| The Chinese banking sector has been fully opened up and fully incorporated to theglobal competitive pattern and rules of games since 2007, facing the challenges from allaspects. In recent years, domestic academic society has paid more and more attention torisk management of banks. However, up till today, a majority of the relevant researcheshave focused on credit risk and insufficient systematic researches on the liquidity risks ofChinese banks. Rare attention has been attached to liquidity risk in China mainly due tothe following two reasons: firstly, under the credit guarantee by government under thesystem of state-owned banks, financial institutions rarely go bankrupt or have liquiditycrisis. Secondly, there is rich liquidity in the macro economy in China and banks havesufficient funds to operate, which leads to the lack of urgent awareness of liquidity riskmanagement.It is pointed by Diamond and Dybvig (1983) that: the nature of banks is to convertassets of low liquidity into debts of high liquidity and thus create liquidity for the wholesociety. However, at the same time, banks have become the key entities exposed to theliquidity of the entire society, causing liquidity risk as the inherent problem of thebanking system. On the other hand, liquidity risk is the ultimate form of risks of banks.Other risks of the banks (such as credit, market and operational risks) can ultimatelyburst out in the form of liquidity risk. Therefore, liquidity risk is one of the major risksbanks are exposed to. Liquidity risk management is a vital task banks are facing.Therefore, the insight research into the liquidity risk of banks in China shall have bothstrong theoretical and practical significance.The research follows the concepts from theory to practice, and from general tospecific by combining logic deductions with demonstration, qualitative analysis withquantitative researches. The theory to practice study starts from the abstract concepts onliquidity risk management to the specific operation and practice of Chinese banks in riskmanagement. The general to specific research starts from the general theory of riskmanagement to the specific models of liquidity risk management, and from liquidity riskmanagement in general to the specific practices of local commercial banks in liquidityrisk management. At the same time, the paper makes theoretical modeling and logicaldeductions based on information economics and the theory of games, and makequantitative analysis and pragmatic tests on relevant programs.The paper makes the researches following two topics of measurement of liquidityrisk of domestic banks and management frameworks. The following five questions areanswered:1. What is the essence and generation mechanism of liquidity risk of commercialbanks?2. What is the liquidity risk's quantitative level of banks in China and how tounderstand the situation?3. What are the characteristics and operation logic of liquidity risks of banks inChina?4. What are the advanced methods and experience in theories and in practices for banks to manage liquidity risks?5. How to construct liquidity risk management framework for Chinese commercialbanks?The research presents the following deliverables:1. To make insight quantitative analysis on the liquidity risks of commercial banksin China using complete and updated data. The paper uses various liquidity indices tocome up with the conclusion of the current excessive liquidity in the Chinese economyvia historical and horizontal comparisons. Analysis is also made on the causes on amacro and micro level with comparison of liquidity risks in the Chinese banks frommulti prospects (including state-owned and joint stock banks, publicly listed andnon-listed banks, domestic and foreign banks).2. The liquidity concepts on the macro and micro level are also differentiatedtheoretically with the conclusion that the current excessive liquidity in China is mainlycaused by the changes in the monetary supplies at the macro level. That is, the excessivemonetary supplies. The excessive liquidity on the macro level brings affluence inliquidity in the banking system. However, such does not mean that all individual bankshave little liquidity risk. Such are largely different. Currently, the good liquidity profileof the banking sector in China is the result of external macro factors rather than theimprovement on liquidity risk management. Liquidity risk management shall still be apermanent basic work for banks.3. It is also pointed out in the paper based on large number of data that the currentexcessive liquidity in the banking sector in China indicates large potential risks, largelybecause: the systematic factors causing the current excessive liquidity may not last in thelong-run. Serious potential liquidity risks due to the large amount of non-performingloans, mismatch of funds and the trend of increasing amount of long-term loans mayincrease the liquidity risks. Small and medium-sized banks are facing serious liquidityrisks. The opening of the financial sector in China will bring further challenges toliquidity risks.4. The paper also uses panel data to make practical researches in the factorsinfluencing liquidity risks of commercial banks in China. It is found that there is highcorrelation between the liquidity profile and the assets and liabilities structure instate-owned banks with the advantage of state guarantee. The higher the profitability is,the better the liquidity is. However, there is not distinctive relation between capitaladequacy ratio and the liquidity profile of the bank.5. the paper has built a liquidity risk management framework for commercial banksin China based on the general rules and methodology of liquidity risk managementtogether with the considerations in the specific conditions of commercial banks in Chinaincorporating the organizational structure, workflow and supporting framework ofliquidity risk management and designed the organizational system of liquidity riskmanagement for Chinese commercial banks based on the overall risk managementsystem of bank.
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