans. Value at Risk model is a useful tool widly applied in financial risk management, it has been used widely from interest rate and exchange rate flucation to credit risk, portfolio management and bank capital requirements. Unfortunately, Conventional Value at Risk(C-VaR) only accounts for the loss probability at the end point of investment period, and ignores loss probability within the investment period, but actually, the price fluctuations of financial assets are path-dependent, this flaw causes underestimation of VaR, so, this dissertation applies a modified method, which includes the loss probability that the price first breaks the loss threshold value at anytime within the holding period but recovers at the end of the period, it is a continuous monitoring way and its VaR is bigger than conventional VaR. We demonstrate the two methods with bank capital requirements. The mispricing of deposits and loans may lead risk to bank, as well as causes loss to depositors and loan borrowers, even it can hinder financial reform, becomes a kind of systemic risk. Based on this, starts from a strict assumption, this dissertation formulates a break-even formula to determine the loan price, then looses the postulates one by one and popularizes it to conditions of portfolio and profits, formulates a perfect formula applying china banks in current time, then uses the data of state-owned banks to substantiate it, which puts forward a clear logical thought. Furthermore, the author analyzes there maybe some problems in current strategy of marketization of interest rate, suggests that marketization of interest rate should benefit all partners of the market and marks up two margins of inflation rate—deposit interest rates and deposit interest rates—loan interest rates. Corresponding, besides these, the loan prices should be added risk premium and policy factors modification spread. Monetary policy may lead to risk and bring about risk to banks, too. According to present situation, The author analyzes the paradox of fixed foreign exchange rate, capital flow and monetary policy discretion in China economy, points out the dilemma between monetary policy and foreign exchange increments on condition of continuous trade surplus and foreign capital pouring in, demonstrates that sterilized intervention is at the cost ofindependent monetary policy. Furthermore, it piles up financial risk and lead to money shock or financial crisis, which signifies the sterilization policy can not sustain in long-run, so it is pressing to reform the foreign exchange reserve and exchange rate system, and loose capital regulation. Another topic colsely connect with this is non-performing loans. Usually, NPLs originate from higher GDP growth period, especially during inflation and bubble period, and expose in lower growth period or deflation period. They that hide can find, on condition of conventional methods cann't deal with NPLs effectively, how to use proper inflation to deal with them and don't lead new risk to finacial systems and banks? Based on this, the dissertation devises economitric model, then empirically tests and analyses it, finds money supply causing GDP fluctuation in Granger causuality, so it shows past money supply is helpful to predict future GDP, so this paper suggests properly increasing money supply and use moderate inflation to cover NPLs, and test its feasibility in history and simulated data. Financial reforming has taken place for decades in China, although gets some developments, but the bank-dominating phase in finance sector hasn't been broken up yet, furthermore, leads to new financial repression in deposit interest rates as well as other items, the enlarged spread is not conducive to innovations and reform for banks and whole financial sector, which becomes factors hindering interest rate marketization. After analyzing this with Theory of Financial Development Path-dependence, the author concludes that in the process of catching up with and surpassing strategy in developing China finance, in order not to be locked-in by old path, we have to develop and reform or correct at the same time along the old path, adjust financial structure, turn bank-leading system to capital market-leading system, and government phases out in financial activities early, facilitates government dominating supply-leading financial system turning to market dominating demand-following system.