A Study On The Early Warning System For Systemic Risk In China's Banking Industry

Finance is the core of the modern economy, and banking is the core of financial system, hence, defending risk in banking is crucial to the sustainable development of China's economy. Among risks in banking, the systemic risk is the most dangerous and influencing one, so it is very significant to study the early warning system for systemic risk in banking. Also, along with China's accession to the WTO, China's finance industry is opening up to foreign countries, and more and more foreign banks enter into the China market. The fierce competition places great impact on China's banking. Moreover, as China's banking links up with the global financial systems, the risk contagion becomes easier. And Since 1990s, there has been a worldwide high-frequency occurrence of financial crises especially bank crises , such as the collapse of Japan's bubble economy, the currency crisis in Europe, the Mexican financial crisis, the Asian financial crisis, the financial crises in Russia, Brazil, Turkey and Argentina. These crises led global economy to a period of great turbulence, damaging the society's normal development. Hence, it is significant and hard task to study the early warning system for systemic risk in China's banking.There are two aspects that may cause systemic risk of China's banking: one aspect is that the characters of banking itself bring the inherent fragility, and the widespread existence of information asymmetry and conflict between individual and collective rational anticipation aggravate the accumulation of banks'inherent fragility; another is that the economic period, outer impact, the situation of finance and money policies, the bubble risk in stock market and the bank's accumulating bad assets may lead to systemic risk. According to the causes of systemic risk in China's banking, the early warning system can be composed by four subsystems: the macro economy risk subsystem, the outer impact risk subsystem, the inner banking risk subsystem and the bubble risk in stock market subsystem. The macro economy risk subsystem gives early warning for systemic risk caused by the economic period and the situation of finance and money policies. The outer impact risk subsystem gives early warning for systemic risk caused by the outer impact. The inner banking risk subsystem gives early warning for systemic risk caused by the inherent fragility of banking and the bank's accumulating bad assets. And the bubble risk in stock market subsystem gives early warning for systemic risk caused by the bubble risk in stock market. By building a set of indicator system, the article employs entropy method and fuzzy comprehensive evaluation to estimate the 1991-2006s systemic risk in China's banking, and gets the result: the systemic risk in 1992-1996s is larger, whose early warning state is mid-warning; while the early warning state of systemic risk since 1997 is slight warning. The result accords with the reality in China, and the model is successful. Then, the article uses the secondary exponential smoothing method to forecast the single indicator, then employs the early warning model to analyze the systemic risk of 2007-2008s, and gets the result that the sate of early warning for systemic risk is slight. This illustrate that the potential systemic risk in China is huge, which we should pay our close attention to. Among the four subsystems, the macro economy risk contributes the most to the systemic risk in banking, and its early warning signal is mid-warning. Hence, the government should take some measures to prevent the economic overheating trend. For example, to control the increasing speed of investment in fixed assets, to control the trend of inflation of prices, to prevent and control the assets bubble risk and so on. Of course, in order to prevent systemic risk in banking, the basic method is to strengthen the banks'capacity of defending risk.