China Banking Crisis

With the economic development and deepening of reform in China, banking crisis constantly appears. Making the solution to banking crisis as its orientation of research, the thesis sets out to put forward some practical solutions to the problem of banking risk management.1. Main viewpoints of this thesisThis thesis is divided into three chapters. The first chapter analyzes the cause of the banking crisis, strong negative externalities, and latent banking crisis elements, thus revealing the significance of the research into the solution to the crisis. The second chapter presents a comparative analysis of the different ways to solve banking crisis in China and abroad. The last chapter puts forward some suggestions regarding the improvement on and perfection of the banking crisis solution in practice in China.1.1 Central factors leading to banking crisis in ChinaThe thesis argues that the central factors leading to banking crisis include: the instability and vulnerability of banks caused by high liabilities operations; severe imperfections of self constraint and management such as self regulation and development mechanism; concentration of loans in big cities, large-scale enterprises and projects, monopoly industries and medium-and- long-term loans; huge agent risk resulting from the absence of bank's proprietor and the tendency of " insiders' control", and the further instability of banks due to the fact that the government imposes its own motives on the commercial banks; the great pressure caused by the absence of social credit; the possible transmission of the risks from other industries such as securities and insurance; social distrust in banks.1.2 The importance of timely and reasonable handling of banking crisis1.2.1 Strong negative externalities of banking crisisFirstly, on account of the high relevance and interdependence of banks, and the constant financial innovative, the crisis within a single banking institution can become the crisis in the whole banking system.Secondly, large-scale bank run will bring about chain reaction and thus the breakdown of the whole banking system.Thirdly, banking crisis will destroy the credit initiation mechanism and as a result the quantity of money supply necessary for economic development cannot be guaranteed.Besides, banking crisis undermines the banks' capability to distribute capital, increases the financing cost of banks and enterprises and reduce the efficiency of economy.1.2.2 The latent crisis elements of China's banksFirstly, the ratio of bad assets of China's banking business is still relatively high.Secondly, capital adequacy ratio is comparatively low.Thirdly, the ability of commercial banks to make profits is very weak and China's banking business lacks international competence.Fourthly, the reserve ratio is dropping and the payment guarantee capability may be affected.1.3 Main methods of handling banking crisisThere are four main methods of dealing with banking crisis: assistance, takeover, merger and acquisition, and bankruptcy.1.3.1 AssistanceThis includes self assistance and external assistance.Self assistance consists of institutional reorganization, supply of capital, transition of mechanism, and legal assistance.External assistance includes: inter-bank assistance, central bank assistance, and governmental assistance.1.3.2 TakeoverBanking takeover is the compulsory interference of financial supervision authorities with badly-performing banks aiming at preventing their capital quality and operations from deteriorating, protecting the rights of depositors and other creditors, and recovering the operational capability of banks and the credit order.1.3.3 Merger and acquisitionM&A is an important way of assisting problem banks by sound banks. When the assistance fails and takeover cannot be carried out, or the cost is too high for the bank to go bankrupt, M&A is frequently utilized. In the acquisition, the bank acquired no longer exists or continues with...