Research On Liquidity Creation And Business Model Of The Chinese Commercial Banks

Liquidity provision and creation is indispensable in modern economy.Liquidity created by the banking system is of great importance for both developed and developing countries,whether their financial system is bank-based or market based.In the past decades,against the backdrop of IT technology progress,deregulation and active trading,various financial innovations and new business model boomed,which boosted the integration of market and bank.It seems that the basics of commercial bank's liquidity creation change a lot.Driven by profit maximization,the factors of liquidity creation and their combination,even the existing form of liquidity creation evolve quickly.All this changes seems making commercial banks disengaging from traditional deposit-and-loan business and forming new business model that relies more on wholesale funding and trading business.The new business model of liquidity creation strongly facilitates money construction,but it also may boost asset price bubbles;it does render more financial services to the society,but it may also circumvent most regulations and break the governance balance between liquidity creation and macro/micro regulations.Moreover,it may increase the financial fragility of both individual banks and financial system as a whole.As the proliferation of new business model in financial sector,potential risks accumulated and finally outbroke.The subprime crisis in 2007 is exactly the vivid example.In the post-crisis era,the thought of "back to basics" regains and reform must be made.So how to rebalance and make the financial system running for real economy is of great importance.In order to draw a lesson from past crisis,the transition of business model for commercial bank and the mechanism affecting liquidity creation may be a nice breakthrough point for both private internal and public external governance improving.Firstly,this paper starts with the essence of liquidity and liquidity creation,the ways of liquidity provision and their implications.By using the business model concept,this paper decomposes the liquidity creation activity,clears the inevitability of the unique combination of liquidity creation factors and the synergy effects it brings,and then makes further effort to analyze the efficiency of business model for liquidity creation and its obvious fragility.To counter the dark side of liquidity creation,all relating individual and aggregate risks have also been dissected.In light of PPP(public-private-partnership)feature of liquidity creation,this paper also applies Hufty's(2012)Governance Analysis Framework to dissect the participants,problems,norms,process and nodal point of the governance of the liquidity creation activity.By taking the business model as the nodal point,this paper analyzes the migration of the factors,business model and alternative form(Shadow Banking)of liquidity creation of the western countries and compares those situations in China.By constructing static panel data model,using liquidity creation measurement initialized by Berger and Bouwman(2009),this paper tests the empirical relation between liquidity creation and business model in China under the governance framework.Unlike western countries' situation which is characterized by complex derivatives and wholesale funding with highly interconnected shadow banking,the econometric model shows that in recent years interbank wholesale funding do boost the growth of liquidity creation,which also implies the fact that more illiquid assets are funding by short-term wholesale deposit.Secondly,oppugning the appropriateness of the business model that combines illiquid assets with wholesale deposits,this paper expands the asset-liability matching model initiated by song and Thakor(2007)by combining the concept of business model which involves different activities areas designing,and induces the optimum business model of liquidity creation under the general conditions.Based on the optimum choice and by taking accounting principles for financial assets classification into consideration,this paper develops a method to discern commercial banks' business model choice making further empirical research possible,which may be one of the innovations of this paper.On basis of this method,this paper induces a proxy variable M to represent commercial bank's business model choices in real world.Using K-mean clustering of M,this paper empirically analyzes Chinese commercial banks' choices that deviating from the theoretical optimum model.Thirdly,this paper follows the thought of measuring liquidity mismatch proposed by Brunnermeier.ect(2013),with reference to NSFR parameters constructs liquidity mismatch index,and observes Chinese commercial banks' business model choices and their impacts on aggregate liquidity risks.The relating data shows that systemic risk increasing as the aggressive business model proliferating among Chinese commercial banks.Since it will often take time for commercial banks to change their asset-liability portfolio,this paper chooses dynamic panel data model and difference-GMM estimator to test commercial banks' liquidity risk taking and business model choosing empirically,the result shows that M is more sensitive than other variables in reflecting individual banks' risk-taking,which implies it may be a useful policy instrument for governance improving.Finally,based on the relating theoretic analyses and empirical tests,this paper proposes possible solutions and policy suggestions in regard with governance improving,business model discerning,inter-bank wholesale funding managing and shadow banking supervising.