A Policy Bank Under The New LPR Mechanism Financial Risk Management Study

As early as 2013,China has introduced the Loan Pricing Rate(LPR),which is expected to reflect the market supply and demand of funds through the LPR,but at the same time retain the operation of the benchmark interest rate.Under this "dual-track" system,banks have not used LPR to a high degree and the implementation effect has not met expectations.In view of this,to further deepen the interest rate market process,the People’s Bank of China announced on August 17,2019,the implementation of the Loan Market Offer Rate Mechanism(New LPR).All RMB loans are required to be priced uniformly using the new LPR,and the conversion of interest rates for existing loans will be completed within the year to fully realize the "dual-track consolidation".Unlike the relatively fixed benchmark interest rate,the new LPR is updated monthly,increasing the risk of interest rate fluctuations.Influenced by the macro environment,monetary policy and market interest rates,the LPR quotes continue to fall after 2019,which is equivalent to a disguised interest rate cut,directly leading to the narrowing of banks’ interest rate spreads.However,policy banks,which always operate on the principle of "capital preservation and profitability" and have a narrow moat,will be seriously affected by the new LPR mechanism in terms of profitability and will be under greater pressure in financial risk management.In the context of the new LPR mechanism,this paper takes policy bank A as an example and identifies financial risks based on the camel evaluation framework,including liquidity risk,profitability risk,asset adequacy risk,asset security risk,and management risk that may be brought by the new LPR.The model was used to quantitatively evaluate the financial risk management of Policy Bank A under the new LPR mechanism.It is found that the current financial risk management of policy bank A is "not good",with problems such as high deposit-to-loan ratio,insufficient liquidity,low capital adequacy ratio,and low profitability.In addition to historical factors,the main reasons are the decline in market interest rates,repricing risk,and increased interbank competition caused by the new LPR mechanism.By drawing inspiration from domestic and international experience,this paper proposes measures to strengthen prevention and control: first,adjust the structure of deposit and loan business,increase the scale of deposits and loans;second,consolidate traditional business and find new profit growth points;third,reduce provisioning and optimize capital structure;fourth,do a good job of "pre-lending" prevention and control to ensure asset safety;fifth,establish a whole process Fifth,to establish a whole process financial system to reduce ineffective resource consumption.This paper hopes to further add to the relevant literature by studying the financial risk management of Policy Bank A under the new LPR mechanism,so as to broaden the ideas for the sustainable development of Policy Bank A.It also hopes to provide reference for the financial risk management of other banks.