Empirical Research Of The Market Process And The Risks Of Commercial Banks

This article aims to analyze the relationship between the progress of the market and commercial banks’risk-taking based on a sample of107commercial banks’2000-2010data in China. In this paper, we use the Z-score to measure banks’risk.The Z-score is equal to the sum of the banks’return on assets (ROA) and the capital adequacy ratio(CAR) then divided by the standard deviation of the yield of bank assets σ (ROA).By the definition we can see, the higher of banks’ Z-score, the lower of the banks’ risk. Measure of the level of the market we use Fan Gang and Wang Xiaolu’s market index defined in "The Chinese market index report",2010.As for the sample, it includes107commercial banks. There are five large state-owned banks,12national shareholding commercial banks,80city commercial banks and10rural commercial banks. Because most city commercial banks and rural commercial banks often operate in the local region, so we analyze them together and compare to the whole sample.We first investigate their relations between banks’risk-taking (Z-score) and market level. Second, we investigate the channels which influence bank risk taking, such as the relations between bank loans and the level of market. Also we further investigate the relation between each part of bank Z-score (we can disaggregate bank Z-score into three parts) and the level of market. According to Fan Gang’s description the market index include five parts. In order to find how the market level affect the banks’risk, we also use the five parts to regress with Z-score. As we know, financial market is one important part of the whole market. So we also analyze the relationship between the financial market index and the banks’Z-score.At last, because of Fan Gang’s market index only from1997-2007, but our empirical analysis need the data from2000to2010, even rough we use the last year’s data to measure this year’s market level, we can only have the2008’s data. Then we use time series to predict the missing tow year’s data. Therefore, in order to enhance our conclusions, we use the2000-2008’s sample data to do a robust test. After our robust test, we came to the same conclusion.Finally, we find higher level of the market (especially better legal protection and the development of non-state economic) are associated with a higher level of bank loans, higher level of bank performance, higher level of banks’CAR (capital asset ratio), higher fluctuation of bank’s performance and greater bank risk taking. That means the the volatility of bank performance contribute much to the bank’s risk.The conclusions show that control the speed of the market process, to avoid the volatility of banks’ performance and enhance the construction of legal institution and supervision of bank capital is important.