Financial Systemic Risk And Banking Supervision

The financial systemic vulnerability is mainly caused by the internal instability of both the financial system and banks regardless of external factors and the violent price fluctuation of financial assets. It is also determined by the important role that banks play in the financial system. Fisher put forward the over-indebtedness and deflation theory to analyze the instability of the financial system while Minsky carried out his analysis from the economic cycle angle. In terms of the internal instability of banks, adverse selection and moral hazard caused by asymmetric information and the inadequate liquidity of bank assets can give us a sound explanation.The international financial turmoil of the second half of the 1990s has provoked much reflection and analysis within the international community on ways to strengthen the international financial system. The international community has identified a number of priorities in this work, including the need to enhance the financial supervisory authorities' and financial institutions' ability to assess the vulnerabilities of financial systems. The Macroprudential Indicators (MPIs) and the Value-at-Risk (VaR) model are explored and developed to meet the above goal. The MPIs are defined as indicators of the health and stability of financial systems. And the VaR model has been widely applied in the banking risk management in the western countries. As the complement of the VaR model, stress testing and back testing have come into application.In view of the fact that the internal instability of banks is the major inducement of the financial systemic vulnerabilities and the important role that banks play in the financial system, we can, through strict bank supervision, minimize the possibility of the financial systemic vulnerabilities so as to maintain financial stability and avoid financial crises. In the narrow sense, bank supervision refers to the surveillance and regulation of banks by the supervisory authorities of a country, including supervisions on market access, business scope, capital adequacy, asset liquidity, market retreat and some other aspects. In the broad sense, bank supervision also includes Financial Safety Net, namely the Lender of Last Resort and the Deposit Insurance System. They are necessary for strengthening the public confidence in the banking system and maintaining the financial system.The banking system of China has great vulnerability, which is shown by its large volume of bad asset, low capital adequacy, poor asset liquidity and low profitability. If things carry on like this, the financial systemic vulnerability will at last bring about financial crises. Therefore, it is necessary to take effective measures in bank supervision to avoid the worsening of financial systemic vulnerability and the occurrence of financial crises.