Mechanism Study On The Influence Of Profit Pattern On Profitability And Risk

With the rapid development of information technology,Internet finance has seen explo-sive growth in China,and financial disintermediation becomes more and more frequent.Chi-na's financial system,which is dominated by commercial banks,has been severely impacted and its profit pattern needs to be transformed.China's commercial banks are faced with two reverse forces in the transformation of their profit model:Firstly,the adjustment of economic structure forces commercial banks to improve their function of serving the real economy.The profit model is required to transform its leading role from the highly effective basic function of mobilizing savings to the core function of allocating capital,and to lay foundation for fur-ther expanding resource redistribution,risk diversification and other derivative functions,as well as achieving functional upgrading.Secondly,interest rate liberalization leads to the nar-rowing of interest margin,forcing commercial banks to explore new profit structure by im-proving on and off-balance sheet business income and comprehensive operation.To organi-cally combine the profit structure adjustment with improvements in serving the real economy so as to avoid the tendency of "shifting from real to virtual" in the process of interest rate lib-eralization is crucial for Chinese commercial banks to improve their competitiveness and en-sure the smooth transformation of economic growth model and economic restructuring.It is also the main guarantee for the sustainability of profit pattern.However,existing literature lack necessary attention to this aspect.Firstly,on the basis of sorting out domestic and foreign literature about topics including the influence of profit pattern of commercial banks on profitability,and influence of profit pattern of commercial banks on risk,this paper puts forward the proposition that the profit pattern of commercial banks affects profitability and risk by unifying the profitability and risk into the profit pattern according to the fact that commercial banks' earnings cannot be inde-pendent of risks and the two reverse forces faced by the profit pattern of China's commercial banks,trying to find out the similarities and differences between the profit patterns of com-mercial banks in China,developed countries and transition countries and the reasons behind the market system and mechanism.Next,this paper makes definitions on terms including profit pattern,profitability and risk of commercial banks and divides profit patterns into two types,one type is the profit pattern dominated by interest margin and the other is the type that makes a balance between interest margin and intermediate business.It also explains the prof-itability of commercial banks and the basic indicators for measurement,and sorts out main risks faced by commercial banks and select Z-SCORE as the measurable indicator.Then,this paper systematically summarizes the theories related to the impact of commercial banks'profit pattern on profitability and risk.The above research provides a logical framework and a theoretical basis for this paper.Secondly,this paper constructs a theoretical model of the impact of commercial banks profit pattern on profitability and risk.It uses the Cobb-Douglas production function to de-scribe the input-output of commercial banks,and draws on the loan production function,so as to build the basic model of banks' profit pattern on profitability and makes the theoretical analysis on the impact of non-interest business on the profitability.By solving the influence of commercial banks' profit pattern on profitability under the Cobb-Douglas function system,it is found that there is a non-linear relationship between the two,that is,with the diversifi-cation of commercial Banks' business,the positive influence of profit pattern on profitability is gradually strengthened.However,due to the influence of monopoly power,external com-petition and other factors,the profit pattern of commercial banks has a high limit on their profitability.Based on the bankruptcy distance thought proposed by Roy and the Z-SCORE model proposed by Altman when studying the financial risk status of enterprises,this paper calculates the value of Z-SCORE model and extends the theoretical model by combining probability distribution in statistics.By solving the theoretical model of the impact of com-mercial banks' profit pattern on risk,it can be realized through business income fluctuation:When the business income fluctuates less,the diversification of the income structure will reduce risks;whereas when the business income fluctuates greatly,the diversification of the income structure may increase risks.The theoretical models of the impact of profit pattern on profitability and risk make up the deficiency of empirical test and theoretical analysis in this research field.Thirdly,this paper selects the data of the top 20 commercial banks in 4 developed coun-tries,6 transition countries and China from 2005 to 2014.It explains advanced functions of different financial system in different stage of economic development according to the char-acteristics of industrial structure in different development stages of real economy.Based on the perspective of financial function,this paper uses descriptive statistical methods to analyze the profit patterns of commercial banks in different types of countries.The result shows that the profit pattern and profit structure of Chinese commercial banks are quite different from those of commercial banks in other countries:(1)Excessively dependent on mobilizing sav-ings.The proportion of net interest income in the operating income of Chinese commercial banks is much higher than that of the comparable countries.Chinese commercial banks blindly overextend loans,which leads to the primary position of the profit pattern dominated by interest margin.(2)In terms of the core function of capital allocation,Chinese commercial banks are in high net interest margin but weak function of core capital allocation.(3)In terms of derivative functions,the net fees and commissions of Chinese commercial banks account for a relatively smaller proportion,and the function of risk diversification is weak.There is the small proportion of other incomes and the lack of derivative functions such as risk aver-sion and corporate govermance in China.Through the analysis of this chapter,it can be con-cluded that the transformation of profit pattern of Chinese commercial banks has bigger pro-motion space for improvement in the process of serving the real economy.The descriptive sta-tistics of microcosmic data of commercial banks make up for the fact that relevant indicators of commercial banks at home and abroad are mostly concentrated at the industry level or lim-ited to commercial banks of individual countries and lack of comparison of microcosmic data of multiple countries.Fourthly,this paper empirically examines the impact of commercial banks' profit pattern on profitability and risk.In this dynamic panel model,ROAA(return on average assets)and Z-SCORE(probability indicator of bank failure)are selected as explained variables to meas-ure profitability and risk of commercial banks,NIM(net interest margin),NIIR(non-interest income ratio)and DIV(diversification income structure indicator)are used as explanatory variables.By using the GMM method which is based on dynamic panel,this paper analyzes the data of the commercial banks in 4 developed countries,6 transition countries and China from 2005 to 2014,the following results can be obtained:(1)Similarities of commercial banks in China and those in developed countries and transition countries:The profit pattern of expanding credit business and increasing net interest margin significantly improves their prof-itability,but also increases risks.(2)Differences of commercial banks in China and those in developed countries and transition countries:Firstly,the expansion of non-interest business of Chinese commercial banks has significantly improved their profitability,but it has a negative impact on the profitability of commercial banks in transition countries,and has no significant impact on the profitability of commercial banks in developed countries;Secondly,diversified operation can significantly increase the profitability and reduce the risk of commercial banks in transition countries,and it will significantly reduce the risk of commercial banks in devel-oped countries but negatively affect their profitability.While diversified operation of Chinese commercial banks can significantly improve their profitability,but cannot significantly reduce their risks.(3)In China all business income can significantly improve the profitability of commercial banks,but none of them can effectively improve the risk-bearing function.Com-pared with other countries,Chinese commercial banks blindly pursue profits and do not fully consider the problem of avoiding risks when carrying out diversified operation,which is a very noteworthy phenomenon.Using the micro data of commercial banks to reveal the sig-nificant differences between the profit pattern of Chinese commercial banks and that of com-mercial banks in developed countries and transition countries on profitability and risk,this paper makes up for the deficiency of existing literature that limited to the unilateral influence of the profit pattern of commercial banks on profitability or risk in China and a certain coun-try.Finally,according to the research conclusions,this paper puts forward some suggestions on how to improve profitability and strengthen risk control of Chinese commercial banks in the transformation of their profit pattern.(1)China's commercial banks should improve capi-tal allocation in the profit pattern and play the core function of serving the real economy.It is necessary for China's commercial banks to enhance their ability to identify and predict the real industry,link the banking service chain with the industrial service chain,and conform to the development of the real industry.(2)China's commercial banks should strengthen indus-trial supervision and risk awareness,and correct the distorted relationship between business innovation and regulatory arbitrage.Commercial banks should refine the product innovation mechanism and strictly implement the supervision system.At the same time,the regulatory authorities should improve the effectiveness of regulatory mechanism to provide institutional guarantee for the transformation of commercial banks' profit pattern.(3)Optimize the corpo-rate governance structure of commercial banks and promote the benign transformation of profit patterns.It is necessary to strengthen checks,balances and coordination among the board of directors,the management and the board of supervisors of commercial banks,and transform the profit pattern driven internally.Commercial banks should replenish capital in a timely manner,improve the quality of capital,enhance their ability to resist risks.(4)Com-mercial banks should realize differentiated operation to serve the real economy,and tap greater profit potential.Big data should be used to deeply dig customer data and provide dif-ferentiated risk control for different business.Commercial banks should realize diversified operation in the true sense,and promote the transformation of profit pattern from the tradi-tional type dominated by interest margin to a more diversified type with comprehensive oper-ation.(5)It is a necessity for commercial banks to strengthen the upgrading of service func-tions,select and cultivate professional bankers,establish and improve the training mechanism for T-type talents in the banking industry so as to provide talents for the transformation of profit pattern.