On Financial Innovation and Risk Control of Commercial Banks in China

Abstract: Since the mid-1970s, China's commercial banks have entered an innovative era in the reform and opening up. Financial innovation has become one of the new trends in the development of contemporary commercial banks. However, the ensuing financial risks are also increasingly prominent. In particular, financial innovation will generate new financial risks while avoiding the original financial risks, which has become an important constraint factor for financial development and innovation.

This paper reveals the antagonistic relationship between financial innovation and financial risk, briefly summarizes the new risks that commercial banks may bring in financial innovation, such as credit risk, design risk, legal risk and operational risk, and on this basis, puts forward the basic strategies for commercial banks to prevent and control all kinds of risks that may occur in the process of implementing financial innovation, so as to promote commercial banks to implement financial innovation with minimum risk and seek steady development in innovation.

Keywords: financial innovation, financial risks of commercial banks

Analysis on Financial Innovation and Risk Control of Commercial Banks in China

Abstract: Since the mid-1970s, China's commercial banks have entered a new era in the reform and opening up. Financial innovation has become a new trend of contemporary commercial banks, but the related financial risks are becoming increasingly prominent, especially when avoiding the original financial innovation, new financial risks have also emerged, which has become an important constraint factor for financial development and innovation.

This paper reveals the contradictory relationship between financial innovation and financial risk, briefly summarizes the new risks that commercial banks may bring in financial innovation, such as credit risk, design risk, legal risk and operational risk, and on this basis, puts forward the basic strategies for commercial banks to prevent and control all kinds of risks that may occur in the process of implementing financial innovation, so as to promote commercial banks to minimize risks in implementing financial innovation and thus develop steadily in innovation.

Keywords: commercial banks, financial risks, financial innovation

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Since 1970s, a wave of financial liberalization reform and financial innovation has been set off all over the world. Especially with the development of world economic integration, the formation of financial market internationalization and the rapid development of science and technology, financial innovation is forming a worldwide powerful wave, which impacts the traditional financial systems and financial services of various countries and has brought profound influence on the development, reform, operation and management of the world financial industry. At the same time, financial innovation has been endowed with more and more rich connotations. In the process of financial instruments constantly breaking through the traditional old system, promoting financial marketization and promoting financial development, China's financial innovation also began with the reform of the banking financial system in the 1980s. Therefore, the reform process of China's banking financial system is actually a process of continuous financial innovation. However, while carrying out financial innovation, the banking industry has also brought some new financial risks. Although the process of financial innovation has avoided some risks, it has also brought new risks.

Relevant persons also pointed out the opposition between innovation and risk. Innovation is to boldly try to take the road that others have not taken and chew the buns that others have not chewed. In this case, there is often no experience to learn from, and this kind of innovation investment is high, so the innovation risk is also great; A complete innovation project generally has no major problems in many aspects such as strategy, technology and product innovation. But in the whole process of innovation, it is impossible for people to foresee all the situations, and it is inevitable that they will ignore all the secrets and often ignore some small details. It is these small details that are likely to subvert the whole innovation plan and cause the complete failure of innovation; If new products are produced in advance, the corresponding industry standards are lacking, the supporting industries are far behind, and there is no industrial chain, so it is extremely difficult to go it alone. The product cost will be high, the quality will be difficult to guarantee, and the profit margin will be greatly squeezed.

Therefore, while attaching great importance to and actively supporting banking innovation, the banking industry should respond quickly to the product market in view of financial innovation, pay close attention to and identify financial risks related to innovation, and guide banking institutions to strengthen risk management in time according to the characteristics and trends of fast product launch, short update cycle, combination, intersection, complexity and high degree of electronicization. Carry out financial innovation on the premise of controlling risks and realize rapid development in innovation.

In short, financial innovation is a "double-edged sword", and commercial banks should properly grasp this double-edged sword to make it play its best role in the current unpredictable environment.

First, the meaning and necessity of financial innovation

(A) the meaning of financial innovation

Joseph, an Australian-American economist in the 1920s? In his masterpiece Theory of Economic Development, Schumpeter believes that innovation is to establish new production functions, including developing new products, adopting new production methods or technologies, developing new markets, developing new resources and implementing new management or organization forms. Then financial innovation is to establish a "new production function" in the financial field, "a new combination of various financial elements, and a market reform formed in pursuit of profit opportunities." In the final analysis, financial innovation is financial innovation and creation, and it is the general name of new theories, methods and achievements creation in the financial field.

(B) Financial innovation is the inevitable choice for the survival and development of commercial banks.

For China, a developing country in the early stage of financial deepening, financial system innovation and financial product innovation are both urgent tasks for commercial banks to survive and inevitable choices for their development.

1. Only financial innovation can meet the requirements of economic development.

At present, the economic situation is developing rapidly. With the gradual implementation of various economic growth measures, the growth rate of China's national economy is increasing. In the future, the party and the state will focus on optimizing the structure, improving the quality and efficiency of economic growth, and at the same time promoting the growth of consumer demand as an important measure to stimulate economic growth. Economy determines finance, which further promotes economic growth and brings development opportunities and challenges to commercial banks. Not only do banks need to increase investment and adjust the credit structure; In addition, commercial banks are required to expand intermediary services, create new credit instruments and reform settlement methods. Facing the new economic trend, commercial banks must assess the situation and actively carry out financial innovation to adapt to changes and better promote economic growth.

2. Only financial innovation can meet the needs of the market and customers.

Over the years, commercial banks have laid a foundation in traditional business operations, consolidated their position and developed their business by relying on time-honored brands and gold-lettered signboards, which has had a certain impact on customers. However, the traditional business of commercial banks has entered a certain period of decline, and the market and customers faced by banks have changed significantly. The rapid development of the capital market, the gradual opening of the financial trading market, the effective structural upgrading and product replacement of state-owned enterprises, and the increasing personal assets have made the mainland banking industry feel the squeeze of bank competition more and more deeply. The development and changes of the market and customers inevitably require diversification, personalization, intensification and integration of financial services, which brings great challenges to commercial banks, but also provides a lot of business opportunities and broad development space for commercial banks. Only by constantly seizing opportunities, meeting challenges, studying the market, mastering the market, making innovative articles and being unique in operation can domestic commercial banks form their own operating characteristics, meet customers' needs and consolidate and expand their share in the fierce market competition.

3. Only financial innovation can cope with the fierce market competition of foreign banks.

Modern finance is full of fierce competition, whether domestic or international. Whoever is better than others in management can effectively occupy the market and win the initiative in competition. With the cancellation of protective measures after China's entry into WTO, foreign banks with national treatment will develop rapidly in China with their strong innovative ability, skillful innovative skills and mature innovative products. At present, the share of more than 200 foreign banks in China financial market is about 3%. It is predicted that the business of foreign banks in China will increase by 40% every year from 10 to 15, which may account for about 30% of China's domestic financial market. Foreign banks have obvious advantages in operating system, management level, scientific and technological network, international business and human resources. They will adopt the development strategy of selecting regions, customers and businesses, focusing on international settlement, consumer credit, bank cards, personal finance and financial consultants, and compete with domestic commercial banks for high-quality customers. In this fierce competitive environment, only by forging ahead and expanding the market through continuous product and service innovation can domestic commercial banks be invincible in the competition.

Second, the degree of development of financial innovation in China's commercial banks

It can be seen from the above that financial innovation is the only way for commercial banks. However, China's banking financial innovation began gradually after the reform and opening up, and has achieved remarkable results after more than 20 years of development. Mainly reflected in:

Organizational system

In terms of organizational system, a unified central bank system has been established, the organizational framework of the central bank has been completed, a banking system with four state-owned commercial banks and more than a dozen joint-stock commercial banks as the main body has been formed, urban credit cooperatives have been reorganized into urban commercial banks, nearly 100 securities operating institutions, a number of insurance institutions and other non-bank financial institutions have been established, and a financial enterprise system with multiple ownership structures and multiple financial institutions has initially formed. At the same time, the market access conditions for branches of foreign banks and insurance companies were relaxed, the foreign exchange market was initially established, and the pace of opening up was accelerated.

(2) Management system

In the management system, the central bank has changed from simple planned financial regulation to financial macro-regulation, and the regulation mode has changed from planned and administrative means to economic and legal means; The business control of financial institutions has been relaxed, and various specialized banks can offer RMB and foreign exchange services in urban and rural areas.

(3) Financial market

In the financial market, a multi-category, multi-level and initially formed financial market system has been formed. Established a money market based on interbank lending, commercial paper and short-term government bonds; A unified foreign exchange market has been established, combining the retail foreign exchange market between banks and enterprises, the wholesale foreign exchange market between banks and the open operation market between the central bank and designated foreign exchange banks.

(4) Financial business.

In terms of financial business, the liability business includes value-preserving savings deposits, housing savings deposits, entrusted deposits, trust deposits and other varieties; Asset business includes mortgage loans, pledged loans and other varieties; In the aspect of intermediary business, diversified services, such as personal remittance and personal check service, various agency services and multi-functional credit cards are introduced.

(v) Financial instruments

In terms of financial instruments, the money market and the capital market mainly include treasury bills, commercial bills, short-term financing bills, repurchase agreements, large negotiable certificates of deposit and long-term government bonds, corporate bonds, financial bonds, stocks, beneficiary bonds, stock warrants, closed-end funds, open-end funds and other financial instruments.

(vi) Financial technology.

In terms of financial technology, the level of electronic equipment of financial institutions has been continuously improved, and electronic information technology has been widely used in the financial field. At present, China has fully realized the computerization of financial institutions' fund transfer, securities trading, information management and office automation, and new electronic and networked financial services such as electronic money "one card", online banking, online stock trading and online wire transfer processing have emerged, realizing the docking with the international financial industry in financial technology.

From the above analysis, we can see that China's financial innovation has been launched in all directions. Through financial reform and innovation, the efficiency and service quality of financial enterprises have been improved, the quality of credit assets has been improved, and the profitability has been gradually improved, thus greatly promoting the development of the financial industry and providing strong financial support for the development of the entire national economy. But as the saying goes, "the greater the income, the greater the risk", financial innovation has a double-edged sword effect, and risk management is an important aspect that cannot be ignored in the process of bank innovation.

Three, China commercial banks must risk management throughout the innovation process.

Risk management is an important aspect that cannot be ignored in the process of bank innovation. For modern commercial banks, risk management has penetrated into their blood. Therefore, innovation without considering risks is not scientific innovation and will not bring stable and sustainable benefits to banks. Banks should maintain high risk sensitivity in the process of innovation, so that innovation awareness and risk awareness run through the whole business development. Think of innovation as soon as you meet customer needs, and think of risk as soon as you meet innovation.

(A) Financial innovation has enhanced the ability of commercial banks to manage and avoid financial risks

Financial innovation, as a means for commercial banks to manage risks, can effectively improve the ability of commercial banks to manage and avoid financial risks through institutional innovation, business innovation, market innovation and technological innovation.

First of all, through product innovation, commercial banks can allocate the financial assets of the same unit to multiple financial products, or apply them to multiple financial markets, or be shared by multiple risk-takers, thus effectively dispersing risks through different combinations and configurations.

Secondly, commercial banks can legally transfer their own risks to other subjects through financial innovation. For example, banks can determine the transaction price of future financial assets through some financial derivatives, such as forwards and futures, and transfer risks to speculators who are willing to take risks, so that market risks can also be separated from normal business activities.

Third, commercial banks can also plan and arrange financial risks through various soft technology innovations, such as statistics and probability theory in the early stage and financial engineering and mathematical finance in the later stage. At the same time, they can also record and manage financial risks more quickly and effectively through various hard technology innovations, such as computers and various modern communication means, so as to achieve the purpose of effectively avoiding risks. Finally, the innovation of financial derivatives provides an effective means for banks to hedge risks. Interest rate forward agreement, foreign exchange futures, interest rate futures and credit derivatives provide the possibility for banks to hedge market risks and even credit risks.

(B) Financial risks have promoted the development of financial innovation of commercial banks.

From the origin of financial innovation, the original financial innovation was to avoid financial risks. The development course of financial innovation proves that the period of the fastest development of financial innovation is also the period of the fiercest performance of financial risks. Throughout the development history of commercial banks, no period is more extensive, lasting and profound than the financial innovation since the 1960s. There are many reasons for financial innovation, which are directly related to the aggravation of financial risks. Financial innovation in this period mainly includes financial business, financial organizational structure and financial system innovation. From the perspective of financial business innovation, hedging financial instruments and financial derivatives are related to avoiding financial risks; From the perspective of financial organizational structure innovation, the emergence of universal banks is inseparable from the requirements of the financial industry to enhance its ability to resist financial risks in addition to profit-making purposes; From the perspective of financial system innovation, the reform and development of the international monetary system is a way to constantly explore and avoid the risks of monetary policies and exchange rate fluctuations in various countries and seek a more stable international monetary order.

(C) Financial innovation not only avoids financial risks, but also brings new risks to commercial banks.

Since 1980s, financial innovation and increased financial risks have been the most remarkable development features of the international financial market. Financial innovation not only manages and avoids financial risks, but also creates new financial risks.

First of all, financial innovation increases the operational risk of commercial banks. Financial innovation makes financial institutions homogeneous, intensifies the competition among commercial banks, reduces the traditional deposit-loan spread of banks, and has to engage in high-risk business, which in turn leads to the increase of business risks and the decline of credit rating of commercial banks. In recent years, the collapse of the world's major banks is related to financial innovation.

Second, financial innovation stems from the increase of financial risks, but in fact, as a result of financial innovation, the risks of financial products are still increasing with the process of financial innovation.

Third, financial innovation has increased off-balance-sheet risks. That is, the risks that may be brought by the business or transaction behavior that is not reflected in the capital balance sheet and may be converted into the real liabilities of the bank. At present, in commercial banks in western countries, especially in the United States, the scale of off-balance-sheet business has exceeded that of on-balance-sheet business, and the profits created by off-balance-sheet business are becoming new profit points for financial institutions. As a result, the risk of off-balance sheet business has also become the main source of risk for financial institutions.

Fourth, financial innovation has promoted financial homogenization, liberalization and internationalization. The interdependence between financial institutions in a country, between domestic financial institutions and foreign financial institutions, and between domestic financial markets and international financial markets has increased. Any mistake in the financial system will affect the security of the whole financial system, making the "partner risk" prominent.

Generally speaking, the new risks in financial innovation can be subdivided into the following risks. (1) design risk. That is, due to various uncertain factors in the process of financial innovation design, financial innovation measures can not be introduced as scheduled, and there is even the possibility of abortion; (2) Legal risks. That is, because the content of the transaction contract does not conform to the legal norms, the transaction contract does not have legal effect or other legal reasons, which brings risks to the transaction subject; (3) Credit risk. That is, the risk caused by one party's failure to perform according to the terms of the contract; (4) Operational risk. Refers to the risk caused by the failure of internal control system or clearing system.

Fourth, measures to prevent financial innovation risks.

At present, China is in the period of system transition, and the demand for financial innovation is huge, and the development space of financial innovation is quite broad. Therefore, strengthening the supervision of financial innovation risks is more important for preventing financial risks, maintaining financial market stability and national financial security. In order to build an effective financial innovation risk supervision mechanism, I think we should start from the following aspects:

(A) to strengthen the risk prevention of financial supervision departments

1. Participate in the research and development of financial innovation.

Financial supervision institutions should assign special personnel to participate in the research and development of financial innovation, fully understand the process of financial innovation, accurately grasp the risks of their products, and organize relevant experts and professors to conduct a comprehensive demonstration of financial innovation products to investigate whether they can carry out financial innovation and avoid unnecessary design risks.

2. Improve legislation.

Establish a complete set of legal procedures for banking financial innovation, formulate unified financial transaction management standards, eliminate unnecessary risks in the transaction process, and make the whole process of financial transactions from signing contracts to final implementation regulated by corresponding laws. At the same time, establish an effective risk management and transaction consultation mechanism, so that all financial institutions have measures to prevent financial risks, ensure investment safety and effectively prevent legal risks.

3. Strictly supervise the financial innovation activities of financial institutions and control the credit risk in financial innovation.

According to their own credit status, business ability, adaptability to risks and current market fluctuations, we should formulate a series of risk monitoring indicators to control risks within an acceptable range. At the same time, when dealing with financial innovation and financial liberalization, we should pay equal attention to deregulation and strengthening management. We should strictly control the listing of controversial financial innovation tools, especially strengthen the innovation of high-risk financial derivatives. In the credit rating of financial institutions, the proportion of financial institutions engaged in speculative transactions should be regarded as an important indicator.

4. In the process of innovation, the risks of commercial banks are increasing day by day, showing a trend of diversification and complexity.

Facing the reality of the change of financial environment and the increase of risks, the banking industry must establish the awareness and concept of risk management in order to achieve good operating benefits. We must establish a sense of risk among employees, stimulate their internal motivation, establish a high sense of responsibility, take risk prevention as everyone's responsibility, and strive for employees to operate in strict accordance with the rules and consciously pay attention to risk prevention when dealing with each business. Banking departments should take risk monitoring and avoidance as their basic duties and an indispensable part of their daily work, and find and avoid operational risks in time during daily monitoring.

(B) Risk prevention of financial innovation subjects

1, clear risk management principles

First of all, commercial banks should follow the principle of prudent decision-making when innovating new products and developing new business, and should not blindly rush for success; Secondly, commercial banks should follow the principle of risk diversification, expand their business scope and implement diversified operations in order to achieve the purpose of risk diversification; In addition, commercial banks should follow the principle of avoiding risks in the process of innovation, and avoid high-risk businesses in order to avoid risks.

2. Establish a risk management system

Financial institutions should formulate an effective and feasible risk prevention system in a unified way, and establish a scientific risk prediction and evaluation index system based on their own characteristics and practice. The system can accurately monitor and judge the risks of various businesses of the whole bank at any time, calculate the time, link, amount and possibility of risk resolution, and guide all banks to solve problems and resolve risks in time through the system. At the same time, through the establishment of dynamic risk statements, the potential risks in business innovation can be found at any time, and the whole bank will be notified to avoid them in time, and measures will be formulated in cooperation with business departments to reduce the risk incidence.

3. Strengthen the construction of internal control system and guard against all kinds of risks.

First of all, employees should establish the concept that safety is benefit, consider the matching of management systems when carrying out business innovation and development, and constantly improve and perfect the existing systems that are not suitable for new business in combination with business development. Implement the safety responsibility system item by item, refine various basic systems and internal management punishment systems, clarify various business operation processes and strictly implement them, so that the construction of internal control system can be based on laws, followed by laws and strictly enforced.

Secondly, give full play to the case prevention role of the banking supervision department and do a good job in the construction of "three lines of defense". If the risk management department is to prevent risks from the business itself, then the banking supervision department is to start with personnel and control the risks of good personnel. The supervision department should adhere to the people-oriented principle, strengthen the education of employees' professional ethics, and standardize the behavior of personnel in obeying rules and disciplines. Hold regular case analysis meetings, select typical cases to explain, sum up experiences and lessons, and prevent delaying the opportunity. Establish "three lines of defense" for personnel to guard against risks. Front-line personnel at the front desk should take precautions against business operation risks. Business functional departments should focus on supervising the implementation of front-line rules and regulations, and put forward specific measures to improve the system and business. The audit department should check the business development and personnel compliance operation of the whole bank to nip the risk in the bud.

Verb (abbreviation for verb) comes to a conclusion

Innovation is the source of development, and financial innovation is the driving force for the continuous development of the banking industry and an important source for achieving sustainable financial development. At present, financial innovation is still a new thing for China's commercial banks, and its growth needs the promotion of investors and regulators of commercial banks. Banks are the main body of financial innovation and take the first responsibility for innovation activities and risks. Therefore, in the process of innovation, banks should constantly discover innovation risks and effectively control them, so as to make China's commercial banks develop rapidly.

thank you

This paper was completed under the guidance of my tutor Mr. Wang. In the whole process of graduation thesis design, Mr. Wang gave me great help and guidance. His rigorous academic style and profound knowledge left a deep impression on me. This graduation thesis mainly studies the influence of financial innovation and risk on commercial banks. Before that, I didn't know much about this. Under the guidance of Mr. Wang, I treat every problem in a down-to-earth way academically and in my life, and strive for new breakthroughs by means of reverse thinking. Teacher Wang's teaching has benefited me a lot, and I will never forget it. I want to express my deep gratitude to my tutor.

In addition, I would like to thank the School of Finance and Finance of Shanxi University of Finance and Economics for their training and help. I learned knowledge here, broadened my mind and felt happy. Finally, I sincerely thank all those who have given me care and help!

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