Risk, Competition and Efficiency in Banking: Evidence from China

Abstract

This paper tests the interrelationships between risk, competition and efficiency in the Chinese banking industry over the period 2003-2013 under a Granger Causality test. The current study contributes to the empirical research by using an Efficiency-adjusted Lerner index and stability inefficiency as the indicators of competition and insolvency risk and more importantly, it is the first piece of research testing the interrelationships between different types of risk, efficiency and competition in the context of Chinese banking. The results show that Chinese commercial banks with higher levels of efficiency have higher credit risk and insolvency risk, but lower liquidity risk and capital risk. Higher competition leads to lower credit risk, lower insolvency risk, but higher liquidity risk. The results further show that Chinese commercial banks with higher credit risk and insolvency risk have higher efficiency, but the impact is significant and negative for liquidity risk and capital risk. Finally, it is found that lower liquidity risk increases the market power (lower the competitive condition) in the Chinese banking industry.