Financial Fragility: Mechanisms And Management Path

Since 1970s, frequent financial crises have made most countries disaster, and made people realize that the financial system has some fragility and the the eruption of crises traces from the accumulation of the financial system fragility. How to alleviate the fragility of financial system in order to make financial crises impossible has been the common question of theoretical and practical.The dissertation tries to analyse the micro formation mechanism of financial fragility and discuss the influence of related policies and systems on financial fragility, from micro perspective based on the micro mechanism of financial fragility-the bank run model. It seeks the administration paths of financial fragility from the aspect of policy and system.The dissertation develops as the following logic arrangement: firstly, it sets up bank run model to investigate the micro mechanism of financial fragility, and discusses how financial fragility come into being and is accumulated; then, it analyses the influences of the related policies and administration systems on financial fragility based on the micro mechanism model, and discusses how to choose the optimal policies and systems to alleviate the financial fragility; in the end, it uses the empirical data of many financial crises to test the related conclusion.The main content of the dissertation include the following parts:Chapter one is the introduction, which elaborates the main questions and the purpose of this dissertation, summarizes the logic arrangement and the main content of the paper; Chapter two explains the theoretical foundation of financial fragility, defines the concept of financial fragility, and assesses the existed study; chapter three sets up the bank run model, discusses the formation mechanism of fragility under closed and open economy perspectively; chapter four analyses the influence of the related economic policies (monetary policy and capital flow policy) on financial fragility based on the micro mechanism; chapter five analyses the influences of the fragility administration systems on financial fragility, and assesses these two arrangements' benefits and disadvantages respectively. Chapter six uses empirical data of financial crises happened before to test the related conclusion, and assesses the degree of financial fragility in China. In the end, the paper proposes related suggestions on administrating financial fragility in China.The main conclusions of the dissertation include the following:Analysis of Financial fragility under micro mechanism indicates that for a single bank, only when both liquidity shock and asset prices shock are in existence and in accordance to some conditions do bank run happened.To the whole financial system, both systematic liquidity shock and asset price shock may trigger systematic bank run, due to the above systematic shocks of different type could interchange during development.The conclusion in this dissertation is not identified with DD(1983) or AG(2000), because model conclusion are not supportive to the view that non-system liquidity crunch, through its self- fulfilling, could spark bank crisis.Meanwhile, systematic factors are not equivalent to economic cycle elements, and the irrelevant systematic shock may lead to bank crisis.When under the open economic condition, different from closed economic condition, the bank run, regardless of being caused by liquidity crunch or solvency crisis, lead to the higher level of banking system fragility even without any consideration of the uncertainties about capital flow.My research on the Policy preference and financial fragility indicates:Capital flow will improve the welfare of consumers on the whole, but the short-term capital flow exasperates the financial fragility. And there exist an optimum capital flow scale which will maximize the whole profit. Thus, measures have to be adopted respectively to restrict on short-term capital flow, and uphold the long-term one.In terms of currency policy, credit business of banking system will lead to an endogenous growth or burst of asset bubble. However, currency policy with a goal of inflation extends the time span of credit business expansion and asset bubble inflation, and thus worsen the financial fragility. In this way, currency policy has to focus on asset prices and the fluctuation range of money aggregates, and avoid the credit business expansion and asset bubble inflation.Financial liberalization raises financing efficiency and consumers' welfare standards on one hand, but strengthens the financial fragility blamed on shortage of justified supervision on the other hand. In the economy of immature supervision, more patient and precautionary steps toward financial liberalization will prevent financial fragility.Research on the relation between financial fragility and financial crisis relieving system indicates:After comprehensive consideration about moral risk and the effect of bank run precaution measures, it has been found that dominant deposit insurance rule doesn't work well in improving the condition of financial fragility in systematic and nonsystematic crisis, in another word, deposit insurance business lay a negative influence on banking system stability.To lender of last resort, the whole-scale efficiency of bank bailout depends on seriousness of crisis. Central bank or government should not implement aid financing to those banks undergoing the nonsystematic crisis, but do give a hand when they suffer in the systematic crisis. Of all the aid plans, measure of ambiguous bailout will hedge moral risks and decline the negative effect. ambiguous bailout is more preferential to improve the financial fragility compared with definite bailout.The results of empirical analysis show the empirical study in this dissertation verify the above conclusions on the policy of financial fragility management and analysis of relieving system. Except the influence of lender of last resort policy to the financial fragility, all other polices and institutions are verified.