Research On The Generation Mechanism And Prevention Of China's Financial Systemic Risk

Systemic risk is different from individual risk.Once it breaks out,it will affect the normal operation of the entire financial system,and may even cause an economic crisis,so it is extremely harmful.The global economic crisis triggered by the US subprime mortgage crisis in 2008 is still vivid.The report of the 19 th National Congress of the Communist Party of China stated that,“Improve the financial supervision system and keep the bottom line where systemic financial risks do not occur”.Prevention of systemic financial risks is undoubtedly an important condition for ensuring healthy economic development and social stability.Judging from the current situation of China's financial risks,the current real estate risk and local government debt risk are more prominent than other risks,and both of them are closely related to the financial system for which banks is the main body.Therefore,once problems occur,it is very easy to cause systemic risks.After the subprime crisis broke out,countries began to strengthen their domestic macro-prudential supervision of the financial system to prevent systemic risks.China is no exception.Macro-prudential supervision aims to reduce the systemic risk of finance by improving the stability of the financial system and enhancing its resistance to exogenous shocks.Based on this background,this article studies the generation mechanism and prevention of China's financial systemic risk.Specifically,this article mainly researches in depth from the following aspects:Firstly,from the perspective of house price fluctuations,this paper studies the mechanism of how real estate market risk induced systemic risk.In analyzing the process of house price fluctuations and the generation of systemic risks,this paper builds a theoretical model that includes house buyers,real estate agents,and banks.By dividing house buyers into rigid demand buyers and speculative buyers,this paper analyzes the mechanism of how speculative buyers caused a real estate price bubble and further induced an excessive fluctuation of house prices,and then,this paper does a theoretical analysis of how the fluctuation of house prices will affect the quality of bank credit.Based on theoretical analysis,this paper further analyzes the relationship between house price fluctuations and systemic risk generation based on the data of real estate prices of 35 major cities in China and their local urban commercial banks.The research results show that the entry of speculative house buyers will cause real estate prices rising too quickly in the short term,therefore resulting in a real estate price bubble,and the higher the proportion of speculative house buyers in the real estate market,the greater the rapid rise in housing prices.In addition,the theoretical analysis also shows that the higher the economic growth rate,the greater the excessive rise in housing prices,so the real estate price bubble is more likely to occur when the economy develops at a high speed.The excessively rapid rise in housing prices will lead to an excessive increase in real estate companies' investment and an excessive expansion of bank credit.When speculative house buyers predict that the supply of the real estate market will increase significantly and therefore exit the real estate market,it will cause great shock to real estate companies,which in turn led to an increase in the bank's nonperforming loan ratio.Empirical analysis based on data from urban commercial banks shows that rising house prices have no significant impact on bank risks,but excessively rapid rise of house price will significantly increase banks' risk exposure.When house prices rise too quickly,it is easy to cause a house price bubble,which will lead to an increase in banks' risk exposure.In addition,empirical analysis also shows that the rise in house prices has a significant positive effect on banks' credit expansion,and the expected growth rate of house prices has a significant negative effect on banks' nonperforming loan ratios.Therefore the excessive rapid rise of house price will led to an excessive expansion of banks' credit,and when house prices are expected to fall sharply,the quality of banks' credit will also deteriorate rapidly,which will have a great impact on the financial system.Secondly,this paper studies the mechanism of systemic risk induced by local government debt risk from the perspective of local government debt expansion.In analyzing the process of local government debt expansion and systemic risk generation,this paper firstly analyzes the expansion reason of local government debt by building a decision model for the scale of local government debt from the perspective of promotion incentives and the tragedy of the commons.Then based on the local government's financial status and debt data,this paper using the KMV model estimate the default probability and default risk of local government debt in various regions.Especially for regions with higher default probability and default risk,this paper further estimates the rescue costs that the central government needs to pay in order to reduce the high default probability to within a safe range,and then analyzes why the expansion of the local government debt scale causes systemic risks.The research results show that the promotion incentives make local government officials have the urge to over-invest,and thus have the incentive to over-borrow.The tragedy of the commons phenomenon makes local governments only care about the debt risk of their own jurisdictions,and not care about the local government debt risk in other jurisdictions and the systemic risk of local government debt across the country.This phenomenon makes the optimal local debt level of local governments from the perspective of maximizing their own utility higher than that of the central government from the perspective of maximizing overall social welfare,which led to the excessive expansion of local government debt and the rise in systemic risk.Studies on the default probability and rescue costs of local government debt in various regions show that although the overall local government debt risk in China is not high,the default probability and default risk of local government debt in several specific regions are obviously too high.The probability of debt default falling below safety standards requires the central government to pay a large rescue cost.From the time dimension,the default risk of local government debt has increased year by year.Therefore,when the scale of local government debt continue to expand and induce the high default risk of many regions,it will be very difficult for the central government to rescue it.Bank is an important source of funding for local government debt.Therefore,the risk of local government debt is likely to be transmitted to the financial system quickly,thereby triggering systemic risks.Thirdly,this paper studies the impact of real estate risks and local government debt risks on the banking system and the contagious effects of risks within the banking system based on the network model of inter-bank holding common assets.Because commercial banks have a large degree of overlap in business operations,they have a high similarity in the type and structure of assets.When a certain asset is deceased due to an external shock,the bank owner's equity will decline and the leverage ratio will rise.In order to reduce the leverage ratio,banks must sell certain assets.Because of the similarity of the banks' holding assets,the banks' asset sales behavior will cause the asset prices to fall,which will further influence the banking system.The indirect losses caused by such shocks are a reflection of the risk contagion effect of banks and reflect systemic risks.At present,both real estate related loans and local government debt related loans account for a considerable proportion of the banks' loan assets.Therefore,when these two are at risk,the impact on the banking system will not only affect the asset price of real estate and local government debt related loan,but also affect the prices of other bank assets,and therefore leading to the spread of risks within the banking system.This paper uses the sum of real estate corporate loans and personal housing loans to measure real estate related loans in banks' loan assets.In addition,this paper estimates the scale of local government debt related loans according to the purpose of bank loans,and then constructs the asset structure matrix of the banking system.Based on this,this paper analyzes the impact of real estate loans and local government debt related loans on the banking system when they are influenced by mild,moderate,and severe,three different extent of shocks.The research results show that,under mild shocks,the direct and indirect losses caused by exogenous shocks to the two assets to the banking system are relatively small.As the intensity of the shocks increases,the direct losses and Indirect losses will also increase,but the growth rate of indirect losses will decline.This is because indirect losses measure secondary shocks.When exogenous shocks are strong,direct losses alone cause a significant reduction in the size of bank assets.As a result,the increase in indirect losses will also decrease.In addition,the research results also show that the liquidity of the market has a strong influence on the possibility of systemic risk caused by real estate risk and local government debt risk.When market liquidity is tight,banks' asset sales behaviors will induce even more asset price falling,so real estate risks and local government debt risks are more likely to trigger systemic risks.Fourthly,considering the strengthening of macro-prudential supervision is the main idea to prevent systemic risks,this paper uses the Co Va R model to measure the systemic risks of banks in China,and uses the Macro Prudential Assessment as an example to analyzes the effectiveness of Chinese macro prudential regulatory policies by using difference-in-differences method.The measurement and analysis results of the systemic risk of banks show that,overall,the systemic risk of state-owned commercial banks is higher than that of joint-stock commercial banks,while the systemic risk of joint-stock commercial banks is greater than that of city commercial banks.This difference mainly due to the difference in system influence.The system influence of state-owned commercial banks is significantly greater than that of joint-stock commercial banks,and the system influence of urban commercial banks is the smallest.But from an individual point of view,there are also some joint-stock banks or city commercial banks that have higher systemic risks due to their higher individual risks,such as Huaxia Bank and Bank of Ningbo.The research on the effectiveness of the Macro Prudential Assessment based on the difference-in-differences method shows that the implementation of the Macro Prudential Assessment can significantly reduce the systemic risk of banks,and state-owned commercial banks are affected much more than non-state-owned commercial banks.Because the implementation of the Macro Prudential Assessment sets different assessment criteria based on the different status of different banks in the industry,the assessment criteria for state-owned commercial banks are higher than other banks,so the systemic risks of state-owned commercial banks have fallen even more.In addition,this paper further analyzes the channel of the Macro Prudential Assessment works.Studies show that the increase in bank capital adequacy ratio has a significant reduction effect on systemic risk,while the increase in leverage ratio will significantly aggravate the systemic risk of banks.The Macro Prudent Assessment can significantly increase banks 'capital adequacy ratios and reduce banks' leverage ratio,so it can effectively increase the stability of the financial system.Based on the above research conclusions,this paper suggests that the current prevention of financial systemic risks should focus on three aspects.Firstly,pay close attention to and guard against real estate bubble risks,strictly prevent the excessively rapid rise of housing price;Secondly,strengthen local government debt management and prevent excessive expansion of local government debt;Thirdly,to further improve macro prudential supervision and improve the stability of the financial system.