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Empirical Study on commercial bank risk measurement based on non-risk Solvency Index

Author: Zhang Lei From: www.yourpaper.net Posted: 2010-06-08 15:16:59 Read:
Keywords: the non-risk solvency risk index bank capital
Abstract: non-risk Solvency Index proposed in this paper for Liang and Rhoades and McAllister and McManus are corrected, the risk level of fourteen commercial banks to the risk free repayment ability index to measure the correction in china.The empirical results show that, the risk level of joint-stock commercial banks is higher than that of the four major state-owned commercial banks, the equity capital ratio, asset size variation rate, proportion of non-performing assets and other factors had significant effects on the risk level of fourteen commercial banks in our country, state-owned property rights brought about by the state credit guarantee is the state-owned commercial bank has a significant advantage in risk take on.

In essence, the risk of commercial banks is its operation, product and customer loss risk, commercial banks will eventually need to support its possibility of loss and eventually make up the loss by equity capital.No matter how the commercial bank risk forms, once the risk of losses beyond the commercial bank's own capacity, will be manifested as commercial bank's losses and failures, failure finally eliminated by the market competition.From a legal sense, when a commercial bank equity capital can not make up for the loss caused by risk, commercial banks do not have repayment ability, the possibility of continuing operations of the lost.

A literature review on , and
the commercial bank risk influence factors

The influence factors of the risk of commercial bank size, McAllister and McManus (1993) that the bank has the risk of loan is higher, the risk is higher.Avery and Berger (1991) found that high risk assets is higher, the higher the risk of bank.Avery and Berger (1991) that the quality of loan, the credit risk of banks have changed, and the AR number or percentage of total loans, as banks operating performance indicators.Gallo et al. (1996) found the bank to invest in the stock proportion is higher, the greater the risk.Because the stock market price changes, the investment behavior has slightly carelessly, losses may jeopardize the bank capital.In addition, the ability of bank size directly affects the size of bank lending and investment diversification.Banks with larger scale, portfolio is more, the ability of the dispersion risk is stronger.Large banks in addition to spread the risks, also have the ability to compare multiple financial.Depositors also believe that the government will be more for the protection of large financial institutions, so the banks with larger scale, the smaller the risk.Saunders et al. (1990) study found, financial leverage and bank size will affect the bank risk; in addition, the relationship between ownership structure and bank risk, the more concentrated the share, the bank's risk is also higher.The bank's own capital can be regarded as a basic guarantee bank security; equity capital in addition to the basic funding for banks play media function and provide other services, but also can be used as accidental loss protection.Saunders et al. (1990) and Gallo et al. (1996) of the study are expected to higher bank capital ratios, the financial leverage is low, the financial situation is better, the risk of banks will be more low.But their empirical results showed positive and negative relationship between the proportion of bank capital and risk of contingent.Taiwan scholar Zhang Renshou (1993) found that estimates of the proportion of equity capital and portfolio risk two functions for systems of equations, raising the proportion of private capital will reduce bank portfolio risk.But the Taiwan scholar Chen Lijun (1994) pointed out that in the study of the relationship between capital and risk degree of variation variation, when the government for capital controls, require banks to raise equity capital, will therefore reduce bank leverage risk.However, financial leverage decline may have been caused by bank asset return rate, in order to improve the rate of return on assets, may induce banks to choose the high risk investment portfolio, in order to increase the return on assets, so the government to raise bank capital requirements are not necessarily can reduce the bank's total risk.

two, commercial bank risk variable selection


In the selection of commercial bank risk variables, Hannan and Hanweck (1988) to measure the bank risk to the after-tax return on assets change.Furlong and Keenly (1990) with reference to the capital asset pricing model (CAPM), to measure the bank asset portfolio to asset returns the standard deviation of the risk.Avery and Berger (1991) in new capital regulation standards impact on the United States bank performance, find the probability of Bank net profit changes and bank failures, change and to measure the risk of the bank.Hughes and Mester (1993) in estimating the cost function of risk and asset quality adjustment, the net profit changes as proxy variables of risk.Berger and Mester (1997) in the proportion of non-performing loans as a measure of risk factors to influence bank performance.
Starting from the angle of business activities of commercial banks, commercial banks can change our input and output variables to reflect the level of risk of commercial bank.Has significant effect in commercial banks' assets size, operating performance and risk to bear ability.Theoretically speaking, the greater the assets of commercial banks, the effect of scale economy and scope economy effect is more obvious, and it spread risk and reduce risk ability.For commercial banks, in the pursuit of effect of economics of scale and scope of the expansion of the scale, often accompanied by declining asset quality, the asset scale for commercial banks to measure the rate of change of LNASSET commercial bank scale expansion and its impact on the level of risk.The total assets of commercial banks in the proportion of investment securities accounts for the larger SECURITY, commercial banks due to undertake securities price fluctuation income fluctuations will be greater.Compared with non - financial institutions, commercial banks with high financial leverage characteristics significantly, equity capital accounted for a small, but the right of capital plays in maintaining market confidence, and ultimately make up for operating losses and resist the market risk, bank equity capital ratio is high, its capital adequacy, capital protection of bank depositors and the creditor is bigger, the bank market reputation is higher, so the probability of bankruptcy is relatively small.Effect of the condition of our equity capital to equity ratio of KA to measure the risk of commercial banks.Asset quality is an important factor to be considered in the portfolio of commercial banks, asset quality has a direct impact on bank earnings and risk status.We use the non-performing assets of commercial banks accounted for the total loans ratio of NPL to measure the quality of commercial bank assets.In addition, we join the OWNERSHIP in the model to measure the state-owned property right of the state-owned banks to provide support for the national credit, reflecting the influence of the state-owned commercial bank risk level; we also introduce commercial bank branch number B to explore the current business structure adjustment, the flat of the operation risk of commercial bank.
Thus, the risk variable R be explained by the following variables:
R=g (LNASSET, SECURITY, KA, NPL, OWNERSHIP, B)
Among them, the d1nASSET/dt measure of asset scale growth rate, we expressed our commercial banks scale changes in LNASSET, SECURITY investment securities accounted for the total assets ratio, KA as equity capital to total assets ratio, NPL of non-performing loans to total loans ratio, OWNERSHIP bank property types of virtual variables, OWNERSHIP=1 said the state-owned commercial bank, OWNERSHIP=0 that the joint-stock commercial banks, B said the number of each commercial bank branches.
Because each bank every year because of the different management and investment strategy, the change in the size of LNASSET, SECURITY, the proportion of investment securities of non-performing loans, equity capital ratio of NPL, OWNERSHIP and KA property form branches quantity difference, will affect the risk level of R.
For the commercial banks, because of its deposits and the service fee for the foundation of intermediate business need not occupy its assets, it needs the support of capital, so, capital gains rate index can not accurately measure performance of commercial banks, this paper use the equity changes in the rate of return rate as a measure of commercial banks operating risk index.Further, we will be Liang
And Rhoades (1991) and McAllister and McManus (1993) proposed bank no liquidity risk index IR to make amendments to the rights and interests of capital gains rate, the standard deviation of alternative asset returns standard deviation as a measure of risk, the commercial banks face the size of the index, the index will be defined as:




The molecular for the return rate of equity capital during the period of samples standard deviation, the denominator is the ratio of asset returns and the relevant shareholders.When the return on assets and equity levels make earnings have a greater fluctuation, rise will no liquidity risk index.Conversely, if the rate of return on assets, no liquidity risk index will be reduced.From the definition of the index can be seen, given the bank's return on assets and equity ratio, when the bank's income level fluctuation, increase bank no liquidity risk; and in the volatility of bank fixed rate of return, rising income levels will reduce bank no solvency risk, no pay risk also increases bank shareholders equity ratio will reduce bank.Further analysis, in the denominator or numerator is not fixed, the bank changes in the rate of return is uncertain effect on bank no solvency risk, but the only certainty is equity ratio influence bank no liquidity risk, namely bank equity ratio rising, no liquidity risk will decrease, on the contrary, its no liquidity risk increases.Theoretically speaking, the bank shareholder equity ratio is higher, its capital adequacy, capital protection of bank depositors and creditors of the greater, the bank market reputation is higher, so the probability of bankruptcy is relatively small.
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