Financial Engineering and the Risk Management of Commercial Banks. Yongming Pan, Xiaoli Wang a

Transcription

1 Advanced Materials Research Online: ISSN: , Vols , pp doi: / Trans Tech Publications, Switzerland Financial Engineering and the Risk Management of Commercial Banks Yongming Pan, Xiaoli Wang a School of Management, Tianjin University of Technology, Tianjin , China b wangxiaoli0315@sina.com Keywords: Commercial banks, risk management, financial engineering, core competitiveness. Abstract. Risk management is one of the eternal themes of the commercial banks. Face unprecedented and increasingly complex financial risks, bankers are increasingly aware that the tools based data which analyze number of traditional risk management is not comprehensive and flexible. To effectively prevent and resolve commercial bank operating risks, enhance the core competitiveness of commercial banks and achieve sustainable development, it is necessary to develop financial engineering as an opportunity for the traditional risk management tools to conduct a holistic deep integration. Introduction With the increasingly fierce competition in the industry, the core competitiveness of the banks are no longer agency outlets, the number of distribution and personnel, nor is their own business expertise, but from the most essential attribute of the community banks risk management capability derived from public financial intermediation services. Commercial banks have particularities in risk management. On the one hand, the commercial banks provide non-standardized financial products, such as loan guarantees, loan commitments, OTC, derivative financial instruments. On the other hand, the internal risk management approach taken by the bank is non-standardized. [1] This is the essential difference between commercial banks and other non-bank financial institutions. From a practical point of china and foreign banks, risk management and innovation have always been the most important factors of core competitiveness. With the development of information network technology, international finance and trade globalization promote the world economy forward. Internationalization of financial markets has brought many benefits to people, for instance, they can promote forming the best price of money worldwide and increasing the variety of financial services, raising mobility of capital and capital allocation efficiency. However, financial globalization is a double-edged sword, in that it benefits the economic development, but also often implies greater financial risks.[2] Financial globalization may weaken the influence of individual national central banks and regulatory agencies or increase the possibilities of financial risk s occurrence. A country's financial turmoil quickly spreads to other countries and regions. In recent years, a series of international financial risks appear and provide a serious threat to the financial industries and the overall economic security and development. Therefore, effective risk management is not only necessary to reduce the loss of financial institutions and improve the guaranteed benefits,but also a prerequisite for financial markets and the economy healthy development of the financial sector.in short, Strengthening financial risk management is the only way for sustainable development of commercial banks. The financial engineering s application in Risk Management Before the financial engineering appearing, commercial banks have three major risk management instruments: the first one is asset and liability management; the Second is participating commercial insurance; the third is portfolio investment. [3]These three methods are all table control methods. In contrast, the risk management of financial engineering technology is used in sheet control method. [4] The introduction of financial engineering and rapid development of the risk management of financial All rights reserved. No part of contents of this paper may be reproduced or transmitted in any form or by any means without the written permission of Trans Tech Publications, (ID: , Pennsylvania State University, University Park, USA-06/03/16,04:45:34)

2 Advanced Materials Research Vols institutions make a revolutionary change occurring. Compared with traditional financial risk management tools, financial engineering s application in risk management has the following advantages: Financial engineering can improve the operating efficiency of financial institutions. Compared with traditional risk management, it is more scientific. With the development of financial engineering technology, lots of mathematics, statistics, physics and computer science technology have been widely used in the products development. That quantification and modeling are applied into the modern financial risk management is an important feature which is different from traditional risk management. Financial engineering can promote financial institutions forming financial organization mode which in line with the requirements of a modern market economy. Financial Engineering can improve financial market efficiency, accuracy and strengthen timeliness of market transactions. Financial derivatives price is subject to changes of the underlying instrument, and this change in trend is apparent regularity. In mature derivatives market, liquidity can make a flexible response to changes in market prices, and solve the problem of time lag in the traditional risk management. Forwards, futures, options and swaps with basic financial instruments - cash, commercial paper, bonds and stocks constitute the basic set of financial engineering. Through different combinations, banks can create a large number of financial innovations to expand choices of investors greatly and provide effective investment portfolio. Meanwhile, the financial markets exist "arbitrage" opportunities, and financial innovation can be obtained through risk-free profits. Financial Engineering can help banks avoid systemic risk effectively. In recent years the international financial crisis in Mexico occurred, the collapse of Barings Bank, UK, Japan and Japan Bank incident, as well as the Asian financial crisis, which tells us that the use of new means of financial risk management is essential. There are two approaches for risk management: risk diversification and risk transfer. The famous principle that Do not put all your eggs in one basket" is an effective way to strengthen risk management. Portfolio is its main tool. This can be a good way to reduce non-systemic risk, and diversify risk appropriately, but for the majority in the stock market, there is little effect on systemic risk, and there are a lot of limitations. [5]The so-called risk transformation is transferring risk to the investor who has the ability or willingness to bear risk. The use of risk diversification, risk control, risk transfer can effectively avoid systemic risks. A modern financial market risk management is the most important tool. The cost advantage is obvious. It has a close relationship with the high-leveraged derivative transactions. Financial leverage is often used in derivatives operation, namely paying small amounts of money to control large transactions unwinding after a certain period just are the differences between the settlements. Spending very little money, you can greatly reduce the company's cost of hedging. And because of the creation of a risk transfer market, you can reduce the risk effectively. It would greatly reduce the counterparty to finding information costs, and standardization and centralization of the transaction also greatly reduces the transaction costs. Promote the development of financial engineering in financial risk management Science and technology are primary productive forces, finance is the first impetus, and financial engineering is an important booster to promote financial development. In the process that China's financial system becomes more and more adapt the market, modernization and internationalization. Vigorously develop financial engineering technology has important significance. Commercial banks should make full use of financial engineering techniques to improve risk allocation function of the financial system and improve the scientific and technological level of risk management of financial institutions. For the national economy and the financial system at this stage of the reform, it is necessary to fully understand the system and business process design and the arrangement of the important role of risk management.

3 3824 Progress in Applied Sciences, Engineering and Technology Banks should make a comprehensive understanding of the proper role of financial engineering in risk management. The rapid development of financial engineering promotes the revolutionary changes in risk management techniques; however, the task of risk management of financial institutions does not seem to reduce. On the one hand, it makes the modern financial risk management has a new, more scientific solutions. On another hand, it makes financial risks become more complex and the risk characteristics of financial products increasingly difficult to grasp and understand. On the other hand, managers also inevitably face the so-called pricing risk and model risk. We should clearly understand that, as a risk management technique, financial engineering cannot be a tool to acquire interests. [6] Superstition and excessive reliance on financial engineering are not only enable financial institutions ignoring the microscopic and building a comprehensive risk control mechanism, but also can lead to speculative forces in the expansion of the market objectively, then increasing systemic risk. Meanwhile, for the purposes of the restructuring process in China's economic system and its financial system, banks should fully aware of the important role of systems and business process design and arrangements in risk management. Establish a sound and effective continuous historical data repository. Commercial banks should pay attention to the accumulation of data and develop uniform standards for data collection to make uniform provisions in the data analysis. Through the construction and use of management information systems, establish and improve the financial information and related databases. Macroeconomic environment database through data exchange with external departments obtained internal business information database produced by the ordinary course of business activities, through aggregation, analysis and decision information database integration process external information obtained so on. Relying on IT and development of information resources, the establishment of various flexible and effective control models to achieve quantitative analysis and control of risk is important. [7] The construction of financial engineers " team. In the long run, the key to commercial banks to strengthen risk management capacity building is personnel. Commercial banks should proactively do professionals reserves and introduce the people who have some theoretical basis, basic skills and experience in dealing with financial issues practitioners training. [8] Personnel may be nurtured by the conditional financial engineering professional colleges. Training staffs that have a certain theoretical basis of existing, basic skills and experience in dealing with financial issues work in financial institutions is effective. In short, the development of China s financial industry needs China financial engineer The methods and means of innovative risk management. Commercial banks should learn financial engineering theory and develop risk management methods and tools. For example, the use of financial engineering and the cross identifiable comprehensive about risk management, as well as pricing stochastic analysis and optimization technology research financial instruments is beneficial to design new risk management methods and means. As another example, with the deepening development of China's market, the share of commercial banks will gradually expand and face a huge interest rate risk. [9]We can use financial engineering to make forecasting. China's commercial banks become more market-oriented and the process is internationalization. On the one hand, they should develop traditional business management tools and financial innovation under market economy conditions; on another hand, with reference to the international system of effective risk-averse approach, building China's risk management system. Speeding up the financial system reform, steadily pushing forward the pace of market-based financial system, and gradually establishing a sound financial asset price formation mechanism of market economy. Application of financial engineering techniques needs developed financial markets, but China's financial reform has not made most financial institutions completely change management system. Central Committee and State Council put forward " further improve the modern financial system, the market system, the regulatory system and control system " as a major task of " Twelfth Five-year Plan Period".Government also stressed that " speeding up the construction of information technology for banks to strengthen management, improving service to provide adequate

4 Advanced Materials Research Vols information, "which indicates that financial engineering and technology in China may have a good economic and financial environment and support platform. Conclusion This paper analyzes the necessity of the risk managements of commercial banks and proposes the application of financial engineering to solve the problem. At last it gives the method of developing financial engineering in financial risk management. References [1] Anthony. G: Rate Control and Risk Management (Economy and Science Press, China 1999). [2] Lorentz. glitz forward: Financial Engineering. (China Science Press.1998). [3] John. Marshall behaved, Wei. Puer: Banzer: Financial Engineering (Tsinghua University Publishing House, China 1998). [4] X. P. Hou, Z. H. Li and H. L. Yang: Modern Management Science, 2005 No.2, p [5] N. Wang: Financial Perspectives Journal, 2013, No.2, p [6] S.F. Yang: Social Sciences, 2013, No.5, p [7] X. J. Chen: Communication of Finance and Accounting, 2012 No.14, p [8] Y. Q. Wang: Modern Economic Information, 2012, No.16, p.192. [9] X. H. Chen, J. S. He: Management Science: History, Current Situation and Development Trend (Hunan People's Press, China 2004).

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