Chinese Measure Of The Vulnerability Of The Banking System And Its Influencing Factors

The stability of financial system lies in the stability of banking industry. Thedevelopment of financial industry witnessed the failure of banking operation leading to a greatdeal of financial crisis. With the wave of financial liberalization, more and more criseshappened in banking industry, which has caused serious losses to the real economy. Suchkind of destructive power has been widely disseminated due to the deepening of financialglobalization. After entering into WTO, China has been more linked with the world economy,thus, its banking industry would be easily affected by international factors. In2007, the globalfinancial crisis triggered by the US subprime mortgage crisis did not lead to direct losses toChinese banking industry. But it has a bad impact on our banking system indirectly throughdecreasing external demand and affecting the real economy. As the domestic banking sector’sreform have not completed and the international factors is becoming more complex, it is ofgreat importance for China to analyze the specific conditions of the banking systemvulnerabilities and find the core elements resulting in vulnerabilities, which will benefitChina’s economy a lot.This paper starts the research from the definition of the concept vulnerability of thebanking system. After reading a great amount of related literature, I list them from fourperspectives------borrowers, depositors, banks and government agencies. On the basis offoreign classic literature, the condition of China’s banks as well as the fact that thevulnerability of China’s banking system resulting from three aspects------liquidity risk, creditrisk and foreign exchange risk， this paper selects seven indicators to establish China’sbanking system fragility measurement system. This paper uses dynamic factor analysis to doa quantitative analysis on the vulnerability in order to get the monthly vulnerability indicatorthrough collecting monthly data. The index chart witnessed four stages of vulnerability ofChina’s state banking system from2000to March,2011. Then this paper uses14variables ofmacro-economic variables, financial condition variables as well as foreign-related economicvariables and use cointegration theory to further analyze the relationship between these factorsand the vulnerability of our banking system Using modern econometric methods combined with statistical methods, this papercollects monthly data to do a quantitative analysis of the vulnerability and an empiricalanalysis of factors which affect it.On this basis,this paper proposes several policyrecommendations,aiming at improving the status of the vulnerability and maintainingstability of the banking system.