Risk Management In The Development Of Chinese Financial Holding Companies

Increasing industry consolidation, financial deregulation and globalization are fuelling rapid growth in the scope of large, multi-line financial conglomerates. At April 1998, American Citicorp. made an announcement that it would merge with a large insurance company, the Travelers Group, to form Citigroup. The merge would bring together commercial banking, investment banking and insurance underwriting under one corporate umbrella. Citigroup established the world's first financial holding company. After that, more financial holding companies appeared all over the world.A financial holding company is a group of companies under common control whose exclusive or predominant activities consists of providing significant services in at least two different financial sectors, such as banking, securities and insurance. According to the economic and financial theories, the reasons of the emergence of financial holding companies in different countries can be interpreted by the similar considerations: to exploit economies of scale and scope; to take advantage of combined resources, more efficient internal capital markets, scarce expertise and technological advances. However, besides the advantages mentioned above, due to the complicated structure and relationship within the group, the risk may actually be high. And if they are not being properly controlled, they may cause systemic risks of the whole economic and financial system.China now also has its own characteristic financial holding companies. The first financial holding company established in China is the China International Trust and Investment Corporation (CITIC), which is founded on December, 5th, 2002. Chinese financial holding companies are now still at their initial step and the number is quite small comparing to the huge size of financial market. The internal management of Chinese financial holding companies is still very poor, and due to the lack of specific regulation, Chinese financial holding companies will face more problems and risks than foreign ones. How to analyze the risk exposures of Chinese financial holding companies and how to manage them properly are very important and urgent problems, it also has practical significance to make some research into it. Therefore, this thesis is to find out the risks that Chinese financial holding companies are facing with and to give some advises on how to control the risks.According to the above-mentioned objective, the body of the thesis is divided into four parts:Part 1 explains the definition and characteristics of financial holding companies as a whole, and points out that financial holding companies have two main kinds of risks. One kind is the normal risks that every financial institution will encounter, such as credit risk, market risk, operating risk, asset/liability mis-match risk etc. Another kind is those risks arise from the complicated internal management like internal business transmission, the opaque internal information risk, benefit conflicting risk and so on. Therefore, the managers of financial holding companies not only need new, complex management skills on how to operate the company, but also need excellent risk control abilities.Part 2 articulates the existing financial holding companies in China nowadays and the problems merge during their development. Illustrates the specific risks faced by Chinese financial holding companies, and then makes quantitative analysis about the relative impact of different risks on Chinese financial holding companies.Followed by the problems and risks mentioned in part 2, the author puts forward the idea that Chinese financial holding companies should speed up the pace of constructuring the risk management system. In order to build the effective Chinese financial holding companies'risk management systems, it is necessary to study foreign superior experience first. Therefore in part 3 the author studies the risk control methods of Mizuho Holding, Citigroup and Credit Suisse Group respectively, and summarizes their practical experience, in the hope of finding something useful that can be used for reference by Chinese financial holding companies.Finally, the author concludes with the comments on possible and proper strategy choices by Chinese financial holding companies on risk control. The inside the companies; 2) build up the internal firewalls to take precautions against the risk transmission within the companies; 3) introduce advanced technology to set up the effective inside risk alarm systems; 4) build the information control systems of financial risk management systems of Chinese financial holding companies; 5) use economic capital as the tool of risk management; 6) control the capital adequacy of Chinese financial holding companies by using the principles introduced by BaselⅡ; 7) strengthen the risk management cultural construction; 8) cooperate with financial supervision authorities actively in order to control the activities of'similar financial holding companies'.