The Risks And Risk Management Of Commercial Banks Under The Financial Deregulation

The retrospect of Chinese financial deregulation during the past three decades shows that, despite the ups and downs, the Chinese financial reformation always focuses on deregulation, fostering the market-oriented operation mechanism, eliminating the financial repression, enhancing the financial efficiency. After accepted as WTO member, the process of the Chinese financial deregulation significantly sped up with the gradual relaxation of financial controls, the more opening-up of the financial services, and the financial supervision also accepted the international standards step by step. During this process, the state-owned commercial banks acted as administrative bodies which were protected and supervised by the government, changed their roles into financial enterprises-facing market and took all operational risks by themselves. Confronted with all the resulting risks, the level of risk awareness and risk management of the Chinese commercial banks shall meet the new challenge. How to define, measure, manage and prevent these possible risks have become the strategical problems of the commercial banks must consider. Especially in the financial deregulation process, which risks appears as the new ones, which risks should be supposed to be undertaken by the banks, which risks can be managed, and how to determine the optimal level of risk management, how to use the financial instruments for risk avoidance, transfer and hedging and further enhancing the value of the banks. The answers to these questions are meaningful for the Chinese commercial banks that become players at the international stage, participating in global competition and making continuous development and expansion.This dissertation is based on the risk management theories at home and abroad, it observes and studies the problems of risk management of the Chinese commercial banks under the circumstances of the financial opening-up and financial deregulation. Firstly, it classified the main risks led by the current operating characteristics of the Chinese commercial banks and discussed the evolution of the risk propensity of the commercial banks in the process of commercial liberalization. Secondly, it concerned the current lackage of theories and tools for the commercial bank risk management in China, studied the management models, tools, and risk hedging and tried to establish the model of risk management for the Chinese commercial banks. Thirdly, it choosed the best commercial bank risk management strategy from the perspective of the capital structure and capital budgeting, using the model to clarify all the facts that influence the decision of the commercial bank in the risk management. Finally, it offered a proposal for the commercial banks and their risk management tools, especially for the supervision and risk management of financial derivative instruments.Firstly, since the Chinese reform, the financial deregulation focused on the interest rate, exchange rate, financial controls, capital flows, market access, the reform of the state-owned banks and so on. Will the changes of internal and external factors encourage banks to take more risk or not? In order to find out the result, this dissertation selected two representative perspectives:the relaxation of market access and the marketization of interest rates and exchange rates. The theoretical analysis showed that the process of financial deregulation had the motivative impact on the risk propensity of the commercial bank and the empirical studies afterwards also fully supported the above conclusions.Secondly, the financial derivatives are the main tools for the commercial banks to manage the "manageable risks". It helps commercial banks change the passive risk avoidance in the past into the active risk transfer and recombination currently. Different types of risk can be "unbundled" and separated, indepently valued, re-packaged and put into transaction. The commercial banks, according to their risk appetite and tolerance degree, can adjust their financial instruments and risk characteristics of the financial products to achieve the optimal risk allocation level. This dissertation also pointed out that although the financial derivatives have risk management functions, but they themselves are also huge sources of risks and shall be deliberated to build the market structure and improve the relevant systems, using these two pronged measures to strengthen risk management of the derivatives.Thirdly, is there the optimal risk management for the commercial banks? If yes, which factors are determinant? The existing theories for the risk management of the commercial banks treat the bank risks level as exogenous variables, and then put forward all kinds of theories and tools to control and manage the risks. These studies ignore the role of the commercial banks as risk operator, if blindly concentrated on the risk control and reduction, how do the profits come from? Why should the commercial bank exsit? In terms of the insufficency of theoretical research, this chapter analyzed the factors, which determine the optimal level of risk management, from the following two perspectives:Firstly, using the dynamic optimization model which is constructed by Froot and Stein (1995), to introduce the new financial products investment (or assets) as variable factors which could impact financial deregulation and to observe the optimal risk management strategies of the risk-averse banks form the perspective of capital budget and capital structure; Secondly, in order to be more realistic, introducing the "financial crisis" and "financial crisis cost" to study the optimal risk management strategy of risk-neutral banks, to find out which ones are the determint factors of the optimal level for the commercial banks.Forthly, why do the commercial banks need overall risk management? What are the rules? In the practice, a commercial bank can diversify their investment, but facing the various risks. At that time, the optimal risk management strategy of commercial banks should not only consider one single risk factor, but also take into account the correlation between the various risks, that means, establish the bank’s risk management strategy from the holistic, global perspective, which challenges the ability of the commercial banks in its infromation collection, organizational construction and business processes management. Meanwhile, because of the various risks, the commercial banks can not be confined to select the optimal level of risk, but also focus on the effiency of the risk allocation. Specifically, in order to enhance their internal core competence, they should determine which risks can be taken (the core risk), which risks should be avoided (the non-core risk), the former could bring excess profits to the commercial banks, the latter equals investing in a zero or negative NPV project. From the above two perspectives, the new demand requires the commercial banks to manage the risks in the comprehensive way..Fifth, numerous banking crisises have proved that relying solely on bank’s own self-discipline and internal risk management can not solve the actions of the more risk accumulation in the banking industry, the external supervision must also be strengthened. The latest Basel Ⅲ published after the subprime mortgage crisis, focuses on the improvement of the exterior supervision, through the establishment of the financial macro prudent management system framework to protect the whole financial system and financial market.The possible innovations:1) Based on the traditional financial risk formation theory of the commercial banks, this dissertation explored the causes and classified the commercial bank risks during the process of financial deregulation deeply, from the perspective of the financial deregulation and innovation, the international monetary system, derivative products and so on.2) It analysize the risk-bearing propensity of the commercial banks after the deregulation of the financial control more specifically and deeply. The empirical research showed, the financial deregulation had definitely changed the cautious management style of the banks.3) Based on the traditional research of the risk management of the commercial banks, it proposed the concept of "optimal level of risk management", pointed out the determinant factors which influence this level. This conclusion can explain that the risk management of the commercial banks shall not only be regaded as part of their internal management system, but also be emphasized in consideration of the capital structure and capital budget.