Open Economy, Banking Stability

With rising of the global economy integration, the open level of the countries'economy has been rising, and the countries'economy gradually is turning to open condition from self-enclosed condition to realize the optimal allocation of element and increase the country's welfare level. According to the demand of open economy, the countries'financial controls have been relaxing and the level of financial opening has been increasing, but getting the economic benefit has not been all plain sailing in open economy. Since the eighties of the 20th century, the financial industry of some developed countries and emerging market countries have produced financial crises, including banking crisis and currency crisis and others in economic opening. Especially, banking crises have caused the heavy economic loss, even the political and economic crises. Traditional macro and micro theories study about banking stability don't effectively explain the cause of a series of banking instability,because the circumstances of these countries'banking have changed , which the open level of these countries'economy and finance greatly has been improved. Therefore,it is a new issue how the country realize the banking stability in open economy, and is becoming one of the hot issues that the economists both at home and abroad study.Through sorting out a number of the recent documents of the banking stability both at home and abroad, it is discovered that a whole set of theory system hasn't been formed about the study on the banking stability in open economy. The paper thinks that in view of system, the major factors that affect the banking stability are macro-economic policy, financial liberalization and financial innovation in open economy. At first, the paper will make use of Mundell-Fleming-Dornbucsh's open economy model, namely IS-LM-BP model to exhaustively analyze the inherent mechanism which the domestic non-moderate macro-economic policy and the overflow of foreign macro-economic policy effect affluence banking stability. The analyses indicate that in open economy, the non-moderate macro-economic policy will initiate the unusual fluctuations of interest rate, exchange rate, income and price which directly and indirectly bring about banking instability. In addition, the changes of macro-economic policy of the economic power which keeps in intimate contact with the country will impact its banking stability through the paths of interest rate difference and income growth etc. Secondly, highly open economy certainly requires the cancellation of financial control, which relaxes or cancels all kinds of controls about interest rate, business, market entry and capital flow, namely called financial liberalization. It makes banking competition increase, and banking faces more complex circumferences. Especially, capital flow liberalization causes a series of issues such as assets price fluctuation, currency substitution and capital outflow, which result in banking confronted with more serious instability, and the Empirical studies of relative financial indices for eighteen countries from Europe and America, Latin America and Asia from1976 to 2005 provide data basis for theoretical analyses. Lastly, in open economy, financial innovation activities emerge in an endless stream. On the one hand they create profits for banking, on the other hand bring about some unfavorable macro and micro influences such as currency policy effect reduction and risk preference aggravation of bank operational conduct and others, which lead to banking instability rising.According to the above theoretical analyses, realizing the banking stability demands a series of institution system construction, mainly including moderate macro-economic policy, internal risk control system, financial safety net and market discipline. The moderation of macro-economic policy is revealed in two levels. At first, the enforcement of financial and currency policy should be appropriate, and pay attention to the effective matching with exchange rate system. Secondly, the international coordination of macro-economic policy should be strengthened to relieve foreign macro-economic policy causing disadvantage impact on the domestic banking stability. Internal risk control system is micro system basis which maintains banking stability, mainly consisting of the elements such as circumstance construction, risk discernment and evaluation etc. Its effectiveness depends on establishing effective internal risk control organization, making clear internal risk control system composition and improving internal risk control methods. The financial safety net composed of banking supervision, deposit insurance and lender of last resort can effectively keep banking stability. At fact, the current financial safety net has some faults, so it need be improved by strengthening the risk supervision function of supervision organization, eliminating the moral hazard caused by deposit insurance and lender of last resort system. The market power consisting of depositor and others is able to restrain the bank's risk conduct to reduce government supervision cost in maximum limit and promote supervision efficiency. Strengthening the power of market discipline demands a series of system construction, including strict information exposure, advanced financial market and limited financial safety net. Even if there are these systems from micro to macro, it also is difficult to completely avoid banking crisis, so the supervision organization must possess a set of whole urgent management procedure for banking crisis from crisis control to assets and liabilities handling.Through a series of theoretical and empirical analyses about the key factors of effecting banking stability and systems construction of dealing with banking instability, the paper roughly constructs the frame of theory study about banking stability in open economy. The last chapter deeply studies the factors of effecting Chinas'banking stability and appropriate strategy dealing with banking instability in the open course by using the theory frame, combining the present situation of china's banking development. The study indicates that the monopoly degree of china's banking market structure has been decreasing, and banking operational efficiency has bettered in open course, but there are some gaps in comparison with international advanced banks on either earnings or security. At present, these factors such as high non-performing loans,exchange rate policy change, financial liberalization and financial innovation deepening will influence china's banking stability in open course in period. According to theoretical and empirical analyses, the paper finally puts forward a series of strategies such as reducing non-performing loans, steadily realizing exchange rate policy change and setting up financial safety net to achieve the strategic target which maintains china's banking stability.The paper intends to establish the theory frame which realizes banking stability from the view of open economy to create a new path of study. Hoping theoretical and empirical analyses related with the status quo of china's banking can provide theoretical basis and guidance in practice for realizing the target that keep its banking stability in open course.