The enlightenments in the commercial bank of China by financial crisis

The negative influence caused by subprime crisis does not liberate completely, so it is not necessary for the bank of China to make adjustment according to the current serious situation. At the moment, the Chinese capital market is not perfect compared to the developed countries, the consciousness to the risk management of the bank is not sensitive, and it has low level of monetary and securities market, the commercial banks have bias awareness of creative financial instruments. Because the there is relative large bubble in Chinese real estate market, the market returns and risk of it are very high. Overall, the subprime crisis impact directly on the capital loss of the Chinese commercial banks which purchase the loan of related USA housing. Facing to the changing of economic structure in USA, the banks of China have to take measures to correspond to it.

The enlightenments in the commercial bank of China by financial crisis are as following: On the first point, due to the high market return in real estate in China, so the mortgage occupies large proportion in commercial banks, hence, the whole real estate market would impact the commercial banks in recovering loans. At present, the phenomenon in real estate speculation seems serious which may bring risk to the commercial banks. On the other hand, the regulation in real estate in China has a very big gap between it in USA. However, the subprime crisis made a sudden appearance to USA. So the Chinese commercial banks have to think deeply about how to defuse the risk of subprime market in a way.

 In my opinion, the Chinese commercial banks have to develop the financial innovation according to the market and demand of customer. There is different between the “demand” and “want”. “Demand” is the basic factor that people need it to satisfy their normal living standard, but “want” may be the desire of people. The former require is affordable and less risk, nevertheless, the latter may be hard to come true. So if the normal residents just need the house rather than villa, the commercial banks should just offer a loan up to the proper price to the house.

How do financial crisis influence the small banks in China?

 There is a great quantity of literature about the financial crisis influences the middle-large size banks in China, whereas there is seldom document which talks about how the financial crisis impacts the small banks in China. We can regard the small banks as “a small enterprise”, which has less power to confront the risk. In other words, it has a more profound and lasting effect by the financial crisis.

  The main characteristic of the small banks in China is as following: From capital aspect, they have relative the smaller capital scale. From region scope side, those banks usually spread over the rural area or just enter into the domestic market. On the operations side, the small banks just deal with the customer of small business. And as mentioned above, the risk management falls behind compared to other larger banks.

  First of all, the financial crisis affects the marketable value of the small banks in China, which makes international financial institutions invest such small banks as the city commercial banks or the rural commercial banks slowly. And those banks which want to make use of foreign investment to seek strategic cooperation or technological upgrading may feel helpless. Secondly, the financial crisis influences the business environment of the small banks in China. According to the statistic data, the increase in GDP in the first quarter in the year 2009 was only 6.1%. The small banks have significant decrease in profit. If the bad influence of overseas market can not reverse by the financial crisis, the part of banks which mainly rely on the export enterprise will meet further difficult situation.

   If we take above aggregate, we can see that the financial crisis brings dangerous impact on the business of small banks. The shrink in the marketable value go against the expanding the capital strength. However, in my opinion, the financial crisis may offer the small banks in China some opportunity. Because of the unfavorable environment caused by the financial crisis, the small banks will focus its core competitiveness. They will improve their risk management standard, and increase their ability of financial innovation, and advance their adaptability to changes.

How does financial crisis influence the bank of China?

Due to the subprime crisis in USA in 2008, the financial crisis is sweeping way cross the world. However, it does not destroy everything, for the banks act as an important role in the financial institutions in each country. China is a country which has been developing rapidly. It has its own political system and hence there is different financial system. That is why the bank of China have to recognized about the reason of this financial crisis so that to find the way to solve the problem which correspond to China.

 At present, the direct impact to the bank of China includes the bond holding, the commercial loans, although those can be controlled. And the bank of China can not ignore the risk of providing the loan to the real estate. Retail banking business may also exert the negative impact.

 The Chinese government takes measure to prevent economic slowdown which can affect the average profit level on the bank of China. The detail is as following. From long term, the sustaining economics development of China depends on the adjustment of its economic structure. The guidance to the fund flow by the banking plays the vital role. In the next place, as the result of lacking the completely social security in China, the Chinese citizen would be anxious to the economic slowdown, hence, there is a large restrain on residents’ consumption and investment willing. The consumer banking business which dominates the housing mortgage loan is facing the risk of going downhill. On the third point, the most important task the Chinese commercial bank will meet is how to take advantage of minimizing the interest rate spreads. The basic idea is that the payoff space of the banks shrinks due to the reduced margin between deposit and loan rate which is the major resource of the profit of the bank.

  Overall, the bank of China has to find the proper way which fit its own financial institution and development direction during this financial crisis.

Why do banking crisis and financial crisis happen

  The US subprime lending crisis erupted in 2007 has been involved as the global financial crisis in 21 century, which not only lead to the economic depression in USA, but also result in tough time in economy during many countries. The US subprime lending crisis influenced from investment banks to commercial banks gradually. Up to year 2009, there were fifteen banks went bankrupt. The biggest bank among them is IndyMac bank, which was one of the largest mortgage lenders in USA. An analyst at RBC capital market in San Francisco said “IndyMac still has a sizable book of poorly performing loans. That’s its biggest problem. Our best guess is that IndyMac winds up in receivership.” According to the international monetary fund, global financial lost 1.4 trillion dollars due to this subprime lending crisis. There are many factors cause such crises. Overall, there are three aspects to analysis. First of all is from financial market and institution side. In short, subprime mortgage is to mortgage the houses to the people who in fact have no ability to pay back the money in a very low price. Such subprime mortgage was based on the low interest rate and increasing property price. However, the higher interest rate increases borrowers’ cost and the real estate market met recession in year2004, which shake the existence and development of subprime mortgage. And this situation led to higher rate of liquidated damages. Quite a lot of mortgage enterprise went out of business. Then, from investors’ side, many investors have no ability to identify the value or risk of derivative which may make mistake. Finally, from the regulation side, the irresponsible rating agency made incorrect strategy due to lack of good regulation. For example, many Chinese banks hold bond of Lehman Brothers, and along with subprime lending crisis, the Chinese financial institution lost 4.9 billion in Chinese currency.  The Chinese commercial banks appear toxic assets at present.

   Many theories explain why banking crisis happen. In Macroscopic view, Irving Fisher believed that there’s close relationship between banking crisis and bad economic cycle. Hyman P. Minsky suggested “financial instability hypothesis”, which showed that economy boom may cause the financial turbulence in the future. Friedman concluded that “the wrong monetary policy brought about the banking crisis” by researching banking behavior during the great depression from 1929 to 1933. From microcosmic, such as asymmetrical information, adverse selection by borrowers, the moral hazard behavior, the banking behavior itself, all of these factors would cause the banking crisis. Overall, it is impossible to understand how banking crisis exist. We need more and more theory and case study to conclude it.

   Subprime lending crisis impact banks most. The following week I will discuss how does it influence the banks, and banks' response to it. (In week 2, I discuss the reason of banking crisis and financial crisis in general according to my own point of view and research.)