Research On Bank's Franchise Value And Risk Incentive In China

According to the regulation of WTO, the period that the Chinese government may put a protection on civil banks came to an end since 2006. The assurance of the safety and stability of banking system, the perfection the recognition of banking risk and prediction and controlling of risk become the main concern of the bank supervisor. Researches showed that franchise value can help to reduce excessive risk taking because banks with high franchise value have much to lose if a risky business strategy leads to insolvency. Franchise value—the present value of the stream of profits that a firm is expected to earn as a going concern—makes the supervisor's job easier by reducing bank's incentives to take risk. The source of franchise value can be divided as "Market-related source of franchise value" and "Bank-related source of franchise value". Although regulatory and technological changes have eroded market-related sources of franchise value, bank-related sources remain important. Franchise value is also declined as a result of innovation. But we find that the "Market-related source" is still important to bank's franchise value by regression. And the study also proves that bank's efficiency in "Bank-related source" made a significant contribution to franchise value. On the basis of theoretic analysis, we find the determinants and disciplining effect of bank franchise value on bank's risk incentive in the period 1999-2005. In the end, advice is given that the bank supervisor should enhance the bank's franchise value by improving supervision. High franchise value may have a disciplining effect on bank's risk incentive and the banks with high franchise value intend to align their interests with the bank supervisor.