The Effect On The Stability Of The International Capital Flows On China's Banking System

Since the1990s, from the international situation, international capital flows has beenshowing a large-scale and speculative development trend. From the experience of theprevious financial crisis, large-scale international capital inflows and outflows can be ashock to the stability of a country’s banking system and then could cause the banking crisis.The economic recession caused by banking crisis may penetrate to the entire financialsystem and will be derived into large-scaled financial crisis. Thus, in the currentinternational situation, to measure the impact of international capital flows on the stabilityof a country’s banking system will help to avoid the risk of capital flows, and promote acountry’s banking system and even the stable operation of the entire financial system.From the theoretical basis of international capital flows and banking system stability, theadverse selection, moral hazard problems and the bank run caused by international capitalinflows and outflows is the main manifestation of the vulnerability of the banking system.As a result, international capital flows may trigger a bank run or adverse selection andmoral hazard problems mainly through the direct impact, indirect impact and secondaryimpact ways, thereby affecting the stability of a country’s banking system. By constructingBSS3index model and the Granger causality test, we can come to the conclusion that theimpact of international capital flows on the stability of the banking system in China ismainly from the direct effect of foreign direct Investment and the indirect effects of grossdomestic product, inflation rate, and money supply as well as exchange rate fluctuations.This is because our government is still in control of the capital and interest rates.Within the development trend of the opening of the capital and interest rates, in order tomaintain the soundness banking system in the open economy operation, we should activelybuild up the deposit insurance agencies, improve the level of bank credit management,build up the banking market exit mechanism and strengthen banking supervision.