Study On Impacts Of Financial Innovation And Macroeconomic Risk On Risk-taking Behavior Of Commercial Banks

Finance is the core area of modern economy development, without which theeffectiveness of government would decline sharply. And banking is the most significantpart of the financial system. Specifically, in current condition of Chinese financeindustry, any change or adjustment of banking can influence national economy andindividual wealth severely in terms of scale, extent, market dominance and thepossibility of risk of financial system. Therefore, research into the risk-taking behaviorof banking will play a pivotal role in ensuring the healthy development of banking andmaintaining national economy security and social stability. Aiming to reduce the risk ofbanking operation and enhance the risk resisting capabilities of banking, this articleprobes into the way how financial innovation and macro economical risk impact onbanking risk-taking behavior on both theoretical and empirical level. It will contributeto stem the crisis theoretically and practically.The contents of this paper include:Firstly, on the basis of relevant research literature, it is hypothesized that1)banking prefers risk aversion,2) it holds two kinds of assets–risky assets and risk-freeassets, and3) banking makes decision to pursue utility maximization. Then, the wayhow financial innovation and macro economical risk impact on banking risk-takingbehavior has been studied through building proper mathematical model. The resultsshow that financial innovation enhances banking demand of risky assets and creditderivatives. In other words, bank tends to possess more risky assets and creditderivatives to increase its wealth. Moreover, financial innovation will exert moreobvious effect on bank’s more demand of risky assets when macro economy runs in thelow-risk condition. As a consequence, the variance of bank investment portfoliobecomes large, which can lead to the more unstable banking system.Secondly, Chinese banking is studied empirically. Non-performing loans arechosen as explained variable, the ratio between M2and M0and its square, the growthof financial products, the growth of total investment in fixed assets and the growth offiscal revenue of central government are chosen as explaining variable, the quarterlydata of bank from June2004to December2010is chosen as sample. The influence offinancial innovation and macro economical risk on banking risk-taking behavior isprobed through building time series static model of regression. It is found that positive correlation exists between financial innovations and banking risk-taking behavior.Macro economy running will also increase banking risk-taking behavior.Lastly, some suggestion is proposed to maintain and promote the healthy and rapiddevelopment of bank industry from aspects such as banks itself, financial monitordepartment, and government.