Research On Systemic Risk And Regulation Of China’s Banking System

Finance is the center of modern economy. Economy’s sustainable healthy development depends on financial stability. How to construct complete financial market system to prevent financial crisis is always a hot topic of financial field. Based on the characteristics of different financial crises, researchers put forth different theories. So far there are three generations of currency crisis model. From the beginning of the third generation, theoretical research has go beyond the macroeconomic scope such as exchange rate or monetary policy, looking at the role of micro-institution in the occurrence and contagion of financial crisis. The U. S. subprime crisis that erupted in2007soon became worldwide financial crisis. The occurrence of this crisis makes the regulators of the world realize that micro-prudential regulation alone can’t maintain the stability of the whole financial system. The scope of regulation should incorporate systemic risk. Currently, China has reached its crucial time of financial reform. How to construct complete macro-prudential regulatory system in order to prevent systemic financial risk are key issues faced by domestic researchers and regulators. Domestic related research is still in early stages, especially lacking of theoretical study. Based on China’s specific financial market conditions, this paper analyzes sources of systemic risk, identification of systemically important banks and macro-prudential regulatory system so as to give some suggestions for domestic financial reform.Theoretically, this paper examines sources of banking systemic risk using three stage model of discrete time. The findings are as follows:Decentralized equilibrium can achieve first best allocation of liquidity. Interbank market can cause full participation equilibrium, interbank market breakdown or liquidity hoarding in the existence of information asymmetry and counterparty risk. Relying on asset securitization and international financial market makes bank more easily affected by asset price fluctuations of international financial market. When the demand of financial asset is elastic, asset fire sale can lead to amplification effect. Faced with short time liquidity shock, asset fire sale may cause bank run even though banks are moderate in the long run. Loss of investor confidence plays a key role in the international contagion of U. S. subprime crisis. Under certain conditions, improvement of capital requirements can enlarge banking systemic interdependencies and thus improve potential systemic risk when existing too-many-to-fail implicit government guarantee.Empirically, network model is usually used to analyze contagion effects of bank closure to other banks through interbank lending market. However, based on the data characteristics of China’s banking system and the approach’s shortcomings in policy analysis, it’s not suitable to use in China. This paper focuses on the effectiveness of indicator-based approach and some market-based approaches in identifying China’s systemically important banks. Results are as follows:Different approaches tend to explain different aspects of sources of systemic risk. Relative to other commercial banks, large-scale commercial banks have lower individual risk and market risk. The reason is that they have lower volatilities. In consideration of size characteristics, all approaches get similar results, that is large-scale commercial banks have the biggest systemic risk contributions. The reason is that there exists huge asset size difference between large-scale commercial banks and other commercial banks so that size factor dominates other factors in the estimation process. In the light of current situation of China’s banking system, market-based approach is not superior to indicator-based approach. We should combine indicator-based approach and market-based approach reflecting different risk sources to dynamically assess different banks’systemic importance. Furthermore, using an unbalanced panel data from2006to2012of11different countries and regions’listed commercial banks, we find that in countries with low level of financial freedom, capital requirements and banks’systemic interdependencies have positive correlation. Improvement of financial freedom can reduce this effect.The regulation of systemic risk should consider characteristics of banking system of China. The effective implementation of capital requirements as main regulation tools can’t do without complete financial market environment. China should speed up financial marketization reform, implement deposit insurance system and withdrawal mechanism of commercial banks, reduce the cost of capital, let markets play a decisive role in allocating financial resources. Furthermore, regulators should strengthen the coordination of macro-prudential regulatory policy, fiscal policy and monetary policy, promote international communication and cooperation.