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Risk Early Warning、Credit Crisis and Macro-Prudential Management Strategy

Author: NieZhao
Tutor: LiZhiHui
School: Nankai University
Course: Finance
Keywords: Risk early warning Credit crisis Monetary policy Macro-prudentialregulation
CLC: F832.4
Type: PhD thesis
Year: 2013
Downloads: 84
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Abstract


Since the late1970s, with a series of financial crisis in the developed countries and emerging market countries and regions, domestic and foreign scholars had researched a large amount of theory. But due to the different causes of the crisis in the different historical periods, the theoretical analysis of the causes of the financial crisis had evolved with The Times change, and the causes also can be roughly divided into three generations. The first generation of the crisis models were used to explain the crisis of Latin America in the1960s and1970s. The second generation was used to explain the crisis of the European exchange rate mechanism in1992, the Mexican peso crisis of1994. The third generation was used to explain the Mexican crisis of1994and the Asian financial crisis in1997.Plenty theoretical models can explain and analyze the various periods of currency crisis very well. But in2007, the subprime mortgage crisis has spread around the world, and not only lead to the most severe economic recession after the economic depression of1929, but also sparked the economists and governments rethinking and reviewing deep. It’s indispensable to establish a effective macro-prudential financial supervision framework, and to overcome the pro-cyclicality of financial supervision at the same time. It will effective reduce the system risk and maintain the financial stability.It’s sudden and destructive that financial risk changed into the financial crisis. To prevent the financial risk, firstly, the key point is to build an effective risk prevention mechanism from within. And timely found the potential risks and resolutely eliminated them, rather than delay or cover up the risk to cumulate the hidden danger. It can reduce the nation’s financial crisis, and prevent the impact of international financial risk at the same time. On March18,2012, the National Development and Reform Commission (NDRC) issued "The key work opinion about deepening the reform of economic system in2012", to decide that,"to accelerate the establishment and improvement of macro-prudential policy framework, and to research the method to set up the systemic system of preventing and early warning and assessing the financial risk, and the mechanism of disposing of the financial risk" as the important content to reform the financial system. Because of this, it’s the key content of research, which have to research firstly, to established the appropriate risk early warning system. At present, a lot of empirical studies have tried to identify the correlation between indicators based on the theoretical basis and the crisis, and to establish the risk early warning model, by using the data such as parameterized and nonparametric methods. But in the empirical literature, it’s ineffective to verify the next crisis by using the established "universality" model, with the except of explaining the current crisis. So most of the models also was poor in the result of the other sample test. Therefore, in order to effectively monitor and prevent the financial crisis, it’s primary to research the reason of why the performance of the traditional early warning model was barely satisfactory, and whether there were better methods to research the system, and so on. If it’s possible to solve the above problems, we can not only provide a solution to deal with the melee of the index system research in the current, but also provide a more convenient application to the practice authorities in the early warning of financial risk, which helps to improve the scalability and application of early warning theory and the index system of the financial risk. And it also has important theoretical and realistic significance for the establishment of the financial risk early warning system in our country.When policy authorities, meanwhile, accurately identifyed the category and the reason of forming financial risks, the central bank and banking regulators would need to take effective measures to correct in advance. But in this time, the global financial crisis that outbreaked in the developed countries, led by the United States, made us to rethink the traditional monetary policy tools and the regulatory theory methods. With the continuous development of financial institutions and markets, the traditional theory of monetary policy and bank supervision theory face to the challenge. In regulation, the traditional banking supervision methods only focus on the single agencies, and think it was enough to prevent the occurrence of systemic risk by ensuring that the single institutions of prudent operation. They largely ignored the macroeconomic cycle, and unable to cope with the overall credit wave. The Basel committee in1988and2001respectively promulgated the "Basel agreement" and "the new Basel capital accord", They were the basic framework and guidance documents of effective regulation on banks. But by analyzing the recent the global financial crisis, which triggered by the subprime mortgage crisis in U.S, we found even the improvement of the Basel agreement also have done nothing on fundamentally solving the problem of the security and stability of the global financial system. On the contrary, it adds the pro-cyclicality and volatility in the financial markets. And microcosmic individual rationality can make the overall irrationality, it will lead to the "prisoner’s dilemma" in the financial stability, which formed the so-called "combining fallacy". This suggests that the monetary policy in order to control inflation as the target in the past, and the macro-prudential financial supervision framework which was formed by the micro-prudential financial supervision, does not effectively prevent systemic risk and the financial crisis. Therefore, it’s the key problem on the further study that how to establish the counter-cyclical macro-prudential financial supervision tools. NPC and CPPCC in2013government work report emphasized,"macro-prudential policy framework should be improve and play a role of counter-cyclical monetary policy regulation, improving the monetary policy transmission mechanism and strengthening financial supervision and coordination of monetary policy, and optimizing the regulatory standards and regulation methods." So how to choose the counter-cyclical macro-prudential regulation tools and policy to suit our nation’s finance system, and form the well coordination mechanism between the financial regulatory policy and the other fiscal policy at the same time, has become the major realistic problem urgently to be solved in China’s financial authorities and the forefront of academic research project.But by analyzing the international practice, at present the global study of macro-prudential regulation is still at the exploration stage. Some important issues, such as how to construct the basic framework of macro-prudential regulation, how to develop the implementation tools, how to coordinate the monetary policy and the macro-prudential supervision, etc., were in a process of open discussion. There was no doubt that only clarify these problems theoretically firstly pave a way for the implementation of the macro-prudential regulation practice. Therefore, based on the above logic framework, this paper will totally analysis the practical path of macro-prudential regulation, to deepen the comprehension of the inner mechanism of macro-prudential regulation and the path of practice. There were three aspects of content in this paper to establish and analyze the macro-prudential financial supervision framework.Firstly, macro-prudential analysis have to establish a financial system robustness analysis and evaluation system, to develop the financial system of early warning index system, to judge the trend of macro-economic cycle and the financial system’s risk. This paper studies the currency crisis and discovery the conclusion that:(1) Currency crisis were belong to different types, which was divided into three categories:policy unbalance crisis, financial excessive crisis, external debt and suddenly stop crisis.(2) Crisis was caused by a variety of vulnerability factors.(3) The origin of the crisis is very similar, and currency appreciation and domestic credit expansion were the most important predictor.(4) The excessive leveraged capital market easily lead to crisis.(5) The third crisis to total sample was21.69%, We should pay more attention to this universality crisis;(6)This paper also identify key indicators and threshold combination of "bad" factors.Secondly, macro-prudential policy research have had to support the policies and measures corresponding with the potential systemic risk which identified by the macro-prudential analysis. Base On China’s1994-2011data and BCT model, we carried on real diagnosis analysis and found that the probability of currency crisis is low, but we should still focus on " financial excesses crisis". This result also provided the direction of niche targeting Counter-cyclical macro-prudential management tools.Thirdly, This chapter was divided into two main research, separately analyzed from the quantity-based regulation and price-based regulation of monetary policy. In terms of quantity-based regulation, the main analysis was whether the reserve against deposit have counter-cyclical characteristics. In terms of price-based regulation, mainly studies was the relationship between the monetary policy interest rate regulation and financial stability, and have discussed a new kind of monetary policy transmission mechanism, the risk-taking channel. In the first study, We found the cointegration relationship between the reserve against deposit ratio and total credit, and the reverse cycle characteristics of legal reserve against deposit. Central bank had raised the reserve against deposit ratio frequently, produced a positive reverse cycle effect. In the second study,(1) We find evidence that low levels of interest rates have a positive impact on banks’risk-taking behavior. Decrease in short term interest rates has a positive impact on the loan portfolio quality and thereby, financial soundness of banks.(2) This result implies that when short-term interest rates were below a benchmark level, banks increase their risk-taking. Relatively low levels of interest rates cause either a decrease in risk perception or an increase in risk tolerance. This result gives evidence of a change in risk perception or risk tolerance and accordingly, it confirms the impact of the risk-taking channel of monetary policy transmission channel.(3) Bank risk-taking behavior was negative influenced by the market structure, the capital asset ratio, and the bank size, but positively correlated with GDP growth. When banking concentration increased or competition reduced, the loan risk of banks was less. The larger the capital asset ratio and capital size was, the lower the risk the banks take, and the better the loan portfolio quality was. Our findings also have several practice significance. First of all, the banks was not risk-neutral. When setting monetary policy, central bank should think about the banking conditions. As judging financial stability, the monetary policy was non-neutral. So, monetary policy was able to mitigate some negative influence of financial instabilities on the real economic activity. The potential effect of risk-taking channel also have implied that long-term macroeconomic policy outlook should include output growth, investment and credit. Secondly, the bank specific characteristics, such as capitalization and liquidity, have play a key role in banks’lending and risk-taking behavior. Therefore, it’s an important factor of efficient regulation and supervision in providing prudent bank behavior. Thirdly, In a continuous period of low interest rates, especially if accompanied with other risk-taking signals, such as rapid expansion of credit and asset prices, banking supervisors should their vigilance and take more effective regulatory policy to limit risk-taking behavior of Banks.The forth was research the macro-prudential policy, and designed the macro-prudential management tool by the perspective of macro-prudential regulation. This chapter was mainly divided into three research. First of all, it have systematic analyzed the effectiveness of macro-prudential management tools, which was used international commonly. It have divided tools to handle specific types of systemic risk, avoiding a unified approach to all tools and improving the effectiveness of the tool. Then, it have a further analysis of the policy tools that adopted in the process of our country dealing with the fluctuation of credit, and have a systematic analysis on its control effect. Finally, it researched the Counter-cyclical capital buffer mechanism in the Basel3. In the first study, to effectively cope with crisis of credit boom, we have divided the popular macro-prudential tools into the following four categories. They were capital requirements, liquidity requirements, assets and credit growth limitation, and the variables associated with loan eligibility criteria. We found that tools can effectively slow down the credit pro-cyclical macro-prudential were loan to value ratio (LTV), debt-to-income ratio (DTI), the upper limit of credit growth, reserve requirements and dynamic provisioning extraction rules. In the second study, we found that (1) the adjustment of reserve against deposit ratio was significantly influence the regulation effect of credit growth. And the influence has obvious counter-cyclical features. This result was the same as chapter5study1.(2) the benchmark deposit and lending interest rates was significantly influence the control of the housing price index, and it also showed that the effect of tightening signal was very obvious, the same with the result of chapter5study2.(3) It was the combination of the proper means of monetary policy, the reserve against deposit ratio and macro-prudential policy that could stabilize economy, the continuity of policies have significantly effect to curb housing prices.(4) There were different factors that driving house prices rose. The main factor that driving house prices rose after2009was the excessive credit, which was consistent with chapter3.(5) During the adjustment process of counter-cyclical, the overall direction was very correct, and the management tools were targeted. Looking ahead to2013, the country should continue to adhere to the regulation, and deepen the adjustment of administrative and economic means. The focus was the structured credit policy, to ensure the continuity of policy and implementation. In the third study, The Basel committee (BCBS) have recommended the Credit/GDP gap as anchor variables and have argued that it was the best indicators of Credit expansion. Combined with the analytical results of BCT model and the data of our country’s empirical study, we found that the credit/GDP was not a suitable anchor variable of countercyclical capital buffer ratio. This paper suggests using the quarterly data of the credit/M2gap as the anchor variable.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Credit
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