Non-performing loans (NPLs), liquidity creation, and moral hazard: Case of Chinese banks

Umar, Muhamad; Sun, Gang

doi:10.1186/s40589-016-0034-y

Cited by 18 publications

(19 citation statements)

References 54 publications

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“…A moral hazard hypothesis suggests that an increase in NPLs may result in higher bank liquidity creation (Umar and Sun, 2016). According to Bernanke and Gertler (1989), prudential banks may reduce lending when they faced up with increasing NPLs and the banks having a moral hazard issue tend to advances more loans in the presence of higher levels of bad debts.…”

Section: Methodsmentioning

confidence: 99%

“…If too many distressed economic projects are funded with loans as a result of the loose evaluation process, banks are likely to face greater risk when these assets deteriorate in value. On the other hand, a study by Umar and Sun (2016) shows an insignificant relationship between liquidity creation and credit risk in China.…”

Section: Literature Reviewmentioning

confidence: 96%

“…Several studies examine the inter-relationships between capital and risk when controlling bank efficiency (Fiordelisi et al , 2011; Le, 2018), while others investigate the relations between capital and liquidity creation (Fu et al , 2015; Horváth et al , 2014; Le, 2019). Or even a one-way relationship between either capital and liquidity creation (Umar et al , 2017) or credit risk and liquidity creation (Umar and Sun, 2016) is examined. Extending these above studies, we study bi-directional interactions among bank capital and credit risk that should provide a more complete picture of liquidity creation is affected through these two channels.…”

Section: Introductionmentioning

confidence: 99%

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The inter-relationships among liquidity creation, bank capital and credit risk: evidence from emerging Asia–Pacific economies

Le¹,

Pham

2021

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PurposeThis study investigates the inter-relationships among liquidity creation, bank capital and credit risk in selected emerging economies between 2012 and 2016.Design/methodology/approachA three-step procedure as proposed by Berger and Bouwman (2009) is used to measure liquidity creation. Thereafter, a simultaneous equations model with the generalized method of moments (GMM) estimator is used to examine the links between liquidity creation, bank capital and credit risk.FindingsThe findings indicate that bank capital and credit risk affect each other positively after controlling for liquidity creation. Also, the findings show a negative impact of credit risk on liquidity creation while our findings do not find any evidence to confirm the reverse relationship between them. Furthermore, the findings demonstrate a two-way negative relationship between liquidity creation and bank capital in these emerging economies. Finally, the results indicate a positive relationship between capital and credit risk, especially in the case of small banks in the sample.Practical implicationsThe findings suggest that the trade-off between the benefits of financial stability induced by tightening capital requirements and those of improved liquidity creation has crucial implications for policymakers and bank regulators in making the banking system more resilient. A positive impact of capital on credit risk emphasizes that the authorities in selected emerging economies should put more attention on small banks to ensure their exposures under target control.Originality/valueThis is the first study that examines the dynamic interrelationships among liquidity creation, bank capital and credit risk in the Asia–Pacific region.

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Section: Methodsmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 96%

Section: Introductionmentioning

confidence: 99%

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The inter-relationships among liquidity creation, bank capital and credit risk: evidence from emerging Asia–Pacific economies

Le¹,

Pham

2021

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“…(Kjosevski & Petkovski, 2016) address the reciprocal relationship between NPLs and GDP. Further, (Umar & Sun, 2016) include GDP as a proxy to control the business cycle; here, in the case of Chinese banks, they point out that the influence of GDP on NPLs is unclear. Moreover, (Tanaskovi c & Jandri c, 2015) analyzes the factors that could influence NPLs among CEEC and SEE countries (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Hungary, Lithuania, Montenegro, FYR Macedonia, Romania, Serbia and Slovenia) for the period 2006 to 2013.…”

Section: Hypothesis Developmentmentioning

confidence: 99%

The causal relationship between SME sustainability and banks’ risk

Shihadeh

Gamage

Hannoon

2019

Economic Research-Ekonomska Istraživanja

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This study aims to examine the influence of banks' credit to SMEs on non-performing loans. Many studies find that access to financial sources has become an obstacle to the growth and sustainability of SMEs. This study uses theoretical and empirical approaches to support the study's hypothesis. Data are presented for 15 banks in Palestine, covering the period 2006 to 2016.The study uses empirical techniques regarding to examine the relationship between the variables. Evidence shows that encouraging banks to lend more money to SMEs through the use of a guarantee fund could decrease their risk. Thus, enhancing credit to SMEs could improve the growth and sustainability of these firms. The study recommending policymakers and bank's managers could develop their strategies according to SME's needing. Therefore, enhancing the growth in these firms and reducing the bank's risk. Furthermore, adopting the guarantee funds in developing countries could decrease the bank's risk, thus lending more to SME. The value of this paper comes from the importance of SME in the economic growth and development sustainability. Therefore, there is a need to convince banks to enhance SME credit through a guarantee fund and that extending this type of credit would positively influence banks' activities.

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“…According to reports from the State Statistical Bureau between 1989 and 1998, the balance of credit assets of the four-major state-owned commercial banks were eleven times higher. However, the total profits grew by only 26%, while the management fees were 8.9 times higher (Umar and Sun, 2016).…”

Section: Market Economy and Credit Risk Management In China From 1994mentioning

confidence: 93%

Historical Trends and Transitions in Credit Risk Management of Chinese Commercial Banks

Nayak

Jia²

2018

IJBA

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The paper outlines different trends and transitions in the history of credit risk management of Chinese commercial banks. By critically reviewing different stages of credit management and its historical evolution, it helps in understanding the nature of subjective challenges faced by Chinese commercial banks to manage credit risks. It reviews post reform policies in particularly after 1978 to locate the policy transitions and trajectories of credit risk management of commercial banks in China. It helps to understand the problems and prospects of effective credit management of risks by Chinese commercial banks. It argues that Chinese commercial banks are facing greater challenges in managing risk after the entry of foreign banks to China. Therefore, it is important for the commercial banks in China to develop its own credit management mechanisms within the context of Chinese banking environment.

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Non-performing loans (NPLs), liquidity creation, and moral hazard: Case of Chinese banks

Cited by 18 publications

References 54 publications

The inter-relationships among liquidity creation, bank capital and credit risk: evidence from emerging Asia–Pacific economies

The inter-relationships among liquidity creation, bank capital and credit risk: evidence from emerging Asia–Pacific economies

The causal relationship between SME sustainability and banks’ risk

Historical Trends and Transitions in Credit Risk Management of Chinese Commercial Banks

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