Hierarchical Governance Of State-Owned Commercial Banks Based On Principal-Agent Theory

In global scale, accompanied with revolution in information technology, financial deregulation, financial integration, and intense international competition, more and more big banks consider internal governance reform as a magic weapon to deal with environment, reduce agency cost and risk, increase efficiency and foster competitiveness; in domestic scale, complete opening of financial market and overwhelming force of foreign bank entry compel state-owned commercial banks(SOCBs) to adopt thorough internal governance reform which will have far-reaching influence on future economy and finance of our country. It is commonly held that SOCB's governance drawbacks lie in property right absence and soft property right restrains, and that property right reform is the key to solve principal-agent problems in SOCB hierarchical governance. However, the truth is that the government, which remains the biggest shareholder of SOCB, possesses absolute control. Moreover, in light of SOCB special status in our country politics and economy, it is necessary that government capital dominates SOCB's property for quite some time in the future. Under China's present economic, social and cultural background, can SOCBs'large and complicated hierarchical system smoothly and thoroughly carry out headquarter'strategic policies? Can hierarchical managers'authority hinder bank corporate legal person governance system implementation, leading to hierarchical benefit maximization? Can SOCB hierarchical governance reform enhance bank performance with bank current property right unchanged? All of these questions are well worth researching. International evidences show that improper bank hierarchical governance tends to cause business risk and financial crisis. In China present turbulent transitional stage, provided that SOCB's property power remains not substantially changed, it serves one of central tasks to enhance bank performance by improving SOCB hierarchical governance, which also gives the significance of the paper.Principal-agent theory is a special method to study the participators' interactive decision-making behaviors on the condition of information asymmetry, value target difference, responsibility unequivalence, and contract incompleteness. It provides the modern economics with effective analysis implement. Based on review of the principal-agent theory, hierarchical governance theory and SOCB institutional reform literature, this paper, combining with transitional economy characteristics of our country, expatiates SOCB hierarchical governance issues such as branch managers'moral hazard, organizational structure, authority allocation and incentive-control mechanism in principal-agent framework. Finally, based on empirical studies, some applicable SOCB's hierarchical governance mechanism reform pattern suggestions are proposed. This paper includes seven parts:The first chapter is forward, which brings forward the study significance, defines study object, overviews the main content and logics, and states the study innovation and future research area.The second chapter includes theories summary and research status, which expounds principal-agent theory, bureaucratic theory and research status of bank internal governance as rationale.The third chapter discusses SOCB hierarchical managers'moral hazard. This part analyzes managers'moral hazard formation mechanism; then explains managers'motive for moral hazard actions with principal-agent model; and lastly studies hierarchical managers'moral hazard actions with local government administrative intervention.The forth chapter discusses SOCB hierarchical organizational structure. This part analyzes the relation between structural factor (scale, layer) and agency cost, principal efficiency and organizational performance, compares common hierarchical structure modes, then recounts SOCB hierarchical structure evolution and current drawbacks and empirically tests DEA efficiency of SOCB hierarchical structure, lastly discusses hierarchical managers'incentive mechanism in structure reform with a replicator-dynamics model.The fifth chapter discusses SOCB hierarchical authority allocation. This part firstly analyses impacts of some elements such as external environment, organizational scale, employee talent, and technical condition on organizational effectiveness of different hierarchical authority allocation modes, then compares centralization and delegation of power with limited contract model and considers incentive effect of delegation precedence. After reviewing SOCB hierarchical authority allocation evolution and analyzing current situation, this part explains why SOCB headquarter commonly limits branches authority and proposes SOCB duly handle the relationship between headquarter control and branch flexibility. Finally, case studies of Citi bank and Deutsche bank are given as reference.The sixth chapter discusses SOCB hierarchical incentive mechanism. This part outlines hierarchical incentive system of modern bank which includes material incentive, spiritual incentive and competitive incentive, analyses current situation of SOCB hierarchical incentive, then uses corresponding models to explain timeliness and base decision of incentive contract and the influence of internal and external manager markets on bank branch's ratcheting effect, lastly give examples of HSBC and SMBC to provide some useful experiences to SOCB's reform.The seventh chapter discusses institution arrangements for hierarchical governance optimization, which proposes some applicable suggestions in terms of organizational structure, authority allocation, internal control and incentive mechanism.Innovation of the paper lies in instead of traditionally discussing bank property right reform, deeply analyzing bank internal hierarchical system in terms of managers'moral hazard, organizational structure, authority allocation and incentive-control mechanism; constructing several principal-agent theory models to explain corresponding issues, with combination of pioneer theory and domestic practical situation; placing SOCB hierarchical governance on the background of China's transitional economy and fully considering uniqueness of our bank hierarchical principal-agent relation; applying comprehensive methods such as DEA quantitative analysis, case analysis, comparative analysis, and historical analysis to empirically study principal-agent matters in bank hierarchical governance; instead of simply copying advanced bank practice, aimed at current situations and challenges, proposing progressive optimization suggestions for SOCB hierarchical governance.