A Study On Incentive And Restraint Mechanisms Between Head Office And Branches Of Our State-owned Commercial Banks

Until now, branch banking system is commonly adopted by China's state-owned commercial banks. A lot of studies on the corporate governance of commercial banks have been done among the academic field. However, there are little studies on how to efficiently regulate the branches from the view of head offices of commercial banks. It is an un-solved but meaningful question. Moreover, the management of branches is the central question of state-owned commercial bank reform and development. Under the operating mode of "a legal entity, level-authorization", there exist conflicts regarding the interests and the objective function between the head office and branches. According to the unified legal system, head office is the first-grade legal entity which assumes full management responsibility. In the real, the main business activities are done in the branch institutions. This leads to the separation of legal subjects and actors. If the head office cannot efficiently control the activities of branches, the branches will overstep their authority, but the emerging risks from the overstepping are ultimately taken by the head office. In this view, insider-control comes easily into being for the branches, which pursuit their own interests at the expense of head offices and the whole bank. Thus, to realize the objectives of enterprise value maximization, the head office of state-owned commercial bank unavoidably faces two problems:first, he needs to create incentives for branch managers to work hard and to strengthen suitable supervision; second, to guide that the branch managers assume expected risk, he needs do increase risk control in order to avoid the whole banking crisis. Therefore, China's state-owned commercial banks need urgently to study the effective incentive and restraint mechanisms to sub-branches to ensure the branch risk control and resource allocation efficiency institutionally. This is the major problem that this paper study and try to solve.The research line of this study is as follows. Starting from the characteristics of current branch management system of state-owned commercial banks, we examine the present situation of incentive and restriction mechanism, and then analyze its deficiencies and problems; in the following part, we make use of principal-agent model of information economics to design incentive compensation contracts for head offices to branches. We analyze the various factors that affect the incentive effect, and our target is to propose solutions to China's current system of state-owned commercial bank's branch banking. At the same time, from the perspective of supervision constraint, we study how the head office make good use of the role of oversight bodies to prevent collusions from the affiliates, and then design effective anti-collusion incentive contracts. From the authorized incentive point of view, we also examine the present situation of China's commercial bank branches authorization, and then give the optimal degree of authority decision model in order to analyze the factors affecting the optimal degree of authority, as well as the degree of influence on the branch managers. We analyze empirically the executive pays of China's state-owned commercial banks in recent years in order to test its relevance and performance level, as well as the applicability and validity of model's conclusions. Taking one state-owned bank's overall performance appraisal system as an example, we analyze deeply the problems of China's state-owned commercial bank's total branch performance evaluation system, and build the overall branch performance evaluation system suitable to the characteristics of China's commercial banks. Finally, we provide the policy recommendations on incentive and constraint mechanism between the head office and branches of China's commercial banks from the experiences of foreign banks.By examining several state-owned commercial banks'incentive and constraint status, we find that the main problems of the state-owned commercial banks' incentive and restraint mechanisms are:first, there is only a single channel for promotion, which means there exists severe personal-controlling; second, the remuneration design is not entirely reasonable, e.g., fixed wages accounting for a larger portion, which mainly focuses on the form of short-term incentive and thus makes the state-owned banks pay in the interbank market un-competitive; third, resource allocation is not conducive to the working of incentive mechanisms; and the last, it is short of capital constraints and large dependence on administrative constraints.By analyzing the three main manifestations of the goal conflict between head office and branches of state-owned commercial banks, we find that the main reason and its corresponding conflicts on risk management of commercial banks. This article constructs a model of incentive and restraint mechanisms between head office and branches of state-owned commercial banks. Based on the traditional principal-agent model, we consider the impact of asset equity on bank profits, by introducing into the model the monitoring mechanism of the head office, which increases penalties for non-compliance rate of the branch. The final conclusions are: first, the level of effort of the branch operator is unrelated with the fixed-income, but positively correlated with the incentive factor of the head office managers made; second, the level of negative effort of the branch managers is negatively correlated with probability that head office managers find the act and the punishment ratio; third, incentive coefficient is positively correlated with the level of supervision and management of the head office and the punishment coefficient, with the asset quality of branches,negatively correlated with the degree of risk aversion of branch operators. In other words, when the head office motivates branch managers, they not only need to consider the level of effort of branches operators, but also consider the asset quality situation and the operator's level of risk aversion in order to strengthen the supervision and constraint on branch of operators. It is the only way to play the guiding role of incentives and avoid effectively branch operator's opportunistic behavior against the overall interests of the bank.In the design of incentive contracts between head office and branches, we find that an effective monitoring mechanism is helpful to realize the optimal incentive contract. Then, in turn, if the monitoring bodies and the branch operators conspire to deal with the head office manager, it causes that monitoring mechanism can not be its proper role. How should the head office deal with this problem? This paper builds three-tier agent model (a principal-supervisor-agent) to explore the audit conspiracy issue of hierarchy among state-owned commercial banks in our country. In the model, we set commercial banks head office act as principal, internal auditor appointed by head office act as supervisor, branch act as agent. We take the monitoring costs of head office into account, the transaction costs of collusion at the same time be integrated into models. By solving the model, we have gotten a very important conclusion:in the design of anti-collusion incentive compensation, the punishment mechanism is a necessary condition. Moreover, from the model it can be seen:if you do not attach importance to the building of punishment mechanism merely considering incentives, the anti-collusion mechanism is not an adequate and effective mechanism.As for the state-owned commercial bank branches, the authority from the head office is an important incentive way. The article builds an optimal authorization decision model between head office and branches to analyze the influence factors of optimal degree as well as the impact on branch managers. We conclude as follows: first, the optimal licensing degree of head office managers is positively correlated with the internal control management and supervision capabilities of head office, but negatively correlated with the branch manager's job aversion; second, at a critical value, which is an increasing function of the branch manager's risk aversion degree, increasing with the branch manager's risk aversion degree increase, beyond the risk aversion degree of branch manager reaches a certain critical value the optimal degree of authority in turn decreases with the degree of risk aversion increases, now which becomes a decreasing function of degree of risk aversion. In addition, the level of effort to supervision and management of branch manager is proportional to licensing degree. The higher the licensing degree the harder the branch manager works. As can be seen from this conclusion, if the head office is over-centralized and the permissions granted to branch managers is so small that it can not give full play to branch managers'working activeness.Performance management is the lifeblood of enterprise management, while performance appraisal is an important means of performance management which is the baton of the business. The incentive mechanism is conducted and implemented ultimately through the performance appraisal. Incentive constraint contract can or not be effectively implemented as well as will play how much role, which will ultimately depend on the scientific design, conduction consistency and effectiveness of the implementation of the bank's performance appraisal system. In order to deeply analyze the status quo, problems and causes of China's state-owned commercial bank's performance appraisal system, we take one state-owned commercial bank for an example to conduct a comprehensive analysis adoption ways of statistical analysis, discussion and business validation. Through investigation, we found that the state-owned commercial bank's performance appraisal system exist many issues and the causes arise from both aspects of performance management system and the system itself. On this basis, the article constructs a commercial bank performance appraisal system based on balanced scorecard, EVA as the core indicators.In the empirical test, through the correlation and regression analysis on the six joint-stock banks, four state-owned banks four years a total of 40 groups sample data, we obtain results as follows:joint-stock commercial bank executives pay is basically related to the bank's operating performance, while state-owned commercial bank executives pay is not related to operating performance and the payment design is mainly linked with the scale of bank not linked with the efficiency indicators, in particular, not take into account the quality of bank assets (positively correlated with the non-performing loan ratio).From this we can conclude that the pay of state-owned commercial banks does not reflect the bank's objectives of value maximization, as well as incentive mechanism not play a role effectively;which also proves that it is entirely necessary and right that we bring asset quality of banks into the evaluation system in designing incentive contracts.Last of the article summarizes the conclusions of the paper and put forward targeted policy recommendations. With respect to Incentives, First, improving the bank professional managers system, establishing a scientific mechanism for selecting personnel; Second,building the branch performance evaluation system based on the Balanced Scorecard, EVA as the core performance indicators; Third, improving the pay incentive mechanism to branch managers;Fourth, establishing a sound corporate authorization management system to improve incentives for scientific authority. With respect to Constrains, First, establishing a sound independent internal audit system, and strengthening supervision and restraint; Second, strengthening the comprehensive risk management, by controlling branch business risks; Third, strengthening economic capital constraint of the branches.The main innovations in this paper are as follows:First, in the design of incentive contracts, the paper introduced asset quality parameters, and empirical tests show that this approach is correct. Second,in the design of incentive contracts, monitoring mechanisms were taken into account. Third, the paper considered the authorization as an important incentive and constraint method to bank branches by the head office.