Abstract
This paper investigates the relation between bank liquidity creation and capital in China. This issue is interesting because of the potential impact on “credit weakness” problems from tighter capital requirements which proposed by new capital rules in China. We perform regress analysis in a simultaneous equations model on the panel data of Chinese banks, which mainly includes 28 commercial banks from 2004 to 2014. On the whole, we find very different relations for different types of bank. State-owned commercial banks do not have significant relationship between liquidity creation and capital. National shareholding commercial banks’ liquidity creation and capital are positive correlation. The capital of regional commercial banks has a strongly positive effect on liquidity creation, but liquidity creation has negative impact on capital. These findings support the point that the new capital rules in China do not detrimentally influence “credit weakness” problems.
Highlights
China banking faces “credit weakness” that mainly caused by infrastructure underpinning and recession of real-state and absence of new growth point in macro-environment
Based on the above analysis, we present the following hypothesis: Hypothesis 3: Tighter capital requirement would lead to a reduction in liquidity creation for national shareholding banks and regional commercial banks
China’s commercial Banks liquidity creation is no longer only relying on five big state-owned commercial Banks. It shows that as Chinese banking industry developed, national shareholding commercial bank, city commercial bank and rural commercial bank can be another force of liquidity creation which will improve the structure of Chinese financial system in the future
Summary
China banking faces “credit weakness” that mainly caused by infrastructure underpinning and recession of real-state and absence of new growth point in macro-environment. From the theory of supply and demand, “credit weakness” is caused by the oversupply of liquidity funds. The China Banking Regulatory Commission based on the actual operation of their banks and “Basel III” issued the new capital rules for tighter capital requirements. (2016) The Empirical Study on the Relationship between Bank Liquidity Creation and Capital. The regulatory agency seems to neglect the possibility that bank capital and liquidity creation might have a reverse influence. A positive effect on liquidity creation provides support for the implementation of new rules. The positive impact from liquidity on capital means that banks might initiatively improve capital after expansion of liquidity creation. The empirical study on the relation between bank liquidity creation and capital helps to assess the economic contributions of the new rules.
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