Research On Risk And Risk Measurement Of The Financial Holding Company In China

With economic globalization and financial integration since 1990s, the evolution in the financial sector has witnessed significant changes. The most notable trend is that the distinction of various financial sectors and the differences between them has become increasingly blurry. The boundaries between banking, securities, insurance are gradually eliminated, and it is growingly obvious for cross-sector financial institutions to conduct comprehensive management. The financial institutions are growing toward the large groups and conglomerations. At the same time, innovative activities made by financial institutions to prevent financial risks, improve competitiveness and avoid financial supervision lead to intensified and expanded risks.As the reform of the Chinese financial system further deepens, China's financial holding companies have developed rapidly from the cracks of the separated operation system in the mixed operations of international financial background, forming a variety of financial holding companies. Differing from foreign financial holding company background and development, China's financial holding companies have been faced with a series of problems since birth. When viewed especially from China's current practice, financial holding companies are still at their initial stage. Although most of them have formulated a series of internal risk control system, risk control often gives way to business development in the face of fierce market competition. Risk control system is often for show, exposing their future development to huge potential risks.What risks will China's financial holding companies face in the course of their development? Will their operation pattern lead to greater risks? More importantly, how to scientifically measure these risks? Those questions are the ones this paper tries to cope with.This paper is composed of three parts: The first part is the theoretical basis of the full paper, including the contents of the second chapter. In this part, the paper describes the different implications of financial holding companies in different countries or areas and gives its own definition, specifying the scope this paper further research. Meanwhile, this paper uses Transaction Cost Theory, Institutional Change Theory and Modern Portfolio Theory to explain the emergence and development of financial holding company. In particular, Modern Portfolio Theory runs through the Chapter V and Chapter VI, and becomes the main theoretical basis in this paper for China's financial holding company's risk measurement and technology application.The second part consists of Chapter III and Chapter IV. From a comparative perspective, the third Chapter gives a detailed analysis of financial holding companies'development and their present situation in China, and uses Translog Cost Function to obtain 14 China's commercial banks'coefficients of scale economy. Chapter IV is the qualitative understanding of the risk in China's financial holding companies, because risk recognition and identification are the basic premise for risk measurement. In this chapter, the paper sums up some special risks and specific performances facing financial holding companies in China.The third part is the risk measurement of China's financial holding companies, including Chapter V and Chapter VI. In Chapter V, this paper puts forward the viewpoint of using Copula-VaR methods to measure China's financial holding companies'comprehensive risks, and presents detailed steps of calculation. This paper uses"Hypothetical Merger"methods to construct a pure financial holding company, and measures this simulated company's comprehensive risk following the thinking of Modern Portfolio Theory. From the perspective of risk segmentation, Chapter VI uses Copula function to combine China's financial holding companies'market risk, credit risk and operational risk into a joint measurement, and points out a practical theoretical method in China's financial holding companies.The main contribution and original aspects of this paper are as follows:(1) Use Translog Cost Function to obtain 14 China's commercial banks'coefficients of scale economy. This paper creatively divides those 14 banks into three sample groups, namely, the group of the state-owned commercial banks, the group of commercial banks having financial holding company background and the group of commercial banks with non-financial holding company background. The study finds out that the mean scale economy coefficient of the group with a financial holding company background is less than the other two groups for eight consecutive years of all time, which means this group has more scale economic advantages than other two groups.(2) Apply the Modern Portfolio Theory to the risk analysis in financial holding companies, and regard financial holding companies as the financial sector involved in different areas of the investment portfolio. In this assumption, the method of measurement asset portfolio risk can be applied to the risk research of financial holding companies.(3) Use"Hypothetical Merger"methods to construct a pure financial holding company, and measure this simulated company's comprehensive risk following the thinking of Modern Portfolio Theory. Positive result shows that the combined VaR, which presents the simulated company's comprehensive risk and comes from Copula-VaR method, is significantly less than the mean value of five separate financial companies, whether it is 90%, 95% or 99% of the confidence level. This proves that the simulated financial holding company in China does reduce the comprehensive risk.The development and establishment of financial holding company in China is not long enough, the data comes to be the bottleneck of the whole research. In addition, transitional economy can not be ignored, while be limited to the author learning, this paper can not make deeper research on these questions.