The Effect Of The Stock Price Fluctuations On The Vulnerability Of The Banking System

With the development of financial liberalization and economic globalization, countries in the world economy become increasingly dependent. Banking system, which plays a leading role in the financial system, was important to the development of a country’s economy and even to the development of world economy. The banking crisis in one country may lead to the global economic crisis. Throughout the history of the world’s economic development, we will find that, from the Great Depression in Southeast Asian in1929to the financial crisis in late20th century, and from the U.S. subprime mortgage crisis in2007to the current European sovereign debt crisis, the generation of these crises are all related to the vulnerability of the banking system, which are fully illustrated that the stability of the banking system is important to the country and the entire world’s economics. Thus, the study of the vulnerability of the banking system is so important to eliminate and resolve the banking crisis and to strengthen the banking supervision. It also plays a positive role for the stable development of each country and the world economy.The characteristic of "soft assets and hard liabilities" in bank decided that banking sector has a certain vulnerability essentially, so the safety of bank credit assets has much to do with the vulnerability of the bank. Given the importance of the vulnerability of the banking system, many scholars began to engage in intensive study of the vulnerability of the banking system, but only limited research on evaluation of the vulnerability of the banking system, as well as indicators of selection, but did not involve the asset prices fluctuations, especially the fluctuations in stock prices which affect the vulnerability of the banking system. In fact, this research in China can not only enable us to fully understand the status of China’s financial system, but also protect our financial system stability through the regulation of the stock market, bank supervision, and supervision of bank credit capital flows. In this paper, I study that how our stock price fluctuations affect the vulnerability of the banking system which is a new angle on the basis of previous studies. Although the banks have a good condition recently, there still are some problems which illustrate the vulnerability. All the problems may bring much risk to the development of the bank, and lead to the high NPL ratio. So this paper explains the mechanism and the transmission channels about the effect between the stock price and the vulnerability of the banking system, which including the money market channels, the credit market channel, the channel of exchange rate risk and the economic and business revenue streams. According to China’s national conditions, this paper choose the NPL ratio as the index to measure the vulnerability of the banking system, then use the econometric methods to make the empirical analysis. In the end, we have the conclusion that there is a significant negative correlation between the price of Shanghai composite index and the NPL ratio of China’s banking industry which means that the volatility of the stock price have a negative impact on the vulnerability of the banking system. When the stock prices rise, the vulnerability will fall, and stock prices decreased while the vulnerability rises. This may be due to the policy regime in China and other reasons like how the bank funds flow into the stock market indirectly through various channels, which make the stock market price fluctuations had a definite impact on the vulnerability of bank system.With the development of financial liberalization, the mixed operation model of the financial sector will be the development direction of China’s financial system. Once the banks in China operate the mixed mode, the contact between the stock market and banking sector will be more closely, and the effect between the stock price fluctuations and the banking vulnerability will be more significant. Therefore, China must not only to strengthen the identification and monitoring of the vulnerability of banks by establishing an effective risk monitoring model and early warning system, but also to strengthen the supervision of the banking sector and stock market to make sure a good economic financial operating environment, and to ensure the stable development of China’s financial industry and national economy.