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Chapter 23 Without "Trust" No Establishment: From Qianzhuang Bank to Commercial Bank (3)
Bank capital: the "capital" of commercial banks

In the early days of Sino-foreign trade, the financial business was generally operated concurrently by major foreign banks, such as Jardine Matheson and Qichang.In addition, some banks that are not headquartered in the UK and India also do some financial business in Hong Kong, such as Agricole Bank, Standard Chartered Bank and so on.However, the center of gravity of these banks is not in Hong Kong, so the financial services provided cannot fully meet the needs of trade.By the 19s, this lack of financial services had become increasingly apparent.

British businessmen in India were keenly aware of this business opportunity.Some British businessmen in Mumbai began to prepare for the establishment of the "Royal Bank of China" for the Chinese market.After the news spread to Hong Kong, it attracted the attention of another British person, Su Shilan, the main promoter of HSBC Bank.At that time, Su Shilan was the agent of the famous British Shipping Company in Hong Kong and had worked in Hong Kong for more than ten years.Due to the reputation of the British Shipping Company and his own qualifications, Su Shilan already has a considerable degree of appeal in Hong Kong.Su Shilan was determined to open a bank first to facilitate the economic exchanges of businessmen in foreign firms conducting trading activities in Hong Kong and the increasingly prosperous Shanghai.

Su Shilan took the bank's establishment plan and traveled all over the major foreign firms in Hong Kong, hoping to get the support of these foreign firms. He himself holds a registered capital of 500 million Hong Kong dollars.Most well-known foreign firms readily agreed to take shares.The required funds were quickly raised. On August 1864, 8, HSBC held the first meeting of the interim committee attended by several foreign firms. In early 6, HSBC completed the preparatory work. On March 1865, HSBC officially opened for business, and its headquarters is located in the location of HSBC Hong Kong today. For more than 3 years, this address has remained unchanged.Today's HSBC headquarters still maintains the mark of that era, and the old-fashioned building records the development track of the modern banking industry.

Why was HSBC established so quickly in such a short period of time?This is all due to the fact that the founder Su Shilan obtained sufficient capital, which is a large amount of capital necessary for the establishment of any bank.

Any profit-oriented enterprise needs to raise and invest a certain amount of capital in the initial stage of business development and in future business operations, which will be continuously supplemented in the course of future business operations.The same is true for banks. The capital of commercial banks refers to the monetary funds invested by bank investors for normal business activities and profits and the profits retained in banks.It mainly includes two parts: one is the capital specified in the commercial bank's business registration to define the bank's business scale.The other part is the funds that commercial banks continuously supplement through various means in the process of business operation.As the capital ratio increases, so does the safety of the bank.However, this definition has been debated in the theoretical circles. So far, there has not been a unified definition recognized by the financial authorities of various countries.In essence, the self-owned funds belonging to the commercial bank are the capital, which represents the investor's ownership of the commercial bank and also represents the investor's ability to repay the owed debts.However, in actual work, some debts are also regarded as bank capital, such as long-term bonds held by commercial banks.Here is to understand the definition of capital from the owner's equity.

The commercial bank laws of various countries set up minimum registered capital requirements for commercial banks.In addition, according to the Basel Accords, the capital adequacy ratio of commercial banks must reach 8%, of which the core capital must reach 4%.

In daily operations and ensuring long-term viability, the capital of commercial banks plays a key role, and this key role is mainly reflected in six aspects:
1. Capital is a shock absorber.Capital reduces the risk of bank failure by absorbing financial and operating losses until management notices the bank's problems and restores the bank's profitability.

2. Before the inflow of deposits, the capital provides the funds required for the registration, formation and operation of banks.A new bank needs start-up capital to buy land, build new buildings or rent space, equip facilities, and even hire staff, all of which require a lot of money.

3. Capital enhances the public's confidence in the bank and eliminates the doubts of creditors (including depositors) on the bank's financial capability.Banks must have sufficient capital to convince borrowers that they will be able to meet their credit needs in a recession.

4. Capital finances the growth of the bank and the development of new businesses, programs and facilities.As a bank grows, it needs additional capital to support its growth and take on the risk of providing new business and building new facilities.The size of most banks eventually exceeds the initial level, and the injection of capital enables banks to conduct business in more regions and establish new branches to meet the expanded market and provide convenient services to customers.

5. Capital, as a factor regulating bank growth, helps to ensure long-term sustainable growth of banks.Regulatory authorities and financial markets require that banks' capital grow roughly in line with the growth of their loans and their risky assets.Therefore, as the bank's risk increases, the ability of the bank's capital to absorb losses will also increase. If the bank's loans and deposits expand too quickly, the market and regulatory agencies will give a signal, requiring it to either slow down or increase capital. .

6. Capital has played an important role in the wave of bank mergers.Under the rules, lending to a single borrower is capped at 15 per cent of a bank's capital, so banks that don't grow capital fast enough can find themselves losing market share in the race for big clients.

Capital Distress: The Credit Crunch

Since the US subprime mortgage crisis in 2006, the US has suffered from serious capital difficulties.

Compared with the situation when China's domestic liquidity tended to be excess at that time, the United States was moving towards the opposite of strong liquidity, that is, credit tightening.Because the subprime mortgage crisis triggered the increase of credit risk, the capital market was filled with fear, which made banks, other institutions and individuals reluctant to lend to enterprises.And this fear has exacerbated the credit crunch: people withdraw their funds and flee the stock market because of fear, and they dare not lend because of fear, causing a shortage of funds in the financial market.With tight credit, it is difficult to sell assets at reasonable prices - often a precursor to a financial crisis.

Affected by the credit crunch, many initial public offerings in the US had to be postponed or abandoned.The financial leaders on Wall Street had to desperately seek help from the central banks of other countries to solve the capital difficulties brought about by the credit crunch.

A credit crunch is a concept that has yet to reach consensus.Generally speaking, credit crunch means that financial institutions operating loans raise their lending standards, grant loans at a rate higher than the market interest rate, or even refuse to grant loans, which leads to a decline in credit growth and makes it difficult for credit funds to meet the reasonable needs of social reproduction. Phenomenon.

The credit crunch is a general phenomenon, not an isolated one.The improvement of financing conditions for individual enterprises or projects does not necessarily mean that there will be a credit crunch in the economic cycle.Only a decline in overall credit growth, indicating that banks are broadly raising the terms of their lending, would be a credit crunch in the usual sense.

Once the credit crunch occurs, the funds obtained by enterprises through the banking system will decline, especially the credit constraints on small and medium-sized enterprises will be more affected.This is due to the low credit rating of SMEs and the lack of financing channels other than banks.Once the credit crunch takes hold, the lack of funds in the real economy may "interrupt" the cycle of economic activity, especially if a sustained credit crunch will cause a severe economic recession.

So why is there such a phenomenon as monetary tightening?There are many conditions leading to the formation of monetary tightening, both from institutional factors and from management levels.There are both external factors and internal conditions.Specifically, the main reasons for the credit crunch are: non-performing loans cause the erosion of bank capital; excessive credit expansion eventually leads to credit contraction; institutional reforms inhibit the effective growth of loans; the poor transmission mechanism of monetary policy makes it difficult for monetary policy to increase loans ; Financial intermediary credit decline leads to financial disintermediation, etc.Among them, non-performing loans are the direct cause of the credit crunch.This is why?If the existing or potential non-performing loan ratio of financial institutions is within the normal range, there is no need for financial institutions to compress credit supply below the level corresponding to the normal market level and the rate of return on investment projects.However, once the credit crunch is formed, the original relationship between credit availability and interest rates will be broken, and the credit standards of financial institutions will be improved accordingly, making it difficult for some enterprises with marginal loans to obtain loans, and their normal operations will be interrupted , there may be losses and new non-performing loans. Some enterprises that have already formed a high proportion of non-performing loans are difficult to carry out technological innovation and improve product quality through new loans, resulting in an increase in the proportion of non-performing loans.In this way, the credit crunch becomes the cause of new non-performing loans.

US subprime mortgage crisis: credit risk

In his book "Greed, Fraud, and Ignorance: The Truth About America's Subprime Mortgage Crisis," Richard Bittner describes the story:
Johnny Carter, the new best man in rural South Carolina, and his wife, Patty, wanted to live out a little American dream when they spotted a newly completed 1800-square-foot home.They applied for a loan with a mortgage broker who had been doing the financing for them in the past.Later, the Carters got the loan.But just 90 days later, they were forced to lose their home because they couldn't repay the loan.At this time, the bank that gave them the loan was also unlucky, and the bank had to use their house as collateral.But the house could not be sold.

In fact, a client like Johnny Carter should not have been given a loan.Let's take a look at his credit history:
The borrower's gross monthly income is $2800.After the monthly loan repayments, the borrower is left with only $700 for the month.And the money has to cover all their expenses.

After paying off the home purchase, they had $250 left in their account.They have no savings, no retirement accounts, and they live on their monthly paychecks.On top of that, their credit history is pretty poor.At the time the loan was approved, they were still in arrears.The rest of the credit report is filled with records of past debt accounts and canceled accounts.Such customers are known as subprime lenders.Due to the high housing prices before, the bank believes that although the loan is given to the subprime credit borrower, if the borrower cannot repay the loan, he can use the mortgaged house to repay, auction or sell it to recover the bank loan.However, due to the sudden drop in housing prices and the inability of the borrower to repay, the bank sold the house, but found that the funds obtained could not make up for the loan and interest at that time, or even the loan amount itself. A large number of such subprime loans could not be recovered and were used as collateral. Housing prices continued to fall, and banks suffered large-scale losses, which led to the outbreak of the "subprime mortgage crisis" in the United States.

In the United States, loans are very common. From houses to cars, from credit cards to phone bills, loans are everywhere.Locals seldom buy houses in full, and usually take long-term loans.But we also know that unemployment and reemployment are very common here.How can these people with unstable or even no income buy a house?Because the credit rating is not up to the standard, they are defined as subprime credit borrowers, referred to as subprime borrowers.Bank loans to subprime lenders have to bear high credit risk,

Credit risk refers to the risk of economic loss caused by the failure of the counterparty to perform the obligations in the contract, that is, the possibility that the trustee cannot fulfill the responsibility of repaying the principal and interest, and the expected income of the credit giver deviates from the actual income. It is Main types of financial risk.

Credit risk is objective, that is to say, it is independent of human will.It is also contagious, and one or a small number of credit entities have difficulty in operating or going bankrupt, which will lead to the interruption of the credit chain and the disorder of the entire credit order; however, this credit risk can be minimized through various control methods.Another characteristic of credit risk is that it is cyclical, that is to say: credit expansion and contraction appear alternately.

In the past few years, credit derivatives (Credit Derivatives), which use new financial tools to manage credit risk, have developed rapidly.Appropriate use of credit derivatives can reduce investors' credit risk.Industry insiders estimate that the credit derivatives market has only been developed for a few years. In 1994, the global transaction volume reached 200 billion US dollars.

Credit risk is the possibility of a borrower defaulting on a debt or bank loan due to various reasons failing to repay debts or bank loans in full and on time.When a default occurs, the creditor or the bank will definitely bear financial losses because they fail to obtain the expected benefits.

(End of this chapter)