Banking Industry Operation Reform And Risk Prevention In The Open Market

Financial service industry provides services to every industry.It is the heart of the whole economy and society.The safety and stability of financial service industry is a prerequisite for economic growth and social development.Among the financial service industry safety,the safety of banking industry is the most important.The Eleventh Five Year Planning has laid out the development plan for the next five years:Expedite financial system reformPromote the stock ownership of state owned financial service companyAdvance the reform of government policy banksSteadily cultivate small and medium size financial service companies with various ownership structureFurther improve management structure of financial service companiesStrengthen internal controlsImprove financial companies'asset quality,profitability and serviceSteadily deregulate banking and other financial service requirementRegulate financial market reformFurther improve floating exchange rate system and gradually accomplish RMB free exchange under capital accountMaintain financial market stability and safetyOn January 19th and 20th,2007,Premier Jiabao Wen gave an important speech on the National Finance Conference.During his speech,he mentioned that since 2002,China has made huge progress on the finance area.The financial service industry is enjoying a fast growth.We have made big stride on the financial reform.Financial function is further improved and more international financial companies are entering China market.Financial monitoring and regulation are strengthening.The whole industry has changed dramatically and is providing important support for the economic growth and social development.However, there are still many unresolved issues in the financial area,such as incomplete financial system,unsound financial structure,imperfect financial company management system , uneven international balance and potential financial risks.Premier Wen listed the following six tasks for focus:Advance the reform of stated owned banks and expedite the establishment of modern banking system; Expedite financial institution reform and improve financial system in the rural areaStrengthen the financial support to rural area from various directions and help the establishment of a rural area Develop capital market and insurance market and establish a multi level financial systemFully utilize the service and regulating function of financial industry and boost economic growthActively and steadily open financial industry to international financial companiesImprove financial regulation capability; strengthen financial company internal management and ensure financial stability and safety.Only after the above goals are achieved,can we accomplish the Eleventh Five Year Planning and ensure the financial safety,especially the banking industry safety.According to the commitment to WTO,since 2007 the open of banking industry is in a new stage.International banks can operate RMB.Competition will intensify among the banking industry.Under the circumstance,we need to address the following questions: how to help the health growth of domestic banks; how to utilize the key role of banking industry in the economy; how to manage the relationship between domestic and foreign investors.All these questions need to be answered to expedite banking industry reform , improve risk management capability and survive in the competition.In my paper,I focus on banking industry reform in the open market and risk management.1) Present the current situation of banking industry operation reform in the open market and the risks associated with the reform.China bank banking industry reform,foreign scholar research and important issues for China banks are discussed in this section,which deduce the importance of banking industry reform and risk management.2) Analyze the exchange system.As the Chinese economy integrates into world economy,more and more countries are paying attention to RMB exchange system.China is under pressure to deregulate its exchange rate system and adopt floating exchange system.Exchange rate under current account is already open.Exchange rate under capital account is still under control.RMB exchange rate formation will only affect the sustainable growth of China and work trade structure,but it will also affect banking industry operation reform and risk management.More analysis is required before we implement a free exchange system.3) Analyze interest rate.Market determined interest rate will bring risk to financial statement of banks.Interest rate is an important resource for profit and value.The change of interest rate will have impact on the intrinsic value of bank's profit,asset,liability and off balance tools.In China,the interest rate determination is still in the early stage.There is no real market determined interest rate.However,to implement market determined interest rate is inevitable.China commercial banks have to solve quite a few issues in face of interest rate reform.First is the product pricing under market determined interest rate.Second is the interest rate risk management.Both of the two issues are new to China commercial banks.In the paper,I will discuss scientific measurement of interest rate risk and《Interest Rate Risk Management Principles》by Basel Committee.4) Discuss how to provide a healthy external environment for bank operation and risk management; how to establish deposit insurance system.So only the best banks can survive in the competition.The main idea of deposit insurance system is to establish risk compensation mechanism and reasonably allocate loses among government,stockholders and depositors caused by bankruptcy of financial institutions.Deposit insurance system will protect depositors'interest,boost public confidence on banking industry and maintain the stability of financial system.