Early Warning For Short-term Risk Of China’s State-owned Banks

After2005, China’s state-owned banks took some strategies to decrease bad loans, such as fiscal pump priming, introduction of strategic investors, etc. After that they realized restructuring and listing. However, with the liberalization of market-oriented bank market, joint-stock banks, city commercial banks began to rise quickly. And foreign banks also began to rise by removing various restrictions in2006. The monopoly of China’s state-owned banks begins to face severe challenges. On March7th,2013, the international rating agency Standard&Poor’s (Standard&Poor’s) expected the rate of banks’bad loans in China would rise to3%by the end of the year. The data from Banking Regulatory Commission of China showed bad loans of state-owned banks accounted for more than60%of the total bad loans of the banking sector. How could state-owned banks reduce such a huge amount of non-performing loans? In1990s, state-owned banks once experienced a period of high bad loans and accounting insolvency, but ultimately the state-owned banks didn’t go bankruptcy or close. Then someone may think maybe state-owned banks also go through today’s difficulty. Obviously, this is unscientific, China’s economic system and market environment has changed, and we should also change our ideas to solve problems.Firstly, this paper qualitatively analyze current risk that state-owned banks are facing, such as credit risk, market risk, operational risk, and special risks and pressure, etc. We can see the risk currently faced by the four state-owned banks is huge. In order to learn more about the risk of China’s state-owned banks, this paper makes a brief analysis of the bank’s risk reasons from the aspects of institutional environment, the bank itself and enterprises. In fact,80%of the risk of the state-owned banks originates from the special system, state-owned property rights regime, personnel management system and so on. Under new economic and market environment, if the state-owned banks can’t reasonably manage risks, it will bring great destructive impact to our economy. In this case, the study of short-term risk of China’s state-owned banks is particularly important, especially short-term risk, which is Not only can help state-owned banks to recognize their own risk in the short term, but also can conducive to the real-time adjustment their strategies of risk management to reduce risks and adapt to market trends.Then I learn early warning technology about banks’short-term risk from the regulatory and I choose one of early warning technology---synthetic index to quantitatively analyze short-term risk of the state-owned banks. Synthetic index is a method that can predict short-term risk of bank:first of all, we choose indicators which can represent bank’s risk to compare to its critical value, calculate a single index of those indicators one by one and weight single index to obtain composite index. Then compare the synthetic index with bank’s warning threshold to judge whether bank will downgrade next period. In order to test the method of synthetic index, I study the short-term risk of China’s state-owned banks in June2012.The results show that the composite index of four state-owned banks is greater than0. There are short-term risk existing among them. Agricultural bank, Industrial and Commercial Bank, Construction Bank will not be downgrade, but Bank of China will be downgraded in the short term. Above all, the main risk that those four banks facing is the risk of asset quality, which is same as the previous qualitative analysis results. For the results, this paper suggests China’s state-owned banks should b strengthen their capabilities of risk management, pay more attention to guard against credit risk and reduce bad loans. There are some things which must be explained. The quantitative analysis of this paper is under many conditions, such as the limitations of the data sources, few indicators and short of non-quantifiable factors. Therefore quantitative analysis of this paper can only be reference and can’t be used as the absolute basis of the judgment.Now there are not many articles that specially study short-term risk of bank, I think this is a relatively new research directions. Short-term risk early warning technology may be a new approach to study short-term risk of bank. Of course, there are still many deficiencies in this paper. To some extent, the study of this paper is rough, but it attempts to attract more scholars to study this area.