Study On Mechanism Of Bank Financial Services

The asset management and wealth management industry has come into an era ofcompetition. In the past decade, the wealth management products (WMPs) of banksemerged from null rapidly. By the end of2013, the balance of WMPs has reached10.2trillion Yuan, taking the largest market share in the Chinese asset management industry(as20%trust balance comes from WMPs). WMPs have become the most familiarfinancial products to the general public. The development of WMPs, however, has longbeen companied by critiques and debates as it greatly challenged the traditionalbusiness of commercial banks. Practitioners and researchers regard WMPs as part ofthe “shadow banking system” and Sorrows even indicated that WMPs might be thesource of next financial crisis. Therefore, it is of great importance to have a thoroughstudy of the history and the business model of WMPs. It will be of great use tounderstand the theoretical and practical reason of the development of WMPs. Bycomparing the asset management wealth management around the world, this study willalso indicate the way of reforms with regard to the wealth management services tocater the needs of the economy and financial system in the future by solving thepotential problem of WMPs and build up the tunnel for the transition from indirectfinancing to direct financing.In the literature review, we find out traditional theories (e.g. portfolio theory,CAPM, financial intermediary theory, life cycle theory, etc.) cannot well explain thereason and status of WMPs. New theories with regards to financial innovation andregulatory arbitrage such as financial repression and financial deepening theory, gametheory, etc. can give better explanations. It is necessary to point out that differentdriving factors affect the development wealth management services in different stagesand result in different properties of the whole market. The increasing personal wealthcreate the fundamental demand for WMPs, while regulatory arbitrage, interest rateliberalization as well as the deflection of macro policies worked together to bringWMPs to where it is now.By analyzing the “Money-Asset Pool” model of WMPs, we find out that WMPsare different from the indirect financing model of traditional commercial banks butthey are still making profit though term structure and credit spread. Thus it is not proper to say that WMPs has achieved the transition from indirect financing to directfinancing. Instead, they somehow make the investor and creditor closer and WMPs arethe tunnel of the transition. Critiques on WMPs mainly argue that WMPs are kind of“Ponzi Game” or part of “Shadow Banking”. These Critiques has misunderstood theWMPs and haven’t got the point of the real problem. On one hand, the spread ofWMPs has been constantly positive which meet the requirement of non-Ponzicondition. All the raised funds are fully backed by a well diversified portfolio in the“Asset Pool”. On the other hand, WMPs has been supervised by authorities with astrict credit check, liquidity control and prudent risk preference inherited in the natureof commercial banks. Instead of being part of the “Shadow Banking” system, WMPsare much more like the “shadow of banks” as it has been assigned too many tasksrelated to the proprietary business of banks.Banks aboard such as UBS, Citi, HSBC put FPS to the first priority to win theclients’ trust and to gain a stable long-term client relationship in wealth managementactivities. Clients are the main focus. With the strong client relationship, widespectrums of financial products are provided to construct a proper portfolio for theclients. In China, on the contrary, the place of wealth management and assetmanagement has been swapped. Banks in China paid too many attentions to the assetmanagement leg while ignored the maintenance of customer relationships withoutwhich WMPs and FPS are separated.WMPs are facing some risks. FPS is also facing various problems. Yet the risks arecontrollable. There are progresses in FPS companied by the development of privatebanks. As WMPs and FPS are playing more and more important roles, to regulate is toguide its way to a suitable business model, not to squeeze WMPs out of the market. Itis a transition requiring not only the development of external market and regulatoryenvironment to push forward the interest liberalization and distinguish regulatoryarbitrage, but also the establishment of the ring fencing between asset management andproprietary business of the banks. Business Unit regime might be needed to completethe transition from WMPs to modern wealth management and to replace the“Money-Asset Pool” model with real asset management products,the financialplanning services(FPS) also needs to transform from the simple product sales agent tocomprehensive wealth management serivcs.In a review of the path of economy growth model and the target of financial reform, we conclude that urbanization, globalization and mixed ownerships will be themain characteristics of future economy growth in China. To cater the need of futureeconomy growth, the financial reform has multi targets among which the developmentof direct financing is emphasized. WMPs has strongly supported the economy growthby promoting the development of direct financing. Thanks to the WMPs, banks havetransformed from traditional credit intermediaries to versatile financial intermediaries.WMPs are facing both chances and challenges. By transforming the business model,implicit guarantee problem can be solved and forced imbursement will disappear. Amore transparent and regulated system will be established to provide comprehensivefinancial services. The wealth management services of banks will build up the bridgebetween indirect financing to direct financing.