Large State-owned Banks Research Articles

The effect of stimulus policy on lending behavior and bank risk: Evidence from the Chinese banking sector

Considering China's stimulus policy in 2008 as a quasi-natural experiment, our study attempts to provide evidence to understand how expansionary monetary policy is likely to influence bank risk-taking in emerging markets, specifically in China. Using data on Chinese counties from 2006 to 2011, we theoretically discuss and empirically observe a positive relationship between the stimulus policy and bank risk-taking, as measured by nonperforming loans. Such a nexus stems from the negative effect of the stimulus policy on banks' lending standards and the positive effect on banks' credit support to small and medium sized enterprises. In addition, our study is enriched by estimating the moderating effects of bank capitalization based on the “risk-shifting” effect and “search for yield” effect caused by the stimulus policy. Specifically, we find important differences across banking groups, such that small and medium-sized banks with low capitalization increase their exposure to risk, while large state-owned banks with high capitalization notably reduce their risk tolerance. The results of this study may help to characterize monetary policy and macro prudential regulation, especially for emerging economies.

Providing Banking Branches in Russian Regions: Assessment of the Role of Distance and Other Factors

Over the past two decades, there has been a decrease in the number of banks in Russia, both as a result of concentration and consolidation processes in the global banking industry and of the banking sector rehabilitation policy pursued by the Central Bank of the Russian Federation. As a result, banking activities in the country are now carried out mainly by banks with headquarters in the capital. The article discusses the consequences of such geographic centralization of the Russian banking sector in terms of providing regions with a sufficient number of bank branches. The aim of the study is to assess the impact of distance on banks’ ability to maintain their presence in regions, as well as to identify differences in this regard between different categories of banks, including the composition of owners, location of the head office, and size of the bank. The impact of distances on the number of bank offices in regions at the end of 2018, according to the Central Bank of the Russian Federation, is assessed using the Poisson regression method for interregional trade gravity models. The results showed that the largest banks in their office location strategy are guided by the characteristics of locales, regardless of distance from the bank’s head office. At the same time, the composition of a bank’s owners has little effect, although in fact, financial accessibility and inclusion in the country are to a large extent provided by the largest state-owned banks. The office location strategy is also linked to the location of the bank’s head office in the capital. The remaining regional banks are more likely to operate locally; for them the distance factor in the formation of a branch network is important. Despite banking licensing reform in 2018, the number of banks continues to decline and the level of competition and diversity in this sphere in Russian regions is still debatable.

Analysis of the Development Process of Payment Methods and Mobile Payment Technology Diffusion Trend in China

Under the background of current development of China’s payment system, this paper researched the diffusion trend of mobile payment products and constructed a payment product diffusion model based on the Bass model that considers repeated purchases. Through a comparative study between traditional products, such as debit and credit cards, and mobile payment products, such as mobile banking; as well as a comparative study between mobile payment products issued by large state-owned banks and joint-stock banks; the paper discussed mobile payment promotion strategies among different types of payment institutions. Moreover, the fitting effect between the model in this paper and the traditional Bass model is verified by empirical analysis.

Persistent and transient inefficiency: Explaining the low efficiency of Chinese big banks

A vast literature shows that China's five largest state-owned banks (the Big Five) suffer from low cost efficiency. We offer a new explanation of this situation, by decomposing overall efficiency of Chinese banks into two parts: persistent and transient efficiency. Using the model of Kumbhakar, Lien, and Hardaker (2014) based on the stochastic frontier approach, we measure persistent and transient efficiency for a large sample of 166 Chinese banks over the period 2008–2015. We show that the lower efficiency of China's Big Five banks is almost entirely due to low persistent cost efficiency, indicating structural problems. On the contrary, the Big Five banks transient efficiency is similar to other Chinese banks, reflecting a good aptitude to minimize their costs in the short-term. Our findings support the view that major structural reforms are needed to enhance the efficiency of China's Big Five banks.

Real estate bubbles in a bank-real estate loan network model integrating economic cycle and macro-prudential stress testing

The real estate industry plays a decisive role in the national economy. Once real estate bubbles burst, it will trigger the turbulence of the whole economic system and even lead to serious economic crisis. From the perspective of macro-prudential stress testing, this paper constructs a risk contagion model of bank-real estate loan network. With the help of the data of 136 banks that provided loans for the real estate industry from 2012 to 2017, a macro-prudential stress testing is conducted on the bank-real estate loan system and real estate bubbles. The main conclusions are as follows: (1) Asset depreciation coefficient, bank panic coefficient and bank leverage rate have little impact on the stability of the banking system and the state of real estate bubbles, but the scale of bank assets has a significant impact on them in the whole economic cycle. (2) During the recession period, when China’s banks that are “too big to fail” have not been subjected to excessive shocks, the entire banking system will remain relatively stable and real estate bubbles will not burst. (3) Compared with the recession period, the bank survival ratio is higher under the influence of asset depreciation coefficient, bank panic coefficient and bank leverage rate in the recovery period. And the probability of the system being completely robust increases under the influence of the scale of bank asset, while the probability of being extremely vulnerable decreases. (4) Compared with the recession and recovery period, the bank survival ratio is higher under the influence of asset depreciation coefficient in overheating period, and it is lower under the influence of bank panic coefficient and bank leverage rate. Moreover, under the influence of the scale of bank assets, the probability of the system being completely robust increases, while the probability of being extremely vulnerable decreases. (5) The banking system has significant hierarchical and functional differences in China. It reflects that China should focus on large state-owned banks and joint-stock banks when preventing real estate bubbles from breaking up.

Did China's Bank Ownership Reform Improve Credit Allocation?

This paper studies the impact of ownership reform on the credit allocation of China's three largest state-owned banks (SOBs) in 2004. Using firm data for 2000-2007, we show that listed companies with higher amounts of debt experience a larger decline in credit access in cities that are more exposed to these SOBs after bank reform, indicating that a bank ownership change pushes loan officers to give much more importance to credit risks in the lending process. We extend our study to the universe of unlisted manufacturing companies and find that bank ownership reform also reduces bank lending to state-owned enterprises (SOEs) and low productivity firms in addition to more indebted firms. The negative effect of the reduced SOB lending on firm performance in terms of profitability and investment is only prominent in SOEs and firms with low productivity.

Household deposits and bank license withdrawals in the Russian regions

In our paper we try to answer the question whether license withdrawals undermine households’ confidence in banks and decrease their incentives to make deposits in Russia. To address this question we use balanced panel data for Russian regions for 2010—2016. We find some evidence in favor of a small positive statistically significant effect of banks branches closures due to license withdrawals on household deposits. At the same time we don’t observe statistically significant increase of households’ deposits in the large state-owned banks.

Responding to financial crisis: Bank credit expansion with Chinese characteristics

China has sustained a high rate of economic growth even after the outbreak of global financial crisis around 2008 and 2009. Much of the growth stemmed from consistently high levels of lending after this period. Using a unique large dataset from all banking institutions in 90 counties across 14 provinces of China from 2005 to 2013, this paper examines the patterns of credit expansion by Chinese banks. Our study results reveal a clear pattern of counter-cyclical credit expansion by Chinese banks in response to the outbreak of global financial crisis. We find that ownership structure and bank governance do impact on bank lending: the large state-owned banks have responded more to political pressure to lend while the joint-stock banks and city commercial banks have been more profit oriented. The latter had increased their lending more to increase their presence at the county markets. Overall, compared with county-based small banks, cross-regional banks have expanded their lending much more aggressively. Differences in liquidity and deposit growth, risk management strategies, or legal enforcement cannot explain these results.

Does Lending Relationship Help or Alleviate the Transmission of Liquidity Shocks? Evidence from a Liquidity Crunch in China

We examine China’s June 2013 liquidity crunch as a negative shock to banks and analyze the wealth effects on exchange-listed firms. Our findings suggest that liquidity shocks to financial institutions negatively impact borrower performance, particularly borrowers reporting outstanding loans at the end of 2012. Stock valuations of firms with long-term bank relationships, however, outperform the market and experience smaller subsequent declines in investment than peers lacking solid banking relationships. This effect is the strongest for firms that enjoy good relations with China’s large state-owned banks or foreign banks, and weakest for firms whose connections are solely with local banks. We document a positive correlation between the stock performances of firms and the stock performances of lender banks and the likelihood of lender banks operating as net lenders in the interbank market. These results suggest that banks transmit liquidity shocks to their borrowing firms and that a long-term bank-firm relationship may mitigate the negative effects of a liquidity shock.

Persistent and Transient Inefficiency: Explaining the Low Efficiency of Chinese Big Banks

Considering the evidence that China’s five largest state-owned banks (the Big Five) suffer from low cost efficiency, this paper decomposes overall efficiency of Chinese banks into persistent efficiency and transient efficiency components. Low persistent efficiency reflects structural problems, while low transient efficiency is associated with short-term problems. Using the model of Kumbhakar, Lien and Hardaker (2014) based on the stochastic frontier approach, we measure persistent efficiency and transient efficiency for a large sample of 166 Chinese banks over the period 2008–2015. In line with existing evidence, we find a lower average cost efficiency of the Big Five banks compared to other Chinese banks. It is almost entirely due to low persistent cost efficiency. The Big Five banks transient efficiency is similar to other Chinese banks. Our findings support the view that major structural reforms are needed to enhance the efficiency of China’s Big Five banks.

An Overview of China's Financial System

We provide a review of China's financial system and consider the challenges it faces and future reforms. The formal sectors of the financial system, which include a fast-growing stock market and are dominated by a banking sector with large state-owned banks, have played a critical role in financing the state sectors and the investment-driven economic growth model. However, the formal sectors have not served the needs of the private sectors or of households; these dynamic sectors have been financed by alternative finance sectors operating largely outside the markets and formal institutions. Going forward, financial markets need to be further developed to provide more support for the private sectors, including technology and services industries; the formal and alternative sectors should work together to improve the efficiency of resource allocation to better support the new model of consumption- and innovation-driven growth. Finally, the financial system needs to reduce the likelihood of damaging financial crises, which have included a real estate crisis, a banking crisis triggered by defaults on corporate and local government debt, and a twin crisis in the currency market and the banking sector.

Interest Liberalization and the Estimation of Implicit Interest Rates in China's Banking Sector

China's interest rate liberalization process has yet to be completed. Despite removal of deposit interest rate ceilings on 23 October 2015, controls like window guidance are still imposed to prevent commercial banks from setting interest rates freely. This paper estimates implicit interest rates in China (i.e., the additional yield to official interest rates that banks must pay to attract deposits) using headquarter-level data of 88 commercial banks from BankScope and branch-level data of 317 branches in 90 counties and 14 provinces for the period 2005–13. The econometric methods allow for both heterogeneity and spatial correlation in banks’ behavior to better capture the characteristics of the Chinese banking industry. Three main findings emerge from this study. First, the estimated mean implicit interest rate is between 70 percent and 78 percent of the explicit interest rate—ignoring implicit interest rates results in underestimation of funding costs. Second, a 1 percent increase in deposit interest rates is estimated to decrease implicit interest rates by 0.44 percent, implying that the cost of interest rate liberalization will be smaller than the increase in deposit interest rates. Third, small share-holding banks, city commercial banks and rural commercial banks pay higher implicit interest rates than large state-owned banks. To promote efficient resource allocation, therefore, interest rate liberalization needs to be firmly pursued but its impact on different types of banks needs to be closely monitored to minimize disruptions to the real economy.

Modern Banking Sector in Russia: Trends of Development, Control and Supervision

Objectives: To describe the trends in modern banking sector and the system of State control of the activities of credit organizations in Russia, highlight the advantages and risks that threaten the sustainable development of Russia. Methods/Statistical Analysis: Methodological basis consists of conceptual provisions in the area of institutional foundations of development of banking, monitoring and supervision. The systematic approach considering Russian commercial banks as part of financial market of the country. The following methods of scientific knowledge were applied: Comparative analysis and statistical research. Findings: More than half of the banks operating in Russia are concentrated in the Moscow region, while in the Far East, North Caucasus, the Urals, Siberia, Southern and North-Western Federal districts, their proportion is below 10%. It has been found that the process of bank enlargement in Russia entails a sequential monopolization of the country’s banking sector. It is manifested in the constant increase of the importance of some of the largest state-owned banks in the economy. If in 2007, five leading banks of Russia held 42% of industry assets; by 2016 this figure had risen to 77%. It has been proved that an overall reduction in the number of banking institutions and their affiliates was not caused by compression of the sector, but resulted from its rapid centralization. The authors conclude that excessive bureaucracy in the control of the Bank of Russia hinders the development of the banking sector. It is necessary to generate new thinking focused on formation of professional opinions of supervisors and increased responsibility for results. Application/Improvements: The results presented in this paper may be used in further scientific research in this area.

Research on the Impact of Interest Rate Liberalization on the Profitability of China’s Listed Small and Medium Sized Commercial Banks

In 1996, The People's Bank of China (PBOC) established a national treasury bonds market and inter-bank lending market, marking that the official start of China’s interest rateliberalization. After 20 years of orderly developing, reform has entered the key stage. In October 23, 2015, the PBOC announced that it would no longer set the floating ceiling of deposit rate to commercial banks and rural cooperative financial institutions. Release the control of interest rate means that the entire banking industry will fall into a more intense competition, and the traditional mode of operation will suffer from more threats and challenges. Especially in China's small and mediumsized commercial banks, compared to the large state-owned banks, the capital accumulation is relatively weak, more limited business development, limited customer resources, lack of brand effect, so it is bound to face more difficulties.In empirical research, the article selects 11 listed small and mediumsized banks as the research samples, using panel data model to analyze how the interest rate liberalization impact the profitability of these selected banks. Finally, combining with analysis results, the article proposes some measures to increasing the profit space of small and mediumsized commercial banks under the process of interest rate liberalization.

Features of monetary mechanism of China economy development

The article deals with the modern features of monetary mechanism of China and expected effects of its operation taking into account new economic, institutional and geopolitical circumstances of its development caused, in particular, by the global financial crisis of 2007-2008 and the economic recovery of the global South. The possibility of adapting the Chinese experience to meet the new challenges facing the economy of Ukraine in general and its industry, in particular, at the present stage of development is determined. It is concluded that now, when the Chinese economy has become the first in the world (taking into account PPP) and it is moving to a new stage of its development, the monetary mechanism of economic growth is changing to the "market" direction, but gradually and consistently. Monetary authorities neither recklessly perform the insistent recommendations of international financial institutions to accelerate the creation of a more liberal financial system nor exclude them, but they adapt well-known Western monetary instruments to the specific problems of national development after they are tested in practice. China's success of really planetary scale and consequences have been achieved with the direct participation of the central bank, which provides oversight and control over the financial sector under the leadership of the State Council of China with the dominance of large state-owned banks in the structure the financial system, "non-market" consistently low rate of CNY in relation to the US dollar and "non-market" interest rates on deposits and loans, and an undeveloped stock market. Within the next years China's economy will gradually slow down in line with the strategy of the government to ensure a balanced economic growth. It will be maintained by low oil prices and the prospects for global economic growth that are slightly better than it was expected before, and the possibility of a sharp correction in the property market and increasing indebtedness of local authorities remain among the major risks. Monetary policy is crucial in transition to such a model, and in conjunction with other regulatory tools of mixed economy it is aimed at achieving macroeconomic and financial stability, efficient allocation of scarce resources, and mitigation of shocks of internal and external origin.

Stress Testing of Retail and Corporate Segments of Russian Credit Market

The objective of the paper is to investigate and compare risk patterns in retail and corporate segments and assess the potential impact of macroeconomic shocks on loan quality. Banks’ monthly financial statements data for the period 2004 – 2012 are used. Firstly, we develop an indicator to measure institution’s credit risk that reflects variance and average value of NPL corrected for loan loss reserves. It is used to compare the risk-return patterns of largest state-owned banks, and under our framework we identify how the strategies of various banks differ in retail and corporate loans, identifying ‘safest’ and ‘riskiest’ institutions. Secondly, loan growth and credit risk sensitivity to macroeconomic shocks is analyzed using vector auto-regression. Macroeconomic shocks do not significantly increase NPL growth in the corporate segment. However, inflation and investment growth have a considerable impact on NPL growth in the retail segment (which is however almost three times less than the corporate). Based on these findings we conclude that there is no reason to expect rampant rise in corporate loan defaults in response to sudden changes in macroeconomic environment of Russia, though further growth of corporate loan segment increases credit risk, while the opposite is true about the retail sector.

From Reputation amidst Uncertainty to Commitment under Stress: More than a Decade of Foreign-Owned Banking in Transition Economies

The experience of transition economies (TEs) with foreign bank penetration has a time dimension and an organisational dimension that are intertwined. Before 1995, virtually all foreign bank entry in TEs took the form of greenfield subsidiaries set up by a foreign bank in the host country. From 1995 onward, foreign banks participated in government programmes to privatise large state-owned banks and eventually took control of these banks. Oftentimes, a foreign bank entered a TE initially as a greenfield subsidiary and, after acquiring a former state-owned bank, merged the two entities to create a large foreign-owned bank. This takeover and consolidation activity resembles financial mergers and acquisitions in many emerging market economies. What distinguishes the TE experience from foreign bank penetration in many other countries is the hybrid corporate culture of the resulting foreign-owned bank. Having a dominant market position, the foreign-owned bank is a blend of expertise in transaction-based banking from the parent and experience in relationship-based banking from the acquired bank. Thus, I characterise the resulting bank as a hybrid that combines the hard technical information and banking skills of the parent with the soft information about clients and expertise concerning the local business environment of the acquired bank.

Monetary policy stabilisation, changes in the banking system and interest rate pass-through: the Czech Republic 1999–2006

This article deals with the relationship between market and client interest rates in the period of inflation stabilisation and banking system transformation in the Czech Republic in 1999–2006. It analyses the character of short-run and long-run equilibrium of the transmission of market interest rates to lending and deposit interest rates. In the theoretical part crucial characteristics of the banking system in transition countries and their effects on interest rate dynamics are discussed. These are the strong position of large state-owned banks, limited power of non-banks, low elasticity of demand for bank products, and high demand for investment and consumption. The empirical analysis shows different behaviour of client interest rates in the short and long run and a significant impact of changing characteristics of the bank sector (growth of competition, reduction in credit risk and an increase in operational efficiency) on the stability of the relationship between market and client interest rates.

Efficiency and scale economies in banking in new EU countries

In this paper, we provide empirical evidence on bank cost-efficiency in transition countries. Our estimates of the cost-efficiency using a distribution-free approach suggests that among the countries analysed, Estonia, Latvia and Slovenia display the highest X-efficiency while the Czech Republic and Poland show the lowest X-efficiency. Reported X-inefficiency is found to be lowest in the segment of foreign banks that were on average more efficient than other banks. The efficiency of small and foreign banks was also higher when compared with large state-owned banks. Results also indicate that economies of scale decrease with bank size.

Iraq: First Review Under the Stand-By Arrangement and Financing Assurances Review Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Iraq

The First Review under the Stand-By Arrangement (SBA) discusses policies focused on measures to accelerate the reconstruction of the Iraqi economy while maintaining macroeconomic stability. Inflation has slowed down, and monetary and exchange rate policies have been adjusted. The Central Bank of Iraq (CBI) will increase the pace of appreciation of the dinar and keep the policy interest rate positive in real terms to keep inflation under control. Restructuring plans for the two largest state-owned banks will be developed on the basis of their finalized financial and operational audits.