Abstract
The important role played by the Chinese commercial banks in the development of China’s economy has made the government and banking regulatory authority concerned about the performance of these banks.Indeedthe stability of the banking sector has attracted greater attention since the financial crisis of 2007-2009. The principal objective of this study is to investigate the inter-relationships between profitability and stability in the Chinese banking industry. Using a sample of Chinese commercial banks over the period 2003-2013, the study examines the inter-relationships under an auto-regressive-distributed linear model. Both Z-score and stability inefficiency were used as measures of stability, while Return on Assets (ROA) was used as the indicator of profitability. Different types of Generalized Method of Moments (GMM) estimators including difference GMM, one-step system GMM, two-step system GMM as well as two-step robust GMM were used. In order to the check the robustness of the results, alternative econometric techniques were used, such as ordinary least square (OLS) estimator, between effect estimator, as well as fixed effect estimator. The results show that higher insolvency risk/lower bank stability leads to higher profitability of Chinese commercial banks and also that higher profitability leads to higher bank fragility. Keywords: bank profitability, bank risk, China. JEL classification: G21, C23
Highlights
Profitability is central to the operation of commercial banks, while stability is of concern to the banking regulatory authorities, since the financial crisis of 2008-2009
Due to the fact that stability inefficiency focuses on the insolvency condition of the whole banking industry, while Zscore concentrates on the levels of insolvency risk of commercial banks, the findings suggest that Chinese commercial banks have a larger difference in insolvency risk across the period examined, while the whole banking industry has less volatility in terms of banking industry stability
We look at the insolvency risk of the Chinese banking industry on a year by year basis, which is reflected by stability inefficiency Figure 3
Summary
Profitability is central to the operation of commercial banks, while stability is of concern to the banking regulatory authorities, since the financial crisis of 2008-2009. The empirical literature investigates risk-taking behavior, and links the risk to the efficiency of commercial banks (Abedifar et al, 2013; Tan and Floros, 2013). There is only one study investigating the inter-relationship between insolvency risk and profitability in the Chinese banking industry under a Seemingly Unrelated Regression (Tan and Floros, 2014). The current study focuses on the analysis of insolvency risk and its relationship with bank profitability in China due to the fact that several rounds of banking reforms in China have aimed to reduce risk-taking behavior and improve bank performance. This study extends the work of Tan and Floros (2014) by testing the inter-relationships between profitability and insolvency risk using a number of econometric techniques under an auto-aggressivedistributed linear specification 1. The sample includes three different ownership types (state-owned commercial banks (SOCBs), jointstock commercial banks (JSCBs) and city commercial banks (CCBs))
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