Analysis Of Banking Fragility And Regulations

The research of banking fragility origins from the frequent financial crises of rescent years around the world. The traditional crisis theory indicates the deterioration of economy causes financial crisis, but some countries with good economy suddenly burst out financial crisis such as the South-east countries. Why does the traditional theory fail to explain this phenomenon? The reason is that the banking fragility is inherent and on the exterior impact the banking fragility turns into banking crisis. In addition, the banking fragility and crisis are so contagious as to induce financial crisis in a region or even all the world.The international evidence indicates that financial instability and crisis facilitate severe and devastating harm in economy, political and society. It is a necessary caution to China. China is now going through a profound transform in finance and economy and the uncertainty of finance increases. Especially, the step of openness expedites after we joined WTO and the systematic risk increases. It is an important issue for the stability and develepment of finacial system. The aim of the article is to find the principle of the origin and evolvement of financial fragility, evaluate and regulation it.We firstly sum up the theory of banking fragility and the flaw of current research. We analyse the internal and external elements causing fragility and design a 4-term-evolvement model of banking fragility including the action of contagion. We design a evaluation model to investigate the banking fragility of our country and analyse the influence of some macro and micro elements. We point out the supply and demand supply function and design the equilibria model of bank regulation. We put forward some regulations aiming at the banking fragility of China. The main context and conclusion of the article is as follows:(1)We make research on the origins of banking fragility. We figure that the research of banking fragility can sum up into four sections: enterprise, bank, individual and government. We introduce the viewpoint of different theory and review the achievement and flaw of each theory. We consider the causes of banking fragility including internal and external elements. The internal elements include unbanlance of assets and debt, information asymmetry, distortion of credit culture and financial innovation; the external elements include economic fluctuation, limited reason of borrower, incorrect financial system and moral risks. We describe the process of internal and external elements and research the mocro and micro formation principle of banking fragility. As a result, the measures to deal with the banking fragility shall be used in many ways.(2)We build a 4-stage-evolvement model of banking fragility. We deem that banking fragility includes 4 stages: brewing, formation, crisis and transformation. We analyse the character and law of different stage and find that there are three principles causing the banking fragility into crisis: self-fulfilling, external impact and crisis contagion. We emphasize the crisis contagion and build a contagion model, and in this model we deem that the channels of crisis contagion include credit chain, multi-payment system, comparability of differnet countries and the herding behavior. We make a empirical research on the crisis contagion.(3)We design a evaluation model of banking fragility. The article reviews different theoretical and empirical studies of banking fragility and estinates the fragility of state-owned commercial banks from 1985 to 2005 through 4 kernel variables, including the rate of bad credit, the rate of credit increase, the rate of inflation and the rate of capital sufficiency. It is found that the fragility assumes a parabola tendency and is at the lowest point in recent 2 years. In this sense, it is an historical issue facing by state-owned commercial banks to maintain and consolidate the result of reform and development and successfully transform into modem commercial banks. Granger causality and co-integration tests indicate some macro-economic and financial variables have Granger causality and long term equilibrium relations with the fragility of state-owned commercial banks. Financial variables affect it more than macro-economic variables. Therefore, a favorable interactive economy and financial system is an important foundation of stable development of banks.(4) We make research on the target and equilibria of bank regulation in view of maintaining banking stability. We analyse the excess and insufficiency of bank regulation with the theory of regulation economics and point out the suppy and demand function of bank regulation and design a equilibria model.(5)We analyse the elements affecting the banking fragiltiy of our country and put forward some regulations. We consider that the elements such as financial liberty, the flaw in the regulation law, the absence of financial safty-net lead to banking fragility of our country, the risk of deflation and the increasing non-performing loan of national banks. Finally, we bring forward some measures such as consummating the regulation laws, implementing risk supervision, establishing financial safty-net, constituting risk-forecasting-model and building up the function of market obligation.