A Research On Systemic Risk Based On The Ratio Of Cash Flow To Total Debt

The occurrence of financial crisis can always promote the reform of current regulations, and the 2008 American financial crisis is no exception. Financial integration has become a major trend now, which means the connection between financial institutions is becoming tighter than before due to the convergence in business. Thus, when a single bank is in distress, other banks cannot stand aloof. Under such conditions, drawbacks of micro-prudential supervision showed up, and macro-prudential supervision becomes a heated topic. After the financial crisis, Basel Committee published "Basel?", which enhances supervision from three aspects. Firstly, it extends from asset side to all elements in balance sheet. Secondly, it pays more attention to the relevance between financial institutions, instead of just emphasizing the stability and operating condition of single institution. Thirdly, it stresses the need of establishing a countercyclical capital buffer provision mechanism. As a member of Basel Committee, our country has prepared for several years to implement the Basel Agreement, but some problems still exist.From a review of research achievements in recent years, we can find that most researches focus on qualitative analysis, such as the definition and evolution mechanism of systemic risk (Liu Chunhang and Zhu Yuanqian,2011), researches about quantitative analysis are relatively few. In the time dimension, many of the current studies are about the approaches to measure systemic risk, which can be classified into two types:model-based approach and indicators-based approach (Chan-Lau,2010), but there are few findings of early warning indicator and countercyclical capital provision's anchor indicator. "Rules for Regulating the Capital Requirement of Commercial Banks" published by CBRC proposed to establish a countercyclical capital buffer provision mechanism, but an effective anchor indicator is difficult to find. In the cross dimension, researches concentrate on distinguishing SIFIs (Zhang Yi,2014) and testing the performance of supervision indicators (Wang Fei et al.,2013; Song Xin,2015), few tried to extend regulation indicator system.Based on Minsky's "Financial Instability Hypothesis", this paper discusses the systemic risk information contained in cash flow to total debt ratio (CF/D), which is an indicator that hasn't been explored by current studies. There are two main aspects:the first one is to discuss whether the CF/D ratio of business sector can be an early warning indicator of financial systemic risk, the second one is to explore how bank's CF/D ratio affects its systemic risk. During the research process, this paper will use data from 2001 to 2015, and will apply a variety of measurement methods, such as principal component analysis (PCA), Granger causality test, Hodrick-Prescott filter and panel data regression analysis. Meanwhile, two types of systemic risk measurement methods are involved: financial fragility index (FFI) and systemic risk index (SRI).This paper is organized in six chapters:the first chapter is introduction, which introduces the background, significance, structure arrangement and innovation of this research. The second chapter is about related literature, which is divided into three aspects:the definition, the evolution mechanism, and the measurement methods. The third chapter is theoretical analysis, elaborates related theories. The fourth and fifth chapter are empirical analysis, conducted separately for business sector and financial sector. The last chapter is about conclusion and suggestion, in this chapter, the future research direction is mentioned.By measuring the cash flow to total debt ratio of business sector and financial fragility index, this paper finds that the tendency change of CF/D runs ahead of financial fragility index, which means it has ability to early warn systemic risk, and can be used as counter cyclical capital provision's anchor indicator. By measuring bank's CF/D ratio and systemic risk index (SRI), this paper proves CF/D ratio has appreciable impact on SRI. This finding can help regulatory authority conduct better supervision.This paper creatively imports a brand new indicator into macro-prudential regulation framework, the main innovation point has three aspects:firstly, CF/D ratio used to be an indicator in corporate finance; secondly, it's a new research field that warns systemic risk from business sector's perspective, in the past, systemic risk management only paid attention to financial sector; lastly, supervisory indicators on bank emphasize capital adequacy ratio and leverage ratio, CF/D is overlooked. But actually, bank's CF/D ratio has appreciable impact on its systemically importance. There are some shortcomings in this paper as well, firstly, subject to the length of data samples, this paper failed to explore the practical application mechanism of CF/D ratio. Furthermore, the relationship between CF/D ratio and systemic risks for financial institutions other than banks are not covered in this paper.The future research of this paper can be conducted in two directions:the first one is to continue collecting relative data, so that to make deeper research possible; the second one is to explore systemic risk information contained in other financial institutions' CF/D ratio.