China's Banking System Vulnerability And Empirical Research On Its Influencing Factors

From the development of the financial industry on the empirical evidence of the last century,we know that most of the damage happened in many financial crisis is caused by banking crisis, the extent of damage in banking crises determines the breadth and depth of the financial crisis. Therefore, to keep the banking system stable is the core of the financial stability. In China, an emerging economy in which bank system play a leading role, bank system vulnerability problems appear more prominent.This paper firstly reviewed the classical theory of banking system vulnerability, and conducts a preliminary analysis on china's bank system vulnerability. China's bank financial system is the main body of China's financial system, so, china's financial fragility is mainly concentrated in the banking system. At present, China's banking system vulnerability presents some features:bank system is too monopoly, bank system has a high correlation with the housing and stock market, the NPL ratio is too high and bank profitability is too poor.so,we thought that China's bank fragility is big and the risk is at a high level.This study analyzed the characteristics happened in some emerging market countries crisis during 1990s. The main features are:high inflation rate, high bank loans to private sector, high bank bad loans. According to the features that China and other emerging market countries have, the paper select the inflation rate, bad loans, bank loans to private sector growth and bank capital adequacy to form the synthesis index of China's banking system vulnerability for preliminary measurement. According to the actual economic financial data and the model, we know that China's financial fragility level generally presents a first increased and then decreased shape, and the bank system vulnerability reached the culmination in 1994.and in ten years out of nineteen years, the banking fragility index is above the average .This shows that our bank system vulnerability level deserve our concern. From 2006, China's banking system vulnerability index began to rise, it should be aroused widespread concern. In order to verify the results, this paper also provide a qualitative analysis from China's actual economic operation condition, the result is that the actual economic conditions cater to the analysis of china's bank system vulnerability risk.In addition, this paper also made an empirical analysis on China's banking system vulnerability, and the vulnerability index was explained by other eighteen economic and financial variables, and we divided these variables into four groups:macro economic variables, financial status variables, debt security variables and foreign security variables. Then, we analysis each group's influence on banking fragility. In order to avoid "spurious regression", the paper adopts a single root test to examine the stability of the data, and we use Granger causality test to examine the causality relation between the smooth data and banking fragility. And finally we use the co-integration theory to inspect the long-term equilibrium relationship between the bank system vulnerability and relevant financial and economic indicators.The granger causality test shows that in macro economic variables group, the GDP growth rate,the stock market capitalization /GDP, and the whole society fixed investment growth rate, in the financial condition group, M2/M1 and credit growth rate/GDP growth rate, in the debt security variables group, the short-term debt/the total sum of external debts and debt servicing ratio, in the foreign security variables group, current-account balance/GDP and the growth rate of the actually utilized foreign capital, have the more remarkable Grainger causal relation with the bank system vulnerability.Further more, we used Johansen co-integration test, the results is that GDP growth, the stock market capitalization/GDP are negatively related to the bank system vulnerability, and the whole society fixed investment growth rate, M2/M1,and credit growth rate/GDP growth rate, the short-term debt/the total sum of external debts and debt servicing ratio are positively related to the banking system vulnerability According to the results from the research and the current macro-economic environment, the paper put forward the corresponding policy recommendations.