China's Financial Vulnerability Index System Settings

The period from last century 80 years, of boom followed by recession, both ofdeveloped countries and development countries experienced a series of financial crisis.Minsky first use the word "financial fragility " describe the risk accumulate inside thefinancial system, followed this Financial Instability Hypothesis, some other theorysuch as " Margins of Safety " and "dissymmetry information " focus their discussionon the bank behavior analysis.This paper studies the development of financial fragility theories. In the light offinancial fragility Hypothesis, financial fragility is considered as a result of the "debtoperation mode". That is, just part of fund used for enterprise and bank operationowed by themselves, the remaining is borrowed from banks, other financial institutionand direct financial market. In the boom period enterprise can borrow more moneyeasily in the credit market, so there are more speculative-financed firm in the marketconsequently, more credit risk for bank loans. When the risk accumulated inside thefinancial system comes up to the critical point, a crisis is coming.The second part of this paper is about the relationship of system developmentand financial fragility. For the recent years,we can use financial liberalization todescribe financial system development. Some other studies point out that bankingcrisis are more likely to occur in liberalized financial system. However, the impact ofliberalization on banking sector is weaker where the institution is strong .in particular,respect for the rule of law, a low level of corruption, and good contract enforcementare relevant institutional characteristics. In the practice of our country financialliberalization the core of work is the liberalization of interest rate.Integrate practice experience and theories, we conclude a system of index, whichcan reflect our country financial fragility degree, prospect the possibility of financialcrisis. Bank system has a very important position in our financial system, so this paperfocuses discussion on bank system fragility. We believe, over the long run, financialdevelopment support and promote economic growth.