Research On Loan Securization And Chinese Commercial Banks' Stability

Regardless of “Market leading” financial system or “Bank leading” financial system,bank stability has significant influence on financial stability.Securitization is a major financial innovation,and U.S.banking industry has been heavily promoted by its function of credit risk transfer and the increase of liquidity in the early stage of its development.But the financial crisis in the year of 2008 clearly shows that securitization plays an important role in banking risk accumulation and diffusion as well as the spread of the liquidity crisis,which makes the relationship between securitization and bank stability as well as the adverse selection and moral hazard problems in the process of securitization become the focus of attentions in academia once again.The researchers can be mainly divided into two camps: “Securitization-stability” and “Securitization-instability”.Although the market for securitization has experienced a remarkable decline because of the financial crisis,the market has been restored under the regulation as a whole after the crisis.With the need of increasing liquidity of existing assets in financial systems,and the need to support the real economy as well as reconstructing the economic structure,China has also been speeding up the pace of the development of asset securitization market after the crisis.Due to the two-way influences of securitization on bank stability and the rapid development trend of securitization markets,it's urgent and necessary to deeply and systematically analyze wether or not the funcations of securitization of credit risk transfer and the increase of liquidity can strengthen the risk sharing and dispersion mechanism.This paper focuses on loan securitization of Chinese commercial banks.From the perspective of the basic function of loan securitization,it analyzes the mechanism of securitization's influence on bank stability,the relationship between loan securitization and the commercial banks as well as the existence of adverse selection and moral hazard behavior in the process of loan securitization and other issues.Firstly,based on the review and summary of the relevant research' results before and after the financial crisis,especially after the financial crisis,qualitative analysis and theoretical models are introduced in this paper,in order to expound the mechanisms of asset securitization' effects on bank stability systematically from the basic functions of securitization,which are credit risk transfer and liquidity increase.Results show that the basic functions of asset securitization are proved to be double-edged.Securitization can be a tool for commercial banks to transfer and spread credit risk,and increase the liquidity of banks;moreover,this process improves financial market liquidity,and promotes the stable development of banking and financial market.But,some factors would reduce the stability of banks in the process of securitization,including implicit(or explicit)guarantees and credit risk' backflow to bank' balance sheet,adverse selection and moral hazard because of information asymmetry,and excessive risk-taking for more convenient access to liquidity.Among them,the major factors are adverse selection and moral hazard behaviors of banks and excessive risk-taking.Therefore,the comprehensive effect of asset securitization on commercial bank stability depends on the positive effect or the negative effect which is the dominant power.Secondly,combined with China's macro economy background and the present profile of the bank's risk,this paper analyzes the current situation and the characteristic of Chinese commercial bank' loan securitization,and the results show that:(1)Under the new economic norm,it's an internal need for commercial bank taking adventages of loan securitization to manage credit risk and liquidity risk;(2)Almost all of the underlying assets of loan securitization in Chinese banking are high quality business loans,so,there is no adverse selection behavior of commercial bank in the process of securitization,but the whole quality of bank assets in balance sheet would decline;(3)The explicit and implicit guarantees for asset-backed securities from commercial banks and the holding of asset-backed securities between banks lead to two consequences.On the one hand,credit risk in banks can't transfer to off-balance sheet effectively;On the other hand,credit risk is still circulating in banking system;(4)The liquidity of assets may stimulate banks to expand risky assets excessively,but in the process of risky assets expansion,it's unlikely for banks to reduce loan standards or relax post-loan supervision efforts.Thirdly,based on the theoretical analysis and present situation analysis of the relationship between loan securitization and bank stability,this paper firstly investigates the comprehensive effects of the influence of loan securitization on Chinese bank stability in two dimensions: credit risk and liquidity risk.This paper further empirically investigates the path that how securitization affects commercial bank' stability in China,that is,wether commercial banks in China are encouraged to expand credit due to loan securitization and whether banks have moral hazard behavior in the process of securitization.This paper provides three empirical evidences:(1)Although securitization activities can increase the source of bank' liquidity and transfer credit risk to investors,but reduce the overall stability of commercial banks at the same time,namely,securitization lead to a decline in the capacity of banks using earnings and capital to offset losses and a decline in the level of bank liquidity;(2)The decline in the capacity of banks using earnings and capital to offset losses is due to the negative impact of securitization activities on bank return from assets;(3)Securitization activities inspire banks to expand credit assets excessively and take on more risk,but there is no evidence shows that banks reduced lending standards or relaxed post-loan monitoring efforts in the process of securitization.Finally,according to the conclusion of the whole research,this paper puts forward some policy suggestions to promote the development of China's securitization market from the perspective of bank stability.(1)It is nessarry to establish the legal status of relevant organizations from the aspect of laws and regulations,improve the disclosure of information and risk-sharing mechanism,put forward the accounting requirements of off-balance sheet assets clearly and reduce the burden of taxes and fees and so on;(2)It is important to insist on simple and transparent development direction of securitization market.It's necessary to strengthen risk identification and early warning mechanism and improve efficiency of the third party valuation system and rating system;(3)It should give banks the freedom to choose underlying assets of securitization,relax restrictions of non-performing assets securitization in bank properties and size gradually,but at the same time strengthen information disclosure and risk early warning mechanism of non-performing assets securitization;(4)Correctly handle the relationship between innovation and regulation,and build a system of unified coordination mechanism of financial stability.