Analysis Of The Economics Of Banking Moral Hazard

Banking reform is a systematic engineer. This paper examines the moral hazardmechanism developed by our State-owned commercial banks and further discusses somemoral hazard issues encountered by Chinese banking industry during its development byusing principal-agent theory as its framework.This paper focuses on the moral hazard involved in the operation of Chinese bankingindustry, which includes not only the moral hazard occurring inside the banks but also themoral hazard brought about by the ineffective banking operation to the outside. It mainlyconsists of : 1, government's moral hazard, 2, the regulation institution's moral hazard, 3,commercial banks' moral hazard 4, the borrowers' moral hazard and 5, the depositinsurance system's moral hazard.First the paper analyses the institution reason under which the moral hazard occursfrom the planned economy transformation period late 1970s to 1990s from theperspective of Chinese banking industry development reliance. Then the author comesup with the three characteristics of the moral hazard involved in Chinese banking industry:1, the shortage of the principal, 2, the effect of overlong principal-chain 3, the influence ofthe traditional humanity culture.Secondly, this paper examines the moral hazard involved in banking management,between banks and enterprises, the financial regulation, and deposit insurance systemrespectively by establishing some models.Thirdly, this paper identifies some reasons under which the moral hazard occurssuch as the drawback of the property rights system, the imbalance between the corporategovernance, the distortion of inventive mechanism, the ineffectiveness of the controllingsystem and the disfunction of the measuring system. Meanwhile, the paper puts forwardsix characteristics of moral hazrd:1, human2, covert 3, heavy 4,comprehensive 5,arduous6, regional.Fourthly, this paper points out that the moral hazard of banking industry has led tothe deterioration of financial institution, the rampancy of the financial corruption, theineffectiveness of credit system and the instability of the financial security system.Fifth ,the paper puts forward some effective solutions for the moral hazard from theperspective of regulation mechanism, incentive mechanism and cultural mechanismrespectively.To sum up, the paper discusses in details the formation and characteristics of moralhazard in state-owned commercial banks and the theoretical foundation and models ofmoral hazard, then analyses the subjects of moral hazard occurring in the principal-agentchain of the banking industry and finally points out the detriment of the moral hazard andmeanwhile offers some effective solutions to prevent the moral hazard.