A Study On The Risk Diversification Effect Of Our Commercial Banks' Non-interest Business

Financial liberalization and financial deregulation promoted the financial innovation of commercial banks, also exacerbated the pressure of market competition between commercial banks.Decline in interest income of the traditional business, commercial banks were forced to switch to a new source of profit:Non-interest business.In the past 40 years, through diversification, particularly in the use of financial holding group which is a new company form of organization, foreign commercial banks'non-interest business has seen rapid development. In contrast, China's commercial banks'non-interest business development is lagged. Non-interest income accounted for the proportion of total operating revenue is far lower than the foreign commercial banks.At the same time, China's commercial banks have lots of shortage such as lack of business brand, weakness of business characteristics and the big Inter-gap.On the other hand, due to the low starting point, the non-interest business of China's commercial banks is experiencing fast growth.The development of commercial banks in non-interest business is based on the following effects:risk diversification effect, economies of scale, economies of scope and synergies.The most important and fundamental is the risk diversification effect. In accordance with the classical portfolio theory, diversification through non-interest operations can spread the risks. However, as the conflict of interest produced by the diversified management, the infection of risks,as well as the risks inherent in non-interest business,risk diversification effect was uncertain. A natural question is:Dose the non-interest business of China's commercial banks have played the risk diversification effect? If so, to what extent? What factors influence this effect? This is the research focus of this article. Hope through answering this series of questions, the role of non-interest business of China's commercial banks can be clearly described and give basis for decision making on long term.This is the significance of this research. Except the introduction on the first part, the full text divided into three parts:The first section provides an overview of the development of China's commercial banks'non-interest business.The first is to define the concept, through a combination foreign study of non-interest business and compare the intermediate business and balance-sheet business, give the non-interest business a relatively precise definition; then analyzed the motivation of business development from the external environment and internal incentives;the final analysis focus on the development status of China's commercial banks'non-interest business.The second part is the core of this article.It focus on analyzing risk diversification effect of China's commercial banks'non-interest business.The non-interest revenue and interest revenue growth volatility is analyzed by depicting figures. Basing the portfolio theory, I analyzed the risk diversification effect of non-interest business from the whole banks and the individual banks. Taking into account the risk diversification effect of non-interest business play will affect the bank's performance,so that part of the final adoption econometrics measurement to analyze the impact of business on the bank's performance.PartⅢattempts to theoretically explain the conclusions of the previous section. In connection with variance analysis of portfolio theory, the main consideration is two factors:(1)how the relationship of non-interest business and interest business formed; (2) how the risk of non-interest business generated. Because of that, the last part explained from three points:the conflict of interest produced by the diversified management,the infection of risks, as well as the risks inherent.The main conclusions and implications of this article are the following points.1.Comparing the proportion of the non-interest income accounted for total operating income, at the early stage, the state-owned commercial banks is lower than other commercial banks totally, but then gradually increased. It achieved the same ratio of other commercial banks at 2004, and at the later stage is higher than other commercial banks.This fully reflects the banks'income structure become same by the fierce competition in the market, also reflects whether it is state-owned commercial banks or other commercial banks, the emphasis on non-interest business emphasis be increased gradually. Meanwhile, in the latter part, the proportion of the non-interest income of the state-owned commercial banks higher than other commercial banks shows that state-owned commercial banks has a certain competitive advantage in non-interest business development.2.Comparing state-owned commercial banks and other commercial banks by analyzing the volatility of non-interest income and interest rate volatility, we can get the following conclusions.First, whether it is state-owned commercial banks or other commercial banks, or the overall performance of all banks, the volatility of non-interest income growth is not bigger than interest income before 2000.But after 2000 the volatility of non-interest income growth was significantly greater than interest income. Secondly, the overall trend of volatility of non-interest income and interest income growth shows a certain degree of approximation, especially in the dramatic rise and fall. Third, comparing the state-owned commercial banks and other commercial, the volatility of non-interest income and interest income growth also shows a certain degree of approximation, and the state-owned commercial banks is slightly stronger than the other commercial banks.3.Calculating and comparing the growth variance of the bank's overall non-interest income, interest income and total operating income, we can get the following conclusions.First, after 1998,the growth variance of state-owned commercial banks declined of 68% and the growth variance of non-interest income declined little. Second,whether it is state-owned businesses,other commercial banks, the whole banks or the comparison of different periods, the growth variance of non-interest income is bigger than interest income. Third, whether it is state-owned businesses,other commercial banks,the whole banks or the comparison of different periods, there is positive correlation between the growth of non-interest income and interest income.So we get the following conclusion:China's commercial banks non-interest business development is not expected to play the role of risk diversification.4.Using different variables as explanatory variables to the analysis of non-interest income contribution to the performance of banks showed that:the proportion of the non-interest income accounted for total operating income have negative effect or no effect on the performance of commercial banks.It may be due to non-interest income business itself has a greater risk, so its risk-adjusted earnings shows the above-mentioned results, which also supports the above conclusion:non-interest business dose not play the expected role of risk diversification.5.Chapter 4 by analyzing the risks inherent in non-interest business, non-interest business risks infection and diversified under the conflict of interest under diversified management, reveals the risks to commercial banks by developing the non-interest business,thus to some extent explains the Why do non-interest business development can not play the expected role of risk diversification. Of course, this explanation is only the main reason the author believes, and it is not exhaustive of all factors.Summarily, the non-interest business has its own risks, with its role in risk diversification is not as expected, however non-interest business development is the instrument the future commercial banks increase profits and enhance their competitiveness.By overcoming the negative effects brought by the non-interest and improving the quality of non-interest business is essential for the future fierce competition in the market.