Research On The "Rigid Repayment" Of Trust Company In China

Trust behavior can be traced back to behavior of establishing a testament in ancient Egypt and the concept "trust bequest" in Roman law,while the modern trust system originated in British“USE”during the 13th century.The trust systems of the western world have basically experienced the natural evolution from civil trusts to commercial trusts,and finally became financial trusts.As the first civil law country to introduce trust systems,Japan has also carried out many beneficial localizations of the trust system.With its great institutional flexibility,the trust has become an important means of property segregation and asset management.The trust industry has also developed into an important part of the financial markets of various countries.In October 1979,Mr.Rong Yiren,as the Vice President of China,founded the first trust company,which marked the formal recovery of the trust industry in China.However,in the early stage of reform and opening up,the change of China's trust system was always driven by the government.From the very beginning,it has deviated from the origin of trust and remained in a state of vague orientation and dislocation of functions for a very long period.As the result,the trust industry was bound to grow brutally and chaotically,which eventually leads to the fact that although the trust industry in China has undergone several rectifications,it has been unable to get rid of the strange circle of dislocation of functions and chaos control cycles.The situation was not changed until that the "one law and two regulations" were officially promulgated and implemented in the early 21st century.Since then,the trust industry in China determined the main business as "wealth management under trust settlor's entrustment" and achieved rapid development.By the end of 2017,the property scale of all 68 trust companies in the whole industry had exceeded 650 billion yuan,of which the owner's equity exceeded 520 billion yuan.The industrial annual operating income was 119.609 billion yuan and the total profit was 82.411 billion yuan.The scale of trust assets managed by the industry has reached 26.25 trillion yuan.Trust industry has become the second largest sector in financial industry after the banking industry.It has also become an important channel for the asset allocation and wealth management of high net worth clients.And it has played a positive role in the stable development of the national economy and financial market in China.However,in the process of rapid expansion of trust property scale,the trust industry has also exposed some contradictions and risks.The main issues are the serious diversity within the industry,the obvious phenomenon of regulatory arbitrage,business continuity is not strong,frequently happened risk incidents and so on.The trust industry becomes the target of regulatory authorities'rectification,governance,and punishment.In particular,at the end of 2017,the number of risk projects in the whole industry reached 601,with a scale of 131.434 billion yuan.In the face of risk projects,although the trust company does not have the obligation of“rigid payment”in the trust relationship,and the regulatory authorities have clearly stipulated that trust companies are not allowed to carry out "rigid payment",however,"rigid repayment" has become an unwritten rule in the trust industry and cannot be effectively eliminated.In addition,neither the trust compensation reserve of 22.112 billion yuan nor the net assets of 525.067 billion yuan can support the trust property scale of 26.25 trillion yuan in the whole industry.Breaking the "rigid repayment" is becoming inevitable and essential.Therefore,it is important to find out the reasons of the trust company risk by analyzing the trust company's corporate governance and management behavior,so as to study why trust companies choose "rigid repayment".Thus,it is not only an important topic about trust company governance and risk management,but also has a certain reference value for regulators to formulate regulatory policies.Based on summarizing the existing literature,combining with the characteristics and development status of trust industry in China,this paper is first going to make a theoretical analysis of the trust company's business behavior and incentive mechanism based on principal-agent theory.Then,it explores the reasons why the trust companies choose"rigid repayment" when facing the product payment crisis.Finally,according to the conclusions of theoretical and empirical analysis,the corresponding policy recommendations are putting forward.The specific research contents and main conclusions are as follows:Firstly,based on corporate governance theory and principal-agent model,shareholders are used as principals to analyze the internal governance mechanism of the trust companies,while investors and regulatory agencies are used as principals to analyze their external governance mechanism,and a theoretical analysis framework including both internal and external governance mechanisms is constructed.The operating activities of trust companies are divided into three categories:Firstly,the managers accept the entrustment of shareholders and manages the company's property to maximize the interests of shareholders;Secondly,the managers accept the entrustment of investors and manage the trust property brought by investors so as to maximize the interests of investors;Thirdly,the managers accept the entrustment of the supervisory authority to minimize the company's risks so as to achieve the goal of stable operation of the trust company.The research conclusion shows that the managers achieve the maximum expected effect when the marginal cost paid by the managers in various business activities is equal to the marginal income obtained.And the incentive contracts offered by each principal are determined by the degree of risk aversion of the agent managers and the advantage of information asymmetry,and other factors such as incentive contracts offered by other principals.Moreover,there is a positive relationship between the incentive coefficients provided by shareholders and investors,and there are reverse relationships between the incentive coefficients provided by regulators and shareholders,and incentive coefficients provided by regulators and investors.VIISecondly,the restraint effectiveness of incentives of trust companies is tested empirically.The return on asset(ROA)and return on equity(ROE)are selected as explanatory variables of company's performance,and the regression results show that the corresponding coefficient is significantly positive,which shows that the shareholders of trust company provide significant positive incentives for managers.The return on excess investment is chosen as explanatory variable of the return on investment of investors,and the regression results show that the corresponding coefficient is significantly positive,indicating that investors provide significant positive incentives for managers.However,the regression results on the excess capital adequacy ratio show that the corresponding coefficient is not significant,indicating that regulators cannot provide significant positive incentives for managers.Therefore,the empirical results show that shareholders and investors of trust companies can provide sufficient incentives to managers,while regulators cannot provide effective incentive constraints to managers.In the meantime,shareholders and investors will provide significant positive incentives for managers in order to maximize their own profit,which not only deviates from the optimal incentive contract,but also leads to the decrease of the total output of principals.Moreover,it will make the managers of trust companies more motivated to invest their inherent property and trust property in high-risk and high-yield projects.But the managers will ignore the prevention of risks,thus,the frequent occurrence of industry risks has become inevitable.Thirdly,based on reputation theory,a three-party incomplete information game model of "regulator-trust company-investor" is constructed to explain the inherent mechanism of the "rigid repayment"problem of the trust companies.In the process of multi-stage repeated game,if there is a product payment crisis,the regulators will punish the trust companies by downgrading the regulatory ratings,and investors will also punish the trust companies by demanding higher return on investment.On the contrary,regulators and investors will reward the trust companies.Therefore,the trust companies will use the advantage of information asymmetry to disguise themselves as high-capacity companies through "rigid repayment",which will enable the trust companies to build a high reputation in the regulatory and investor markets,and thus to obtain excess returns in the future.In addition,on the one hand,as the trust companies cannot completely resolve project risks,from the aspect of maintaining regulatory ratings and reputation,the trust companies will solve the product payment crisis through "rigid repayment";on the other hand,since the trust licenses are scarce,trust companies are not able to choose "default".As a result,"rigid repayment"has become an inevitable choice for the trust companies.The results of empirical tests show that:the ROA and ROE are selected as explanatory variables of the company's earnings,while the comprehensive strength and capital strength are selected as the explanatory variables of reputation of trust companies.And the regression results are significantly positive,indicating that the reputation established by the trust company through "rigid repayment" in the early stage can have a positive impact on the future earnings of the trust company,which shows that the reputation mechanism can explain the reason why the trust company chooses "rigid repayment".Finally,in terms of policy recommendations,As the regulators cannot provide effective incentives and constraints,the managers prefer high-risk,high-yield projects,which leads to frequent product payment crisis.Facing the product payment crisis,due to the lack of risk identification and pricing ability of investors,as well as the access approval and rating mechanism of regulatory agencies,the trust companies will inevitably use the advantage of information asymmetry to build reputation through "rigid repayment" in the early stage,so as to obtain excess returns in the future.Therefore,this paper puts forward the following policy recommendations:adhere to the private property of trust products,and strengthen investor expertise and risk education;change the way of supervision,and establish effective regulatory incentives and constraints;strengthen trust corporate governance,and return to the origin of trust industry.This paper is divided into eight chapters.Chapter 1 is the introduction;Chapter 2 summarizes the relevant literature;Chapter 3 introduces the trust system and the development of the trust industry in China;Chapter 4 studies the behavior of the trust company and the incentive mechanism;Chapter 5 empirically analyses the effectiveness of incentive and restraint of the trust company;Chapter 6 studies the problem of "rigid repayment" of the trust company;Chapter 7 empirically analyses the reputation mechanism of the trust company;Chapter 8 provides research conclusions and recommendations.