A Studying Of Commercial Banking Reputation Mechanism

This article will have a deeply study on the functional principle of commercial banks’reputation mechanism. The existing studies, which have research on commercial banks’reputation is fragmented, and they didn’t form a more systematic and rigorous framework. They either focus on the role of bank’s reputation in game process between banks and a certain beneficiary (such as employees, customers, etc), or focus on analyzing some certain characteristics of the commercial banks’reputation (such as reducing the information asymmetry, asset characteristics, etc). While from some particular aspect, these studies really revealed the regularity of the role of commercial banks’reputation mechanism, but because these studies were not unified into a same framework, so these studies cannot be described deeply.Based on the previous studies, the author of this paper seeks to build a more rigorous and more systematic research framework on the reputation mechanism of commercial banks. At the beginning, this paper is going to give the definition of the reputation mechanism. After combining the existing literature, we give the definition as follows:it refers to the interaction between various players involved and their own reputation under the game rules and certain condition. The relative beneficiaries of commercial banks include depositors, borrowers, regulators and employees. The game between the bank and its four type stakeholders above has a decisive influence on formation of a bank’s reputation, and similarly, the bank’s reputation also has a very important implication on their game action.The classic theory on reputation point out that the formation of the reputation comes from the asymmetry of information, and the reputation, dues to asymmetry of information has a function to solve information asymmetry and can encourage more game features cooperative behaviors. The formation of commercial banks’ reputation and its function has no difference from the above. While the reputation of commercial banks has its own characteristic, since it has been playing and will always play an important role. Commercial banks evolved from a currency custodian, they obtain high returns from loaning the idle capital. But this arrangement has its own vulnerability, then, a good reputation is needed to protect commercial bank from going into bankruptcy by this vulnerability. It can be said that if the commercial bank lost its reputation, it would loss the basis for its existence. As an intangible asset of commercial banks, the reputation has a function in ensuring transaction, and it goes along with the bank’s development. Therefore, the commercial bank’s reputation is a self-realization process, and it is built and accumulated during the process in pursuing the maximize interests. While in this paper, the author also emphasize that the bank’s reputation is easy to be damaged, if it appear that there are non-cooperative behaviors (such as the increase of non-performing asset ratio), the early accumulated reputation will be wiped out. In a sense, precisely because of the vulnerability of commercial banks and the perishable nature of their reputation, it is necessary and meaningful to study on this topic.During the analysis of the banks’reputation mechanism, this paper firstly analyzes the reputation mechanism from the employee’s point of view, and through establishing two game models between employees and commercial banks, we can give two conclusions:First, from the perspective of employees, the employees will be less lazy and will provide higher quality and more competitive financial service; Second, the more attention banks pay on long-term interests, the higher power they will have to establish better reputation. Then, this article gives analysis on the reputation mechanism from the depositor’s point of view. There exists very serious information asymmetry in the game process between banks and their depositors, and the dispersion of the depositors and the modern banking business expertise needed makes the information asymmetry even more serious. While the special asset—reputation can mitigate this information asymmetry problem and encourage more cooperation between depositors and banks. The commercial banks need invest on this special asset, and this investment refers to the signal transmission method. Through the establishment of a bank and depositor signaling game model, we find that in the non-mandatory information disclosure system, the banks with good asset condition are willing to disclose their bad debts, while the banks with poor asset condition tend to conceal the real situation of their assets, which achieves a separating equilibrium. So, the voluntary disclosure of information transmission is a signal that banks use to build a reputation. Next, this paper analyzes the interaction between depositor and banks’reputation mechanism, and also between the banks’loan market reputation and its deposit market reputation. The existence of information rents makes banks have incentives to build a good reputation in loan market under certain conditions, we call it as "hard reputation" in this paper, that is, banks will continue to give additional loan to the enterprises which involved in financial crisis, and would rather to give up current interests. Through establishing the game model between banks and borrowers under a different market structure, the paper concluded that:the greater the discount rate, the banks more inclined to choose a "hard reputation". In decentralized credit market, banks are more inclined to establish "hard reputation". Moreover, in the credit markets, the banks that choose to build "hard reputation" will have their asset quality better and better, while banks choose to build a "soft reputation" will let their asset quality worse and worse. When combining the study from the point of view of both depositors and borrowers, it will be found that the reputation of bank’s deposit market influences the reputation of bank’s loan market in an uncertain direction, while the "hard reputation" gained from loan market decline the marginal cost in raising deposit, and then will increase the reputation of bank’s deposit market. This article also analyzes the relational financing phenomenon in bank’s credit process from the perspective of asset specificity. Whether a bank has a relationship-based lending bank’s reputation depends on banks themselves, and this based on the comparison between the amount of benefits gained from relative lending and distance type lending. The last analyzed stakeholder bank reputation mechanism is from the regulator’s point of view. This article firstly analyzes the importance of regulation, then, gets a conclusion on commercial bank’s reputation by establishing a game model between regulator and banks. This conclusion includes three aspects:1. the higher the initial level of the bank’s reputation, the more power it will have to become normal business-oriented bank.2. The more attention a bank pays on its long-term benefits, the easier a bank’s reputation will constraint on its behavior.3. The greater supervision of the regulator, the more power specifications of its business. Subsequently, the paper analyzes the market access bank supervision, deposit interest rate ceiling, the capital adequacy regulation, mandatory information disclosure, portfolio limits and how these five factors influence the effectiveness of regulatory measures.After analyzing the operating principle of commercial bank’s reputation mechanism from four aspects, this paper continue to analyze how other factors influence the commercial bank’s reputation mechanism, they are system background, technology development and characteristics of the banks themselves respectively. The system background mainly refers to the deposit insurance system, in considering the introduction of deposit insurance system, we should measure whether the benefits gained from reducing the information asymmetry exceed the sum of the cost from moral hazard and the cost arising from the implementation of this system. The choice of the specific deposit insurance system, insurance coverage and limits of appropriate restrictions, risk-adjusted premiums, treatment of failed banks are four ways in influencing the commercial bank’s reputation mechanism. The development of the Internet influences the bank’s reputation mechanism mainly through two obvious aspects:the emergence of Internet banking and the information dissemination pattern. The main features of the bank itself refers to the size of bank, its history and the interest rate, through the establishment of a two-period game model, we can find that the survival time of the bank (history), bank size are positively correlated with the its reputation. The paid bank deposit interest rate is negatively correlated with its reputation.In the last part of the theoretical analysis, the author analyzed the characteristics of the reputation mechanism of Chinese commercial banks. The key points analyzed by the author are the impact generated by China’s "financial constraints" policy implementing on the reputation of Chinese commercial banks and national reputation guaranteeing the reputation of the bank. The implementation of China’s "financial constraints" policy has created opportunities of acquiring rent for commercial banks in China, and banks make use of the opportunity to improve the business and consequently increase their reputation. Although the reputation of our nation guarantees the reputation of our state-owned commercial banks and enable our state-owned commercial banks to have a high initial reputation in the beginning of their establishment, State-owned commercial banks tend to choose the "weak reputation" in the credit markets because of the centralized credit markets and the characteristic of policy objectives transmission. The "weak reputation" of credit market will make the assets of state-owned banks get worse and worse, and finally force the government to come into the plight of guaranteeing the reputation of banks. So the reputation of national guaranteeing the reputation of banks has its own vulnerability. The Chinese government is aware of this problem, and tries to exit gradually from the plight of guaranteeing bank’s reputation. The joint-stock reform and listing of four state-owned banks is the first step of national reputation nation exiting from the dilemma of guaranteeing the reputation of banks. In the view of empirical research, this initiative has achieved preliminary positive result.The empirical part focuses on Quantitative evaluation system of commercial bank’s reputation. The past theoretical researches and empirical research on this problem are disjoint, the research of this part is a positive attempt to find a solution of this problem. Since the reputation of some commercial banks index (CBRI) designing theory is based on thorough theoretical analysis of the reputation mechanism principle of Chinese commercial banks done above. With questionnaires and statistical analysis, this part determines the composition of Reputation index of Chinese commercial banks and the weight of each specific factor in the composition of Index, and attains a complete quantitative estimation of the reputation index of the Chinese Commercial Banks. Combining the research of the commercial banks’reputation mechanism of and Quantitative measurement of the Commercial Banks’Reputation Index (CBRI). this paper can provide scientific guidance for the supervision, management and development of commercial banks, especially for the timely and targeted prevention of commercial bank’s reputation risk.