ME  Vol.3 No.1 , January 2012
Bank Non-Performing Loans (NPLS): A Dynamic Model and Analysis in China
Author(s) Shihong Zeng
ABSTRACT
In this paper we report on a utility function (loss function) and model that we designed by using optimal control theory based on previous studies. we found that: (1) the Hamiltonian multiplier of the bank NPLs growth rate in the model was obtained using the negative derivitive of the utility (defined as loan function minus non-performing loan function) with respect to the NPLs multiplied by a factor which expresses the rate of change in NPLs over time with respect to the NPLs, the formula is λN=(1/δ)(-vmNm-1)=(1/δ)U'; (2) the model determines the equilibrium value of the saddle point of the bank NPLs; (3) the model can explain the NPLS phenomenon in the Chinese banking system as mainly significant in the state owned banks (SOBS); (4) The paper supports the following hypothesis by considering the situation in China: the equilibrium value of the bank NPLs is dependent on micro-economic factors but influenced by macro-economic factors.

Cite this paper
S. Zeng, "Bank Non-Performing Loans (NPLS): A Dynamic Model and Analysis in China," Modern Economy, Vol. 3 No. 1, 2012, pp. 100-110. doi: 10.4236/me.2012.31014.
References
[1]   H. P. Minsky, “Longer Waves in Financial Relations: Financial Factors in the More Severe Depressions,” The American Economic Review, Vol. 54, No. 3, 1964, pp. 324- 335.

[2]   H. P. Minsky, “Longer Waves in Financial Relations: Financial Factors in the More Severe Depressions II,” Journal of Economic, Vol. 29, No. 1, 1995, pp. 83-96.

[3]   J. E. Stiglitz and A. Weiss, “Credit Rationing in Markets with Imperfect Information,” American Economic Review, Vol. 71, No. 3, 1981, pp. 393-410.

[4]   N. G. Mankiw, “The Allocation of Credit and Financial Collapse,” Quarterly Journal of Economics, Vol. 101, No. 3, 1986, pp. 455-470. doi:10.2307/1885692

[5]   B. Gonzales-Hermosillo, “Developing Indicators to Provide Early Warnings of Banking Crises,” Finance & Development, (Financial Markets), Vol. 36, No. 2, 1999, pp. 36-39.

[6]   L. Barseghyan, “Non-Performing Loans, Prospective Bailouts, and Japan’s Slowdown,” Journal of Monetary Economics, Vol. 57, No. 7, 2010, pp. 873-890. doi:10.1016/j.jmoneco.2010.08.002

[7]   C. D. Ramírez, “Bank Fragility, ‘Money under the Mattress’, and Long-Run Growth: US Evidence from the ‘Perfect’ Panic of 1893,” Journal of Banking & Finance, Vol. 33, No. 12, 2009, pp. 2185-2198. doi:10.1016/j.jbankfin.2009.05.020

[8]   Y. P. Huang and Y. Z. Yang, “China’s Financial Fragility and Policy Responses,” Asian-Pacific Economic Literature, Vol. 12, No. 2, 1998, pp. 1-9. doi:10.1111/1467-8411.t01-1-00037

[9]   J. P. Bonin and Y. P. Huang, “Dealing with the Bad Loans of the Chinese Banks,” Journal of Asian Economics, Vol. 12, No. 2, 2001, pp. 197-214. doi:org/10.1016/S1049-0078(01)00082-3

[10]   D. Lu, S. M. Thangavelu and Q. Hu, “Biased Lending and Non-Performing Loans in China’s Banking Sector,” Journal of Development Studies, Vol. 41, No. 6, 2005, pp. 1071-1091. doi:10.1080/00220380500155361

[11]   N. Wunner, “Bad Loans, Soft Budget Constraints and the Political Economy of Financial Market Reform in Transition Economies,” Journal of Policy Reform, Vol. 4, No. 1, 2000, pp. 51-74. doi:10.1080/13841280008523413

[12]   B. A. Forster, “Optimal Energy Use in a Polluted Environment,” Journal of Environmental Economics and Mana- gement, Vol. 7, No. 4, 1980, pp. 321-333. doi:10.1016/0095-0696(80)90025-X

[13]   G. Ferri, “Are New Tigers Supplanting Old Mammoths in China’s Banking System? Evidence from a Sample of city Commercial Banks,” Journal of Banking & Finance, Vol. 33, No. 1, 2009, pp. 131-140. doi:10.1016/j.jbankfin.2007.06.013

[14]   A. N. Berger, I. Hasan and M. M. Zhou, “Bank Ownership and Efficiency in China: What Will Happen in the World’s Largest Nation?” Journal of Banking & Finance, Vol. 33, No. 1, 2009, pp. 113-130. doi:10.1016/j.jbankfin.2007.05.016

[15]   X. Q. Fu and S. Heffernan, “The Effects of Reform on China’s bank Structure and Performance,” Journal of Banking & Finance, Vol. 33, No. 1, 2009, pp. 39-52. doi:10.1016/j.jbankfin.2006.11.023

 
 
Top