A Study On Soft Budget Constraint And Behavior Of Commercial Banks

The introduction of the term "soft budget constraint" and relevant theories, has offered a good work frame for analyzing the production and dissolving of the non-performing loan of the commercial bank. We present a two-period game model among government, bank and enterprise that explains the influence to the soft budget constraint of the banks and of the behavior by government's subsidies and local government behavior.In economic transition process, state subsidies to the banks because of government's "paternalism" induce the banks to take excessive risk and expand credit rationally. The more subsidies and the lower supervision, the more possibility for banks to refinance inferior projects. If local government get involved in negotiation between banks, the function of decentralized finance to harden budget constraint will be weakened and the bank will incline to take excessive risk. The result of soft budget constraint is that project quality drops and the non-performing loan increases. The more serious consequence is to cause banking crisis and economic recession.This paper is divided into four parts to analyze the soft budget constraint and behavior of the banks. The first part is to the explain the concept of soft budget constraint and to survey the formal theoretical literature. The second part is to present the model mentioned above, analyzing soft budget constraint of banks by government's subsidies and local government behavior. The third part is to prove the existence of expectation and forming mechanism of soft budget constraint by econometrics measures. Also we estimate the fiscal costs of banking crisis. The last part is to put forward some policies to tackle the soft budget constraint problem, especially enhancing the credible commitment of government.