Financial Stability Framework Analysis And Model Construction

Though it is an essential task of central bank to maintain financial stability from its emergence, the systematic study of financial stability is at its beginning until the end of twentieth century because the financial risk is quickly accumulated.In recent years, the famous international financial institution such as IMF(International Monetary Fund), WB (World Bank), BIS(Bank for International Settlements) and the central bank of German, England, Norway issues financial stability report periodically to stress financial stability. The financial stability forum (FSF) consists of them and other institutions and countries have more and more influence on the other countries.《Law of the People's Republic of China on the People's Bank of China》 issued on 27, December, 2003 specified at its first article: "This Law is enacted in order to define the status and functions of the People's Bank of China, ensure the correct formulation and implementation of monetary policy, establish and improve the macroeconomic management system of the central bank and maintain financial stability." The concept of financial stability of the law is first presented in China and it is referred five times in this law. This is the evidence that the authority pay closeattention to the financial stability. The task——maintain macro-financial stability nowis the duty of central bank from the perspective of law.Then what is financial stability? How to maintain financial stability?The paper begins from the concept of financial stability, reviews the boundary of financial stability, related four development phases of financial stability, presents a framework of how to maintain financial stability, constructs a banking supervision model based on the thought of internal control to analyze financial stability, at last this paper overviews the developmental history of China's financial system and advises its development direction. The main topics of this paper are framework construction and model analysis of financial stability.As framework construction of financial stability is concerned, there are three layers about the current study. For the layer of institution study, Folkerts-Landau and Lindgren (1998X Mishkin (1999X Davis (2002) all present their framework of financial stability, but these framework begin from the academic views, just have little meaning of policy. For the layer of countries, the Bank of England(1999)^ Deutsche Bundersbank(2003^ National Bank of Belgium(2002) all advice the initial discussion of financial stability framework, but these framework have not been systemically developed. The financial stability report's contents of these central banks are just the array of materials, but have no systematic analysis. For the international layer, IMF and World Bank initialize Financial Sector Assessment Program (FSAP) in May, 1999 and advised its analysis tools in 2003, but its method of assessment (Stress Testing) is too subjective, can't handle the correlation that is important to measure risk, so other analytic tools should be supplemented to assess the financial risk. Besides IMF and World Bank, the other rules have been suggested by Basle committee on banking supervision. The key principles of the rules mainly embody in ((Basel Capital Accord)) in 1988, ((Core Principles for effective banking supervision))in 1997. ((New Basel Capital Accord)) in 2004. The mainly contents of the accord consist of three pillars: (1) minimum capital requirements, (2) supervisory review of capital adequacy, and (3) public disclosure. We can enhance the banking supervision; maintain the financial stability according to these accords, but the accords just focus on banking, not including the other industry and real economy. As model analysis of financial stability is concerned, the most research achievements pay their attention to separatetelement, but the research on the inter-influence of each element is superficial, not to mention systematic research on the model of financial stability. Based on these reasons, the focuses of this paper are framework construction and model analysis of financial stability.In general, this paper based on the mainline below:The contents of introduction are the meaning^ methodology % construction and novelty of this thesis and the problem should be studied further.The First chapter reviews the definition of financial stability and advices thedefinition by author: Financial stability is a macro-concept. It requires the followingthree parts run well------financial institution(commercial bank, policy bank, financialasset management company and security company), financial market(market of stocks bond, money and derivatives) and financial infrastructure(system of legal, payment, liquidation and accounting), and can assess, prevent, solve the financial risk correctly.The Second chapter divides the development history of financial stability into four stages: the phase of lender of last resort, the phase of deposit insurance system, the phase of financial security net, the phase of overall financial stability framework. In each chapter the concept, development, theory, advantages and disadvantages of the four stages are also introduced separately.The Third chapter presents how to construct the overall financial stability framework. This chapter can be divided into three parts: analysis of overall financial stability framework; analysis of concrete methods of financial stability; the compatibility of central bank's financial stability objective and monetary policy objective. Based on the former part of the concept of financial stability defined by this paper, the framework of first section includes every element of financial economy and real economy; analyzes the inter-influence of these elements. Based on the later part of the concept of financial stability, the early-warning of financial system and the early-warning of financial method are concerned in second section. This section provides the technique method to maintain financial stability. At last, the compatibility of central bank's financial stability objective and monetary policy objective is analyzed.The Fourth chapter is instructed by the thought "bank stability is the core of financial stability", overviews the model of bank stability, different from the other models, in this chapter, a banking supervision model based on internal control mechanism is presented to analysis financial stability. This model begins from the balance sheet of bank, provides micro-foundation of maintaining financial stability. At last, the model is applied in China.The Fifth chapter reviews the development history of China's financial system,summarizes the current state of China's financial system, then advices its development direction.The sixth chapter is conclusion.This paper begins from the frontier of theory and demand of reality. Author want to have a break in theory and wish the theory can be used in reality.