| Since 1970s, the world has seen such radical changes as the speed-up of globalization, liberalization, and process of integration in terms of international economy and finance; adjustment of the industrial structure, the death of fixed exchange rate system, international expansion of financial market,quickly-developed technology and science, growingly intensive competition, which makes the living space of banking become narrower and narrower, facing unprecedented existence crisis. As a result, numerous bank crises have come in succession, the basis on which banks perform soundly has been undermined, thus they are strongly motivated to indulge in heavy-risk-bearing services. However, the Market Discipline and traditional safety net which are usually made up by the Lender of Last Resort, the Deposit Insurance Scheme, regulations by official discretion fail to meet the expectation of us. So it seems necessary that we adjust and perfect the existing exterior supervision system. That is why we come to the discussion of risk-trading mechanism. This paper is composed of three chapters. In Chapter One, there is nothing but the aim to bring a clear picture of the existing exterior regulation system to readers in terms of its evolution, which, as we mentioned above, are composed of the Lender of Last Resort, the Deposit Insurance Scheme, regulation by official discretion and the Market Discipline. More important, this chapter serves as a basis of introducing the beef of the paper, risk-trading mechanism in the following chapters. Chapter Two that is the most important part of this paper throws spotlight on the course of risk-trading mechanism, the theory of its function, validity, relationship between the Market Discipline, and regulation by official discretion. First, we study the course and meaning of risk-trading mechanism. On one hand, regulation by official discretion will lead to serious moral hazard, and the authorities probably pay more attention to the relationship with the banking firms than the supervision on them; even more they sometimes cast no eyes over their bad-behaviours for the purpose of maintaining its own reputations; on the other hand, the Market Discipline usually performs blindly and electively, which is difficult to maintain the confidence in banking. Luckily enough, risk-trading mechanism provides a solution to the problem in face of the credit risk, market risk and operating risk that can be treated as potential externalities because Coase Theorem tells us that externalities can also be solved by the market only if the initial delimitation of rights is properly arranged. To be more exact, the authorities first bestow on the commons the rights that they should be safe to various risks, then set a limit to the amount of each bank's risk according to its capital protection, asset quality, management competence, earning strength, liquidity ratios and microeconomic circumstances, etc. And banks are allowed to trade in the amount of risks no matter it is below or above the limit only if they are voluntary resulting in the acceptable amount that remains always below the limit. So a mechanism is established to keep banking safe and sound. Secondly as the logic goes, we discuss in detail the validity and paths by which risk-trading mechanism works. One path is that the authorities define the amount cap of each bank's risk and the suitable weight of risk-based services in it considering the determinants mentioned above; the other path is the constraints mainly derived from the purchasers of risks who lay their hands on the rights to strike a bargain and stop continuing the contract according to banks' performance. Of course creditors and shareholders also play a role in constraining the performance of banks by transferring their deposits from an unsound bank to a sound one, or selling their equity of an unsound bank. However, if risk-trading mechanism is to perform efficiently, certain demands must be met with, for example, perfect information disclosure, sound corporate gove... |
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