Factors Inspiring Commercial Bank Risk Taking

The current situation of which the bank industry is in face is that, with the interest rate marketization reform and financial fields opening up, the international financial risk transmission speed accelerates, and that the increasingly competitive financial markets trigger the development of financial innovation. As the result, commercial banks in our country become more risky when the economic growth slowdown. At the same time, Europe’s debt crisis continues, America "fiscal cliff’ approaches, and developed economies subsequently to implement quantitative easing monetary policy. The development of international banking is restricted by the continued economic downturn and the sovereign debt crisis, but also be faced with inflation expectations.In China, bank credit expansions after the year of2008. The problems of non-performing loan become serious when government financing platform loans increases, which will lead the accumulation of bank risk. For large state-owned banks in China, its system reform has made remarkable achievements. However, their primary business is still traditional deposit and lending. The customers are mainly large-sized state-owned enterprises or government projects, and the loans are in a high level of concentration. Moreover, their financial products are lack of diversity, which will make them face adverse conditions when the interest rates are fully marketized and the phenomenon of "financial disintermediation" appears more serious.The formation of the bank’s risk is closely related to macroeconomic policies and market conditions. So the study on the factors affecting state-owned bank risk-taking is of great importance.There are four sections in this paper, which are organized as follows.Section1is introduction. This part describes background and significance of the research, reviews the methods and achievements of study that domestic and foreign scholars have on this problem, introduces the method of research and structure arrangement of the article, and puts up with the innovation points and the insufficiency. And then, the future research directions are suggested.Section2is the general theoretical analysis. We define the concept and make interpretation at first. And then, we discuss how monetary policy, market competition, and other external or internal factors make influence on the commercial bank’s risk-taking from the perspective of theory. Emphatically, we elaborate four bank risk-taking channels of monetary policy effect and set up a theoretical model to make marginal analysis on how market competition impacts bank’s risk-taking behavior through the charter value. Moreover, we analyze risk dispersion effect of the off-balance sheet business on commercial banks. Lastly, the premises and assumptions are put forward.Section3is the empirical analysis:Firstly, we select the appropriate variables. On the side of factors, we choose the difference of market short-term nominal rates and Taylor rule rates to describe the monetary policy stance, and the Herfindahl-Hirschman Index to measure bank industry competition degree, and the proportion of bank credit scale to estimate financing market competition level. We also select the proportion of fee and commission income to measure the off-balance sheet business scale and Tobin-Q to measure the charter value. On the side of bank risk-taking, we use three of regulatory indicators, which are non-performing loan ratio, liquidity ratio and capital adequacy ratio.Secondly, we set up three econometric models. The first one is ARMA model based on the time series, which tells the impacts of monetary policy and market competition on the large state-owned commercial banks’ overall credit risk taking. The second one is a multi-factor regression model, which describes the influences of monetary policy, market competition, business structure and asset scale on ICBC’s risk-taking. The third one is a VAR model, which simulates some kinds of dynamic relationships among the market competition, charter value and the ICBC’s risk-taking.Lastly, we make the robustness test on the models.Section4is the primary conclusions and relative recommendations. The results of empirical analysis are summarized as follows.(1) Quantitative easing monetary policy is likely to motivate the state-owned Banks to bear more risk.(2) Both of banking industry competition and financing market competition can significantly increase the state-owned banks’risk-taking.(3) Fierce market competition erodes the charter value of state-owned banks, but the charter value has no significant effects on their risk taking behaviors.(4) Diversified business structure is beneficial to reduce bank risk.(5) Increase of assets growth rate will result in a reduction of commercial bank credit risk taking.The research follows before path, but carves out a new road at the same time. We put forward more detailed views. The innovation of this paper lies in that, on the one hand, we measure the market competition bank faced from two different perspective, and find that both the two can make significant impacts on state-owned bank risk taking, on the other hand, we find that franchise value has no significant effects on ICBC’s risk-taking behaviors, which is different from the previous research.In the future, researches may focus on the mechanism of low interest rate policy’s influence on bank risk attitude and the value of collateral, as well as the relationship between collateral value and the expected default probability. Besides, the problem of how the off-balance sheet businesses diversify risks is worth exploring either.