The Effectiveness Of Market Discipline On China’s Banking

In the past few decades, the global have broken out large-scale banking crisis. Whether a country’s banking system is security or not will influence the country, even the global economic. In order to control the risk of banking system, all countries have carried on strict supervision to the banking system, china is not exception. According to Basel II, to maintain the safety of the banking system, it is necessary to give full play to the government and market. As a low-cost form of regulation, market discipline is valued by many countries. So base on the situation of our country, this article will discuss the market discipline of our country’s banking system, how capital regulation and implicit deposit insurance institution influence the effectiveness of market discipline.This paper is structured framework as follows:The first part is an introduction; the second part explains important concepts and comb literature; the third part is this article’s theoretical assumptions of; the fourth part is about the empirical study of China’s banking industry; the fifth part is the conclusions and the policy recommendations for our country’s banking system.This paper basis on previous research, data is from BANKSCOPE and the China Financial Yearbook.5state-owned、11joint-stock and33city commercial banks are included, more than4000data samples, spanning the years of2003-2010.Base on the empirical model of Demirguc-Kunt and Harry Huizinga(2004), this paper will use GLS to regression analysis.Conclusions are as follows:First, our country’s banking market discipline is presence and not weak. Second, the market discipline’s effectiveness of the state-owned banks is stronger than the joint-stock and city commercial banks. Third, the capital constraints have inhibitory effect on the market discipline. Implicit deposit insurance system has restricted the effectiveness of the market discipline.Although government capital regulation and implicit deposit insurance system will inhibit market discipline, we can’t deny the role they play in the maintenance of the safety of the banking system. In order to take into account the efficiency and cost, we must combine them together. When establish the safety net of the banking, we should correctly handle the relationship between government and market.