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Chapter 24 Without "Trust" No Establishment: From Qianzhuang Bank to Commercial Bank (4)
Specifically, credit risk is mainly caused by two reasons: one is the cyclicality of economic operation; during the period of economic expansion, credit risk is reduced because stronger profitability reduces the overall default rate.During the period of economic contraction, the credit risk increases, because the overall deterioration of the profit situation increases the possibility that the borrower will not be able to repay the loan in time and in full due to various reasons.

On the other hand, it refers to the occurrence of special events that have an impact on the company's operations. The occurrence of such special events has nothing to do with the economic cycle, but has an important impact on the company's operations.For example: product quality litigation.To use a specific example: When people knew the fact that asbestos has an impact on human health, the product liability lawsuit that occurred caused Johns Manville, a well-known leader in the asbestos industry, to go bankrupt and unable to pay its debts .

Because credit risk will have a great impact on the interests of companies or individuals, credit risk management has become a very important task. Larger companies often have specialized personnel to evaluate the credit status of each transaction partner to measure possible profits and losses and reduce possible losses.Here it is necessary to explain what is "credit risk management".Credit risk management refers to the management of risks arising from the "possibility" of default by counterparties, borrowers or bond issuers.Breaking down this risk component in detail can be divided into "probability of default", "recoverable ratio after default", and "principal".It is currently the biggest topic in the financial industry.In addition to carrying out credit risk management on the "lending position", it is also necessary to carry out credit risk management on the "counterparty" or "securities issuer" of its investment.

Runs: the fatal "soft underbelly" of banks

China Commercial Bank is the first Chinese-funded private bank in China to issue banknotes in the modern sense. At the beginning of the 20th century, there were many Chinese and foreign banks in Shanghai, and China Commercial Bank, founded in 1897, was one of them.Its founder and major shareholder is Sheng Xuanhuai.China Commercial Bank is headquartered in Shanghai.The Qing government gave it the power to print and issue banknotes.But in its history, the first counterfeit banknote case occurred in the history of modern Chinese banks, and this triggered the first wave of bank runs in modern Chinese history.

The 29th year of Guangxu in the Qing Dynasty, that is, 1903.It is said that in the Commercial Bank, a banker took some Commercial Bank banknotes to exchange, but was found by the counter that there were several counterfeit ten-yuan banknotes, and refused to exchange them on the spot.Another theory is that someone went to a store with counterfeit banknotes, and the shopkeeper later found out that they were fake.Some even said that the counterfeit banknote holders were Japanese.After the news of the counterfeit banknotes spread, many people holding banknotes from the Commercial Bank feared that the money in their hands would become a pile of waste paper, and rushed to exchange them for cash.At that time, the Bank of Shanghai and the bank co-existed, and the bank gloated over the matter and refused to use the banknotes of the China Commercial Bank.The next day, there was an unprecedented wave of runs in Shanghai.

The next day, when the run broke out, the Commercial Bank found counterfeit banknotes again, and the bank staff tore them up on the spot and stamped them with the words "counterfeit banknotes".In order to appease the citizens, the Commercial Bank also specially sent people to paste the counterfeit banknotes next to the door, and posted a note on how to identify counterfeit banknotes.However, currency holders are still panicking.Sheng Xuanhuai, the major shareholder of the bank, ordered the bank to make withdrawals at any time, because a run on the bank would cause its reputation in the entire financial world to plummet, and the consequences were unpredictable.But just a few days after China Commercial Bank opened its doors to "welcome" cashing out, there was not much cash left, so we had to ask HSBC for help.Finally, with the gold and silver in stock as collateral, he exchanged 70 taels of cash silver from HSBC, and weathered the storm with difficulty.Afterwards, the investigation results of the counterfeit banknote case showed that the counterfeit banknote was a Japanese businessman.Sheng Huaixuan had negotiated with the Japanese government in order to severely punish the counterfeiters, but in the end it was still nothing.

Runs are the fatal "soft underbelly" of banks.Deposit business is the basic business of banks. For deposits deposited by customers, each bank only reserves a very low percentage of reserves for depositors to withdraw, while most of the deposits are used for profit-generating assets such as lending or investment. , to earn income, to facilitate the payment of deposit interest and various operating expenses, and to distribute dividends and bonuses to shareholders.The lower the bank's reserve requirement ratio, the higher the bank's profitability, but at the same time it will also increase the risk of bank failure due to insufficient liquidity.Therefore, when a run occurs, the bank will face enormous payment pressure.This is why a run can easily trigger a crisis in the entire banking system.

From June to July 2004, Guta Bank, one of the most reputable private banks in Russia, encountered a crisis of trust and a run on bank.At that time, the Central Bank of Russia announced to rectify the banking market and revoked the business license of a bank.Rumors immediately appeared in the society, and there were rumors that Ghouta Bank had entered the "blacklist" of the Central Bank of Russia for governance and rectification.As a result, depositors began to lose trust in Guta Bank, and since June, Guta Bank began to experience runs.However, in order to stabilize the confidence of depositors, Guta Bank refused to admit that it was facing a payment crisis. At the same time, the bank urgently mobilized funds to cope with the run.However, the temporarily injected funds were quickly sold out. On the morning of July 6, the spokesman of Guta Bank swore that he had just successfully withdrawn cash from the ATM. However, at noon, Guta Bank reported to the Central Bank of Russia : We are bankrupt!Although Ghouta Bank was "strong and healthy", it was finally on the verge of desperation and was acquired by the VTB Bank of Russia.

Under the influence of the credit crisis, an economic phenomenon in which depositors and bank note holders scramble to withdraw cash and exchange cash from banks and bank note issuers is called a run.When depositors experience an unusual phenomenon of a large number of withdrawals of deposits, and the bank's cash reserves and liquidity assets are not enough to support customers' withdrawals, it is necessary to discount their realizable low-liquidity assets for cash, and thus bear a huge amount of money. Realization loss.

The best example is the massive runs that occurred during the Great Depression in the United States in the 20s, when crowds of people flocked to banks, hoping to exchange their passbooks and bank notes for cash.In recent years, affected by the subprime mortgage crisis, Countrywide and Indy Mac Banks in the United States, Northern Rock Bank in the United Kingdom, and ICICI Bank in India have experienced runs to varying degrees.

So why do runs happen?There are two reasons for the run: one is that holders of bank notes or depositors have shaken the credit of the issuing bank and have withdrawn their deposits one after another; out to prevent major economic losses.It is often accompanied by the phenomenon of widespread withdrawal of deposits, and further forms a financial trend.Historically, a wave of bank runs is usually accompanied by a credit crisis.Before World War II, credit crises were generally accompanied by periodic crises of overproduction.Due to the rising commodity prices and good profits during the industrial boom, a large amount of credit was used by speculators to engage in speculative activities, and the credit expansion greatly exceeded the growth of production.And when the economic crisis of overproduction breaks out, a large number of goods are unsalable, commodity prices drop sharply, production stagnates, the market shrinks, and credit will shrink sharply.

In this case, if the chain relationship of creditor's rights and debts is interrupted, the entire credit relationship will be destroyed, resulting in a credit crisis.Not only do periodic overproduction crises cause periodic credit crises, but credit crises also deepen overproduction crises.The suspension of commercial credit made it more difficult to sell surplus goods, and the confusion of bank credit further aggravated the difficulty of selling surplus goods, thus intensifying the crisis of overproduction.In addition to the periodic credit crisis caused by the economic crisis of capitalist overproduction, there is also a special type of credit crisis mainly caused by wars, coups, and famines.For example, the credit crisis in Britain in 1839 was caused by poor harvests in agriculture.In short, when a run occurs, the market is extremely tight, the borrowing capital is short, and the interest rate keeps rising, which will force some banks and financial institutions to close down or close down, which will further aggravate the credit crisis of the currency and cause chaos in the financial world.

A run has a contagious effect. In the bank fraud case in India in 2001, although only one large bank was hit by the credit crisis, there were serious runs on small banks that had no connection with it, and these small banks had sufficient reserves and had the ability to pay Capability, nothing to do with big banks.Why are bank runs contagious?Because there is information asymmetry in the bank deposit market, that is to say, although every bank knows its own situation, depositors do not.Depositors think all banks are alike, and when a bank fails, other depositors fear that the banks they have deposited in are likely to experience the same difficulties.In order to get all his deposits, the sooner he acted, the better, so he launched a run on the bank where he deposited.

The Terrible "Domino Effect" - Banking Crisis

In October 1907, the U.S. banking crisis broke out. About half of New York’s bank loans were pledged by high-interest return trust investment companies as collateral for high-risk stocks and bonds, and the entire financial market fell into a state of extreme speculation.

First of all, a large number of articles promoting new financial concepts began to appear in the direction of news and public opinion.At that time, there was an article by Paul titled "The Shortcomings and Needs of Our Banking System". Since then, Paul has become the chief advocate of the central bank system in the United States.

Shortly thereafter, Jacob Schiff declared at the New York Chamber of Commerce: "Unless we have a central bank sufficient to control credit resources, we will experience an unprecedented and far-reaching financial crisis."

Sure enough, before long, Knickerbocker Trust, the third largest trust company in the United States, failed to invest in copper stocks due to a large amount of debt, which triggered a panic on Wall Street and a run on major banks.The founder of JPMorgan Chase, JP Morgan, organized a consortium to inject capital into the banking system in conjunction with the U.S. Treasury Secretary.This time the banking crisis directly led to the establishment of the Federal Reserve Mechanism, with the purpose of stabilizing the banking system and avoiding the outbreak of the banking crisis.

Banking crisis refers to a crisis in which banks are excessively involved in (or lending to enterprises) engaged in high-risk industries (such as real estate and stocks), resulting in a serious imbalance between assets and liabilities, excessive burden of bad debts, sluggish capital operations and bankruptcy.

According to different judgment criteria, we can divide banking crises into different types:
First, according to the nature of the crisis, it can be divided into banking system crisis and individual bank crisis.

Second, according to the cause of the crisis, it can be divided into endogenous banking crisis and exogenous banking crisis.

Third, according to the degree of the crisis, it can be divided into a banking crisis characterized by tight liquidity and a bank crisis characterized by insolvency. In most developing countries, the outbreak of a banking crisis often occurs in the former form.

Since the 20s, the world's financial industry has shown ups and downs.In the past 90 years, the world has experienced frequent banking crises.For example, from the Swedish economic crisis that began in 15 to 1990, according to the statistics of the Bank for International Settlements, Sweden's non-performing loans accounted for 1992% of the total loans.Among all non-performing assets, mortgage loans are the main part, including real estate and residential mortgage loans.

The reason why a banking crisis is triggered is often the payment difficulties of commercial banks, that is, the lack of liquidity of assets, rather than insolvency.As long as banks can maintain sufficient liquidity in their assets, it is possible to sustain their existence and operations in a state of insolvency, technical bankruptcy but not actual bankruptcy.Therefore, in the face of the banking crisis, the main measures taken by the Swiss government are to restore market information and ensure sufficient liquidity of assets through asset management.

Banking crises have a domino effect.Because asset allocation is the main business of financial institutions such as commercial banks, complex creditor-debt relationships are formed between financial institutions due to asset allocation, making asset allocation risks highly contagious.Once a financial institution makes a mistake in asset allocation and cannot guarantee normal liquidity, individual or local financial difficulties will evolve into global financial turmoil.

The banking industry is the main body of the financial industry. It plays a very important role in a country's social and economic life and is also related to the general public.Therefore, the impact of the banking crisis is not comparable to that of general industry crises. It may affect a country's society, economy, politics and other aspects.

"Cancer" that may break out at any time: non-performing loans
Every bank has bad loans.When the non-performing loan reaches a certain level, it becomes a "cancer" that may break out at any time.If it cannot be dealt with properly, it is likely to trigger a serious banking crisis and drag the bank into bankruptcy.

(End of this chapter)