Research On Macroeconomic Risk Sharing And Transferring Mechanism Among Sectors

As one of the core financial functions, the identification, measurement and management of risk reside in the core status in the modern finance research. Macro economic risk of the economic system is the focal problem in the process of economic development. Generally speaking, risk always exists and is shared among various sectors. The change, shift and accumulation of macro economic risk will directly influence the mechanism of risk to financial crisis, then to influence financial security. Therefore, macro economic risk sharing and transferring is the vital point to study the relationship between risk and financial security.The primal designs of modern bank's supervisory system are based on individual bank level, and most research about financial risk also focuses on the micro domain. However, international economy and financial crisis's high cost have reminded that, tradition risk management method has already been unable to meet the careful macroscopic risk supervision need. Therefore, the academics have devoted to establishing frame to analyze the mechanism between macro economic risk and financial stability. IMF(2006)pointed out that, the contingent claim analysis among sectors and the sensitivity estimation through pressure test are basic foundations of financial stability analysis. The studies about pressure test are to be many at present, but studies about the sharing and transferring of macro economic risk are scale, which is a difficult problem around world. Allen, Merton, Gale(2006)creatively proposed a framework to analyze macro economic risk exposition with CCA method: the economical sectors are regarded as incident cross-correlation portfolio of asset, debt and guarantee, and then we can analyze risk transferring among sectors and risk accumulation in the public sector. The new method provides a powerful tool to study macro economic risk sharing and transferring in our country. This article attempts to establish economic balance sheet of every sector, and estimate the macro risk exposition in our country. This research will be helpful to understand the mechanism of macro risk transferring and financial security, take correct measures in the process of risk transferring at the right moment, and carry effective risk prevention or crisis management.We divide national economy into four sectors: private sector, corporate sector, financial sector and public sector. The financial sector in China mainly refers to the banking sector, and the public sector includes two departments: the state finance and the central bank. At core of banking sector, macroeconomic risk is sharing and transferring among the four sectors along with capital flows. Risk sharing can be seen as a stable state, and when the stable state is broken, the risk will be dynamic transferring among various sectors. When the risk accumulates to a certain extent, we should transfer the residual risk out in order to avoid crisis. For example, when the excessive risks of banking sector can not be transferred, the public sector must share some risk, or the outbreak of the financial crisis maybe happen. In reality, the transferring of risk performs as the change of liabilities or guarantee. Therefore, the key to study the risk sharing and risk transferring is the debt risk and the guarantee value in the economic balance sheet.CCA means contingent claim analysis, which means that the future earnings of some financial asset depend on the value of other related assets. CCA defines the basic relation between asset value and debt value, as follows:Asset=Equity + Risk Debt= Equity + Secured Debt–GuaranteeAccording to Merton's corporate value structure model, the equity can be seen as call option, and the debt can be modeled as put option. The value of equity, risk debt and financial guarantee can be priced through Option Pricing Model (Merton, 1974).CCA method depends on economic balance sheet. The economic balance sheet is different from traditional balance sheet that, the economic balance sheet includes contingent claim value, and the traditional balance sheet doesn't include, such as government guarantee.Although the economic balance sheet and CCA are usually used to analyze individual companies or institutions, they also can be used in risk analysis of sectors. We can determine the value of contingent claim and risk debt, and analyze the risk sharing state among sectors. We can also analyze the connection among asset value, debt value and equity value. We can prepare economic balance sheet according to the basic relation between asset and debt, and estimate macro risk exposition. So the intrinsic of Allen(2006)method is integration of CCA method and economic balance sheet, and the sector economic balance sheet is the basic vector of CCA analysis.We look the corporate sector as a single market entity, that the debt value is the secured debt value minus a put option, and the equity equivalents to a call option. The banking sector links the whole macro economic system. It links corporate sector with enterprises loans, and links public sector through direct and indirect channels. The direct contact is the dominant liabilities, and indirect contact refers to the guarantee. The dominant liabilities can be reflected in the traditional balance sheet, and guarantee not. However, the most easily overlooked guarantee is the core risk factor of macro economic risk, because the banking sector has strong external effect. Once the serious problems break out, the public sector will not stand idly by. So there always exist guarantee from public sector to banking sector, which can be seen as a put option. Banking sector buys, and public sector sells. The sectors transfer risk through dominant liabilities and hidden guarantee, the channels and the extent depend on the structure of assets and liabilities. Risk sharing is only temporary state. Whatever ways and channels of risk transferring, and when the risk accumulates to certain extent, crisis may break out. Because the hidden guarantee of public sector to banking sector always exists, the guarantee of public sector is the key of financial stability, and when public sector cannot take risk or transfer risk any more, crisis may break out.In the empirical analysis, we determine the asset value and debt value through establishing 2005 economic balance sheet of China, estimate the macro economic risk exposition, and get the hidden guarantee value of public sector. The empirical results point out: the economic development of our country relies much on the indirect banking financing system, and every sector has high debt exposure; the sector's debt is concentrated, and the vulnerability is high; the guarantee of public sector to banking sector is always exist, and the value accounts much proportion in the public debt at present stage, so the public sector actually bear a high load of macroeconomic risks. Financial stability lies in the financial guarantees of public sector, but whether the guarantee can be sustainable depends on the risk situation of public sector. As the bank's guarantor, once the public sector gets in trouble, the confidence of depositors will be reduced. If the risk of banking sector cannot be shared or transferred, the risk will accumulate in the banking sector. When it accumulates to certain extant, financial crisis will happen. The importance of public sector in the financial stability reminds us to pay attention to the risk of public sector. The risk analysis of our public sector shows that, the state finance and central bank face tremendous challenges.When the public sector bears the loss on its own, risk transferring from the banking sector to the public sector will no longer continue. But when the public sector does not rely on its own income to bear the loss, they transfer risk to public debt holders through issuance of debt or currency. Whether the public sector can take the risk on its own depends on its strength, and whether the public sector can transfer the risk to debt holders relates to the sustainability of the public debt. Traditional methods of sustainability analysis focus on the book debt/GDP ratio analysis, which don't consider the uncertainty. While the CCA method take into the uncertainty, can determine debt risk premium. The CCA method is not substitute of traditional method, but complementary. This paper first analyzes the risk situation with traditional method, and then makes a complementary analysis from the aspects of risk premium of foreign debt and local debt and hidden debt, which will make the analysis more comprehensive.Finally, based on the mechanism of macro economic risk sharing and risk transferring, this paper proposed macro economic risk management frame from the aspects of risk management and risk transferring of bank, public risk management, financial guarantee management, liquidity management and macro financial innovation.