Non-performing Loans Welfare Utility Loss in Beijing Based on Low Carbon Economy

Transcription

1 Advances in Manageent & Applied Econoics, vol. 5, no.2, 215, ISSN: (print version), (online) Scienpress Ltd, 215 Non-perforing Loans Welfare Utility Loss in Beijing Based on Low Carbon Econoy Shihong Zeng 1, Yan Xu 1 and Jiuying Chen 1 Abstract Bank crises and social proble cae into being because of non-perforing loans in Japan and Korea and US. Econoist and specialist have noticed Bank non-perforing loans. The paper applied a social utility function odel for bank loans & non-perforing loans and siulated the odel in Beijing based on low carbon econoy fro 23 to 25, bank non-perforing loans will cause high carbon econoy. Bank non-perforing loans will be harful to econoic growth and social welfare utility. The following result is obvious that fro the above scatter siulation result:(1) The social utility increases fro about to units in Beijing when the non-perforing loans growth rate decrease fro.7 to.1 at 25 year. (2) The social utility decrease in Beijing fro 23 to 25 when the non-perforing loans growth rate is.7, the social utility decrease fro about to units in Beijing when the tie span is between 24 and 25. JEL classification nubers: E17, E37, E47 Keywords: Bank non-perforing loans, Social utility function odel, Welfare Utility Loss, Scatter Siulation, high carbon econoy, carbon eission perit price 1 Introduction It is necessary to analyze bank non-perforing loans to avoid reducing social welfare because of capital chain rupture and financial pollution, which results fro operation failure caused by Bank non-perforing loans. Bank non-perforing loans are a troublesoe proble for any countries. For instance, bank crisis and a series of social probles cae into being because of non-perforing loans in Japan and in US. Non-perforing loans also trouble Korea and China governent. Japanese banking increased so quick that the total asset of Japanese banks occupied 33% 1 Econoics & Manageent School, Beijing University of Technology, Beijing 1124, China. Article Info: Received : January 14, 214. Revised : February 17, 215. Published online : March 5, 215

2 128 Shihong Zeng et al. of total asset of international banking in latter half of 198s. At the sae tie, the aount of Japanese banks non-perforing loans reached 6 billion US dollars. Moreover, the ratio of non-perforing loans to total loans is 6% in fiscal year of 1997 (March, 1998)[1]. It is reported by Korea governent that the ratio of non-perforing loans to total loans is 11.8% in fiscal year of 1997[2]. This ratio increased fro 12% to 18.6% in soe loose-controlled non-banking financial institutions (erchant bank, securities firs, leasing firs, and regional institutions) while the ratio is 6% in tight-controlled banks in late 199s (these big banks loans occupies 7% of Korean total loans), which is uch higher than that of insurance copanies [3]. Financial syste s frangibility and bank crises ainly result fro bank non-perforing loans. The statistics of IMF indicates that 133 countries, which occupy 74% of all the eber states have experienced serious financial probles or financial crises aong the 181 eber states since 198. It is reported that 18 cases suffered for financial probles. Aong the, the probles of 72 cases, which occupy 67%, originated fro bank non-perforing loans. There are 31 countries, which suffered fro financial crises totaling 41 cases. Aong these crises, 24 cases, which occupy 59%, originated fro financial non-perforing loans. Therefore, bank non-perforing loans are considered to be a proble concerned by econoists and specialists. Obviously, it s crucial to identify bank non-perforing loans odel and odel s application. The subsequent content of this paper shows as follows: the author reviews the existing literature in the second part and points out the existing literature's proble as well as settleents, then the paper applied a social utility function odel for bank loans & non-perforing loans in the third part. The paper siulates the odel in Beijing in the fourth part. As for the fifth part, there is a suary. 2 Literature Review 2.1 Classification of Non-perforing Loans in The New Basle Capital Accord It is considered that rate of capital sufficiency; supervision and arket discipline are the three ain eleents in The New Basle Capital Accord. Aong the, the rate of capital sufficiency=capital / (weighting asset of credit risk capital deand of arket risk capital deand of operation risk). The concept of credit risk in The New Basle Capital Accord [4-5] refers to loss risk, which is caused by default of borrowers and arket dealing rivals. Operation risk defines the risk due to incorrect internal operation flow and accidents of personnel, syste or external events. The concept of arket risk is the risk, which results fro variety of interest rate, exchange rate, securities and coodity price. Supervision eans a kind of industry control, which the authorities not only supervises atching of bank capital in cash and risk aount, but also supervises atching of bank capital in cash and level of risk control in order to encourage bank developent and control of risk with ore advanced techniques. Market discipline is a kind of social control, and it sets up a series of copulsive regulations and suggestions. How to easure loan risk is ephasized in The New Basle Capital Accord, but the Accord is lack of analysis of non-perforing loans echanis.

3 Non-perforing Loans Welfare Utility Loss Based on Low Carbon Econoy Analysis of Bank Non-perforing Loans In literature, soe analysis of bank non-perforing loans can be found in literature concerning bank crises. For exaple, Brenda Gonzales-Herosillo (1999)[6] defines banking syste frangibility extent as follows: banking syste frangibility extent = (capital + loan reserves - non-perforing loans) / total asset. Others can be found in literature about financial frangibility. For instance, Minsky and Hyan P. (1964, 1982, 1986, 1995)[7-1] believe that deflation and non-perforing loans increase coe into being since investors get into debt so excessively during econoic boo period that they don t have enough cash to repay the debt during depression. The paper of Stiglitz and Weiss (1981)[11] is about credit rationing. Bernanke, Gertler (199)[12] and Mankiw (1986)[13] hold that currency deflation is related to asyetry inforation under any circustance. Credit arket ay break up after the interest rate of currency arket (banking refinancing cost) increases slightly due to converse choice in Mankiw s odel (1986)[13]. The odel of Bernanke and Gertler (199)[12] indicates that general financial condition (credit value of borrower or bank capacity to pay) will influence acro-econoy operation because of the existence of oral hazard. In China, soe literature, which analyze bank non-perforing loans, have the title bank non-perforing loans. For exaple, the paper of Weiqun Yu (21)[14] analyzes reasons for non-perforing loans systeatically fro the point of view of institutional econoics. Huiwen Fan (1998)[15] analyzes financial risk and risk control widely fro various angles, such as interest rate, exchange rate, bank credit, securities, tools derive fro finance, acro-financial risk, etc. Haixiao Liu (1999)[16] researches financial risk fro bank credit and risk, securities arket, exchange rate, etc. Shihong Zeng (23)[17] did gabling research for non-perforing loans of state-owned coercial bank. The paper doesn t analyze non-perforing loans odel echanis fro cobination of acro-entity and icro-entity, but fro icro-entity s behavior. Fang Zhao (23) [18] ainly studies the influence of bank non-perforing loans on Japanese econoy. Recent years, Bank Non-perforing Loans (NPLS)'s literatures about Different countries exist, for exaple, Yasushi Suzuki, Md. Dulal Miah and Jinyi Yuan(28)[19]; Yang Li, Jin-Li Hu & Hsin-Wei Liu (29) [2]; Levon Barseghyan(21)[21]; Bernardo Maggi, Marco Guida(211) [22]; Karlo Kauko(212) [23]; Shihong Zeng(212) [24]; Diitrios P. Louzis, Angelos T. Vouldis, Vasilios L. Metaxas(212) [25]; Ning Zhu, Bing Wang, Yanrui Wu(214) [26]; Lobna Abid, Med Nejib Ouertani, Sonia Zouari-Ghorbel(214) [27]. 2.3 The existing Literature's Proble and the Ai of this Paper As a financial pollution, bank non-perforing loans ay be harful to social welfare. There regularly is a social welfare function with loan and bank non-perforing loans cited in existing literature. The above literature doesn t study bank non-perforing loans influence on social welfare fro the point of view of the siulation. This paper applied a social utility function odel for bank loans & non-perforing loans [24]and siulate the odel in Beijing.

4 13 Shihong Zeng et al. 3 Utility Function (Loss Function) As the loan balance ( L ) can increase production and service capacities, it increases total consuption ( C ) and social utility. However, since the bank non-perforing loan ( N ) is a financial pollution ( P ) and is harful to social welfare, it decreases social utility. The process is described below. Let C = C(L) P = P(N) Where ( C >, C < ) ( P >, P > ) 1 θ η C ( L) = ( ul ),and P ( N )= η θ Thus, [ C ( L)] = ul As the social utility function is dependent upon the total consuption ( C ) and bank non-perforing loans ( N ), it is reasonable to obtain the following relationship: U = U ( C( L), P( N)) For a siple illustration, we derive the social utility function as follows. If U = U ( C( L), P( N)) = [ C( L)] η P( N) η θ Substitute[ C ( L)] = ul And P ( N )= Then, the utility function becoes vn Into U = [ C( L)] η P( N), U = C η = ul θ, Where < θ < 1 < η < 1, v >. It can be seen that the loan balance ( L ) results in a positive social utility, which is given θ by ul, and the bank non-perforing loans ( N ) leads to a negative social utility, which is. More analyses can be perfored as shown below: U θ If u >, L > Then = uθl 1 > L 2 U θ 2 = uθ ( θ 1) L < 2 L The above iplies that the arginal utility of loan balance ( L ) is an increasing function and that the social utility (U ) function is concave relative to loan balance ( L ). The other scenario can be also analyzed below: U If > 1, N >, Then = vn 1 < N

5 Non-perforing Loans Welfare Utility Loss Based on Low Carbon Econoy U 2 N = v( 1) N 2 < Siilarly, the above analyses indicate that the arginal utility of bank non-perforing loans ( N ) is positive and a decreasing function and that the social utility (U ) function is concave relative to bank non-perforing loans ( N ). 4 Siulation The social utility can siulated by the forula paraeter vary fro 23 to 25 U = C η = ul θ when η θ U = C = ul, < θ < 1 < η < 1, v >. > 1, N >, u >, L > Presue (1). u =.5, θ =.5, v =.5, = 1. 5 t (2). L = L (1 + lg), L = 18 (billion RMB), lg is the loan balance growth rate, L is the loan balance at the end of the fourth onth in 23 in Beijing. t =,1,2,3,4,...48 fro 23 to 25 t (3). N = N (1 + ng), N = 63 (billion RMB), ng is the non-perforing loans growth rate, N is the non-perforing loans balance at the end of the fourth onth in 23 in Beijing. t =,1,2,3,4, fro 23 to 25 η θ So, U = C = ul t.5 t 1.5 =.5[ L (1 + lg) ].5[ N (1 + ng) ] t.5 t =.5*[1.8(1 + lg) ].5*[.63(1 + ng) ] The following is the scatter siulation forula language when paraeter (the non-perforing loans growth rate) varies A. lg =. 15, ng =. 7 UA=.5*[18*(1+.15)^t]^.5-.5*[63*(1+.7)^t]^1.5 B. lg =. 15, ng =. 5 UB=.5*[18*(1+.15)^t]^.5-.5*[63*(1+.5)^t]^1.5 C. lg =. 15, ng =. 3 UC=.5*[18*(1+.15)^t]^.5-.5*[63*(1+.3)^t]^1.5 D. lg =. 15, ng =. 1 UD=.5*[18*(1+.15)^t]^.5-.5*[63*(1+.1)^t]^

6 132 Shihong Zeng et al. E. lg =. 15, ng = UE=.5*[18*(1+.15)^t]^.5-.5*[63*(1+)^t]^1.5 F. lg =. 15, ng =. 1 UF=.5*[18*(1+.15)^t]^.5-.5*[63*(1-.1)^t]^1.5 G. lg =. 15, ng =. 3 UG=.5*[18*(1+.15)^t]^.5-.5*[63*(1-.3)^t]^1.5 H. lg =. 15, ng =. 5 UH=.5*[18*(1+.15)^t]^.5-.5*[63*(1-.5)^t]^1.5 I. lg =. 15, ng =. 5 UI=.5*[18*(1+.15)^t]^.5-.5*[63*(1-.5)^t]^1.5 The following Figure 1 and table 1 is scatter siulation result. The horizontal axes is tie fro 23 to 25, vertical axes is scatter siulation result of the social utility in Figure UA UB UC UD UI Figure 1: Scatter siulation result when non-perforing loans growth rate varies

7 Non-perforing Loans Welfare Utility Loss Based on Low Carbon Econoy 133 Table 1: scatter siulation result when non-perforing loans growth rate varies fro 23 to 25 obs UA UB UC UD UE UF UG UH

8 134 Shihong Zeng et al. 5 Conclusion The following result is obvious that fro the above scatter siulation result: (1) The social utility increases fro about to units in Beijing when the non-perforing loans growth rate decrease fro.7 to.1 at 25 year; (2) The social utility decrease in Beijing fro 23 to 25 when the non-perforing loans growth rate is.7, the social utility decrease fro about to units. The bank non-perforing loans will be high carbon econoy. Bank non-perforing loans will be harful to econoic growth and social welfare utility. Bank non-perforing loans will case price fluctuation, including carbon eission perit price fluctuation. We will research the coplicated relation between bank non-perforing loans and carbon eission perit price in the future. ACKNOWLEDGEMENTS: The authors acknowledge valuable coents and suggestions fro our colleagues. The research was supported partly by the National Natural Science Foundation of China (714731); The education research progra of Beijing University of Technology (ER213B25); The Science Foundation of Econoics & Manageent School in Beijing University of Technology. References [1] J. Peek; E.S.Rosengren,"Japanese banking probles: iplications for lending in the United States. (Industry Overview)",New England Econoic Review, Jan-Feb 1999, pp [2] South Korea's Office, "Non-perforing loans surge 11.8% in Korea. (South Korea's Office of Bank Supervision reports)",new York Ties, Sept 3, 1998, vol.147. [3] A. H. Asden and T. Hikino,"East Asia's financial woes: what can an activist governent do?", World Policy Journal, 15 no.3,fall 1998, pp [4] Basle Coittee, "BIS Consultative Docuent: The New Basle Capital Accord", January 21, pp1-4. [5] W. Chen, "Analysis of The New Basle Capital Accord", International Finance Investigation(in Chinese), no.3,21,pp4-7. [6] Brenda Gonzales-Herosillo,"Developing indicators to provide early warnings of banking crises", (Financial Markets) Finance & Developent, 36 no.2, June 1999, pp [7] H. P. Minsky, "Longer Waves in Financial Relations: Financial Factors in the More Severe Depressions", The Aerican Econoic Review: Papers and Proceedings of the Seventy-sixth Annual Meeting of the Aerican Econoic Association. 54, no. 3,1964,pp [8] H. P. Minsky, "Can "it" happen again?: essays on instability and finance", Aronk, N.Y.: M.E. Sharpe [9] H. P. Minsky, "Stabilizing an unstable econoy", New Haven : Yale University Press,1986. [1] H. P. Minsky, Longer Waves in Financial Relations: Financial Factors in the More Severe Depressions II, Journal of Econoic, 29, no. 1, 1995, pp

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