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Empirical Research on the Influence of Financial Innovation on Risk of Commercial Bank in China

Author: YuanLi
Tutor: SunZuoLin
School: Huazhong University of Science and Technology
Course: Financial
Keywords: Panel data Financial product innovation Risk Off-balance sheet business
CLC: F832.33
Type: Master's thesis
Year: 2013
Downloads: 27
Quote: 0
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Abstract


The wave of financial product innovation has swept across China since the21stcentury. The business pattern of domestic commercial banks has changed from thetraditional pattern to the modern pattern which includes assets, liabilities, and externalbusiness. Many commercial banks launches kinds of innovation products to be morecompetitive in the market.Financial innovation has two sides. It has the function to prevent risk and also has theprobability to create new risk. Even though most commercial banks have built a vast andcomplex risk control system, but the new risks come from innovation need newrisk-management techniques just like the new network virus needs more advancedtechnology to control. When we introduce the technology of how to create new financialproduct, do we also introduce the technology of how to control the new risk related to thenew product? So far none of us knows.In the theoretical part, the paper defines the concept of financial product innovationfrom the theory and practice. In the same time, with the help of the beta of CAPM model,the paper measures the investment risk of commercial bank and uses it to measure thebank’s overall risk. Then, the paper analyses the cause of the risk created by productinnovation basing on the theories of principle-agent, financial intermediation theory andso on. In the same time, I try to expound the hypothesis of the paper: financial productinnovation of commercial banks increased the overall risk of the bank.In the empirical part, the paper choose the degree of product innovation inintermediate business and degree of financial product innovation as the indicator ofbank’s financial products innovation, and a panel data of the sample from2007to2011isused to do a regression analysis. The regression results verify the theoretic conclusionconsistently: there is a significant positive correlation between the degree of commercial bank’s financial products innovation and the bank’s risk. On this basis, I put forward myview that the product innovation of domestic commercial banks is still in an infantile stage,the ability of risk pricing and risk control in the process of innovation is still inadequate.In conclusion part, this paper puts forward some suggestions to domestic commercialbank and the CBRC: you should pay more attention to the potential risk behind thefinancial innovation, specifically, when learning the product innovation you should befocus on how to control the new risk, or the wave of innovation will bring in too manyunstable factors to Chinese financial market.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Financial organizations, banks > Commercial banks ( specialized banks )
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