The Research On Dynamic Identification Of Systemically Important Banks

In 2007, the U.S. subprime mortgage crisis broke out and changed into a global financial crisis quickly. The immediate flash-point was business failure of the large financial institutions with large scale and complexity, which also cooperate and trade with other financial institutions. Therefore the consequence of the funds chain breaks will produce a very strong risk contagion effect, and lead to a wide range of liquidity crisis. So the focus of macro-prudential supervision is these "systemically important financial institutions". Banking is absolutely the main force of China's financial industry, while bank is an important financing intermediaries and a core component of the financial system. The stable and efficient operation of the banking system, in particular the systematically important banks, have essential effects on the stably rapid development of our economy. Therefore, how to guard against systematic risk of banks must be the research focus of financial system risks. Identifying systemically important banks which is the basis of the banks'systemic risk management, should be appreciated. So the topic of this thesis is not only conforms to the trend of global financial regulation, but also accords with the main idea of China's financial supervision. This paper aims to study the systemically important banks to provide some ideas and methods for the effective supervision of regulatory authorities, and to offer reference to the identification research of systemically important banks.This paper focuses on the identification of systemically important banks, and starts with the financial crisis in 2008 to analyze the importance and necessity on the identification of systemically important banks. Through the collation of the relevant literature, this thesis conducts detailed definition and characterization on the related concepts, and reviews the relevant studies based on the data sources, which lays a solid foundation for the latter. After reviewing the mainstream methods of systemically important banks'recognition, this thesis adopts two methods named CoVaR and MES. In addition, introduces TGARCH to model volatility and DDC to calculate dynamic correlation coefficient, in order to measure time-varying of systemic risk and build dynamic identification method of systemically important banks.And then, this thesis empirically studies the identification of systemically important banks based on the daily investment return data of 16 listed banks in our country. The research sample is closing price of 16 listed banks, while the sample period is from January 4,2011 to December 31,2015. Taking the logarithmic return as the daily return and choosing capitalization-weighted return as market return, it analyzes the identification of systemically important banks based on DCC-TGARCH-CoVaR and DCC-TGARCH-MES models, and dynamically ranks the systematic importance of China's listed banks by calculating each bank's quarterly mean value of %?CoVaR and %CES. And then, elaborating the empirical results, and analyzing on the change tendency of the systemic risk contribution in each bank, conclusion is made. In the end, it makes suggestions on the supervision of systematic important banks concerning the practical situation of China's supervision.The main conclusions are as follows:1. In crosswise, the five big state-owned banks hold the highest level of systematic importance.The research founds a positive correlation between bank size and the rankings of systematic importance measured by DCC-TGARCH-CoVaR and DCC-TGARCH-MES models, that means the five big state-owned banks (Industrial and Commercial Bank of China, the Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications) hold the highest level of systematic importance. This consequence is consistent with the current mainstream researches and the definition of systemically important banks made by the regulatory authority. Through further analysis of the influence on the entire banking system from different types of banks, it reveals the role and the position of large state-owned commercial banks, joint-stock commercial banks and city commercial banks on the entire banking system. From the vertical perspective, this conclusion clearly demonstrates each bank's dynamic role and variation trend when preventing and controlling the systemic risk in the banking system. the forward-looking results have an important consulting significance for the bank's risk management.2. Chronologically, the ranking of systemically important banks is characterized periodic.Overall, the ranking of systematically important banks is dynamic. In the rotation of economic cycle, systemically important banks are characterized pro-cyclical. The undulation effect would be enlarged because of the bank's features and the invisible guarantee from government. In this regard, it will deteriorate the bubble economy during good times, and cause a more serious shortage of liquidity and exacerbate volatility in bad times. So systemic risk should take the pro-cyclicality of systemically important banks into account, to avoid underestimated systemic risk.3. Macroeconomic factors have a great influence on the systematic importance of banks.The macroeconomic factors working on the systematic importance of banks, include the economic growth and interest rate liberalization. The decline in the rate of economic growth has an effect on the market demand for credit assets, which results in an increase of banks' systemic risk. In this process, all the bank's contribution to the systemic risk will increase, but the growth rate of the state-owned commercial banks is the largest one, while the growth rate of the city commercial banks is the smallest one. Taking into account of the rankings of the systemically important bank, we can reach the conclusion that systemic risk contribution of systemically important banks will increase, and the growth rate is faster than the mean value of all banks, in the economic downturn. With the liberalization of deposit rate in the fourth quarter of 2014, the deposit rate falls, meanwhile the systemic risk and the risk spillover effect in the banking system increase significantly. In this process, the systemic risk contribution of the large state-owned commercial banks increased faster, while the city commercial banks is the slowest. We can see that the decline in deposit rates will increase the systemic risks contribution of systemically important banks, and the growth rate is even larger than the mean value of all banks.4. Scale effect is significant in identification of systemically important banks.Comparing the results after considering weight with before the results before considering weight, we can figure out that, the scale has an important influence on the systematic importance of banks. In the assessment methods of the global systemically important banks made by the Basel Committee, the scale is also regarded as the primary indicator and given the highest weight of 20%. Above all, this thesis greatly verifies the importance of the scale effect in this assessment method. At the same time, this conclusion also interacts with the conclusions of the existing literature?5. CoVaR and MES differ from their focus, but the the systematic importance rankings based on the two methods interact with each other.By comparing the two calculation methods named CoVaR and MES, we reach the conclusion:(1) this paper adopts CoVaR and MES to measure the systemically important banks. The estimation results of the two mainstream models which are based on the stock market data, are highly effective. The empirical results also show that these two methods are highly robust. (2)These two methods are based on the stock market data analysis, not based on the balance sheet, so the measurement results are more forward-looking and more practical. (3)CoVaR can capture the spillover effects from the individual banks to the banking industry; ?CoVaR pays more attention to the individual contribution to the systemic risk; MES pays more attention to the impact of market risk. (4) The ranking of%?CoVaR which is based on CoVaR method, is not the same as%CES which is based on MES method, but the overall trends are similar. (5)The focus of these two methods is different, so choosing an appropriate scientific method to assess systematically important banks is such important, because the effectiveness of the model greatly affects the accuracy of the identification.The supervision recommendations are proposed basing on the findings:(1) we should consummate the identification method of systemically important banks and regularly assess the systemic importance. We should build the identification index system in accordance with the requirements of international supervision, study the different method using the latest technology, and assess the systematic importance of banks from a different perspective. (2)It is a long-term task to assess the systemically important banks, which requires regular calculations to sample bank and continuously adjust the list of systemically important banks in order to supervise the changes of the banking system.(3)Strengthening the supervision of systemically important banks, supervision departments should refers to the requirements of Basel ?,and make even more severe requirements on the systemically important banks compared to the non-systemically important banks, to reduce the asymmetric information risk and strengthen the construction of public information management system. (4)Supervising the systemically important banks should take cyclical factors and the change of macroscopic environment into account. (5) There are a few steps to moderately develop the business scale and complexity and reduce the degree of systemic importance:Firstly, the supervision of systemically important banks should adjust the way of thinking with restrictions on high leveraged operations. Secondly, the implementation of specialization and cooperation seem to be to have the necessity. Finally, we should carry forward market-based reform of interest rates.In general, the systemic risk of the banking system can be controlled at present. But in terms of the rapid development and the structural problems of the banking system, supervision department should be constantly alert to systemic risk caused by the individual, which would threaten the entire financial system. Supervision department should pay more attention to the sources of banks' systemic risk, especially the risk contagion effect of systemically important banks. In the framework of international supervision, it is of importance to establish an effective multi-level financial supervision system, which is suitable for China's development.This study with highly academic significance is an essential complement to the existing literature, and has practical significance on the construction of a steady banking system.