The Relationship Analysis Of Bank Concentration And Bank Risk

The economic crisis centered around United States has caused devastating impact on global finance industry.Financial crisis risk has accumulated with market supervision easing,banks’ scale expanding wildly and sub-prime loan risks being concealed to make fake economic boom.With financial institutions going bankruptcy in a hurry,the crisis has spread out quickly and people have then begun to pay attention to the relationship between bank concentration ratio and risk.The Banking Industry of China has grown up since 1979,giving impetus for Chinese economic growth.In recent years,China has consistently strengthened the reform of marketization in bank industry,with lowering the acceptance standard of foreign banks,encouraging the establishment of small and medium banks and setting up privately owned banks.Therefore,the competition situation of banking market has changed with declining of bank concentration ratio and with higher efficiency of financial resource allocation.However,asset quality of banks declined and risks accumulated.With the research in this article,the author hopes to creatively discuss in China whether and how the change of bank concentration level impacts on bank risks,on regional risk infection and on different financial sectors.Valuable suggestions are made upon those conclusions.At the beginning,the article reviews classical theories of bank industry organization and of financial infection and spilling out.It summarizes the hypothesis of the relationship of bank concentration ratio and bank risks.Also,creative analysis that bank concentration ratio influences risk spacial spill over and sector infection provides necessary theoretical support and research frame for empirical studies.After that,the article describes quantitatively and qualitatively the situation in China’s bank industry and that in United States and European Union.This article analysis the relationship between bank concentration and bank risk through three parts: credit asset quality,regional risks spilling over and sector infection.The first one is proved by empirical analysis of bank concentration ratio and non-performing loan rate based on provincial statistics in 2006-2016.It reaches theconclusion that increase in banking market concentration ratio benefits banks with lowering NPL rate thus reduces the risks.Robustness tests are finished by switching measurement methods and by regressing different samples.In the research of how bank concentration ratio influences financial risks spreading through different regions,the article concludes three ways of regional risk spread through default clustering: the balance sheet of real economy,the balance sheet of banks,and the financial accelerator effect.With those three ways financial risks in different regions comes in same direction.The change of bank concentration ratio can affect the spread of financial risks by internal information interaction and external information screen,which on the one hand enables local bank concentration ratio to influence bank risk in other areas and on the other hand affects the speed of spread of bank risks in different areas.Four conclusions are made through Spatial Lag Model and Spatial Dubin Model regression analysis with provincial statistics in 2006-2016.First,higher bank concentration ratio will help lower bank risk.Second,higher local concentration ratio will lower bank risk in adjacent areas,which demonstrates an indirect way to financial stability.Third,bank risk is spatially related,as risk may spread to neighboring areas.Fourth,if bank concentration ratio variables are taken into consideration by spatial weight matrix,risks are more related spatially,which means that higher bank concentration leads to higher probability for risks spreading to adjacent areas.Robustness tests are finished by switching measurements and spatial weight matrix.In the research of how bank concentration ratio influences financial risks spreading through different financial departments,the article believes that financial institutions may gather income through adding leverages,adding term mismatch and lowering credit acceptance standards.Meanwhile,risks accumulate in all departments and they rapidly spread out.Whether it is difficult for risks to spread is decided by changes of bank concentration ratio acting through interbank business volume and risk defending ability of financial institutions.This article uses statistics from second-tier financial industry index of Shenyinwanguo from 2007 to 2017 and consistent statistics from CSI 300 stock index futures.CoVaR and GARCH model are adopted to test how bank concentration ratio impacts on the spread of financial risksin different departments.As a result,bank concentration ratio has negative impact on both bank to other financial institutions and the other way around,which demonstrates that higher bank concentration ratio will subsidize risk spread in financial sectors.Also,with fluctuations of the ratio,level of risk spread change from bank to other financial industries is stronger than that from the reverse way.The article believes authorities should not pursue increasing numbers of banks and lower acceptance standard by a large margin in developing banking market.Rather,they should rationally weigh the risk and award in lowering bank concentration ratio and make reasonable reform policies for banking industry.Based on the conclusion of studies,the article makes policy suggestions on four aspects.First,do not lower bank concentration ratio without a clear target.Second,increase bank concentration ratio by product customization.Third,make banking market policies based on local situations.Fourth,strengthen inter-bank business supervision.