The Research On The Cross-sector Risks And The Supervisory Methods Of Chinese Banking Group

Since1970s, the banking group has been attributed to the fragility of anation’s economy or even the world’s economy, due to the magnitude of themarket power and their particular risk profile, accompanied with the deepeningof the economic globalization and financial deregulation. We are trying to fill inthe blank of research in the identifying, measuring and supervising cross risks ofthe banking group, analyzing the categories, characteristics and the formulationmechanism of the cross risks, proposing the respective supervisory methods andthe consolidated supervisory framework for the cross risks of the banking group.This paper defines the cross risks into two categories. One derived from thecomplication of the corporate governance and organizational structure, the otherderived from the intra-group transaction. As for the first category, this papermeasure the complexity of the organizational structure applying the DissipativeStructure Theory and the Management Entropy, therefore the quantitativeassessment could be done to the related cross risks. As for the second category,this paper analyzes the external trigger factors that exist particularly in Chineseeconomic environment. Aiming at analyze further the cross risks embedded inthe intra-group transactions among group members, this paper applies the gametheory to trace the risk infection between a bank and a trust company within abanking group, and a CoVaR model to explain the risk infection processbetween a bank and a security firm, and a quantitative model to quantify theextent to which a failure in an asset management product affects the groupmembers. Cross-border risk affection is also discussed in terms of theattributing factors and affection routes. Based on all above, this paper measuresand assesses the overall risks of the banking group using the Copula function.We also summarize the international experiences of the supervisory measure ofthe banking group and proposing specific supervisory framework targeting thecross risk of the banking group, where the differentiated scope of consolidatedsupervision, corporate governance, intra-group transaction, capital adequacy,ring-fencing and cross-border supervision are emphasized. The main contribution of this paper includes: proposing the definition ofthe cross risks or the banking group and the respective theoretical framework;establishing the analytical model of the risk affection of the cross risks thatderived from both the organizational structure and intra-group transaction;summarizing the international experiences of the supervisory practices datingback from1970s until the very recent reform; putting forward the proposals foran ameliorative framework for the supervising cross risk of the banking grouopin China.