Bank Non-Performing Loans (NPLS): A Dynamic Model and Analysis in China

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 ???? ? point of the bank NPLs; 3) the model can explain the NPLS phenomenon in the Chinese banking system as mainly sig- ?? N?? ? m ?1 1 1 vm N ? ?UN? ; (2) the model determines the equilibrium value of the saddle nificant 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-eco- nomic factors. Keywords: