Regulation, Competition and Bank Risk: Evidence from China

Abstract

This paper uses the semi-annual data of 16 listed banks from the fourth quarter of 2005 to the second quarter of 2016 as the research sample to study the impact of supervision and competition on the listed bank's risk in China. The results show that the higher level of bank holdings (capital adequacy ratio and core capital adequacy ratio) can significantly reduce the combined risk of banks and increase bank stability. Increased liquidity (liquidity ratio and deposit-loan ratio) can reduce bank risk, but this effect is not significant. The more fierce competition among banks (the smaller CR) will not only increase the proportion of weighted risk assets in total assets, but also increase the bank's bankruptcy probability and reduce the overall operating stability of the bank. It is necessary for authorities of policy to strengthen supervision of banking industry, especially the capital adequacy ratio and core capital adequacy ratio regulation and keep the competition of banks under the appropriate interval. It is also necessary for regulators to comply with the latest regulations of Basel III to set up more reasonable liquidity regulatory indicators to meet liquidity risk management.

Competition and Profitability: Impacts on Stability in Chinese Banking

“…Their results indicated that there was a significant and negative impact from competition on risk in the Chinese banking industry. Liu (2017) tested the impact of competition on risk for a sample of 16 listed banks from the fourth quarter of 2005 to the second quarter of 2016. Two risk indicators were considered in the study, the Z-score and the proportion of weighted risk assets to total assets, while the competitive conditions in the Chinese banking industry were measured using the bank concentration ratio.…”

“…Research investigating competitive conditions in the Chinese banking sector has already emerged (Yuan, 2006;Masood and Sergi, 2011;Fu, 2009;Park, 2013;Tan and Floros, 2013a;Tan, 2014, Tan, 2017, along with several studies examining the effect of competition on risk-taking behaviours in the banking industry (Fu et al, 2014;Liu et al, 2012); however, only a few studies have examined the impact of competition on risk-taking behaviours in the Chinese banking industry (Tan, 2013, Tan and Floros, 2014, Tan, 2014, Hu and Xie, 2016Tan and Anchor, 2017a;Liu, 2017). Several rounds of banking reforms have occurred in China, not only with the aim of improving competitive conditions and reducing the risk-taking behaviours of Chinese commercial banks but also to improve the performance of the Chinese banking industry as a whole.…”

Impact of bank competition on bank stability in China

“…There are also some single-country studies focus on China. Using the semi-annual data over the period 2005-2016 in China, Liu (2017) provides that the more sufficient bank competition will increase the bank's bankruptcy probability and reduce the bank stability, support the competition-fragile hypothesis. Hu & Xie (2016) use data from the Chinese banking industry find a negative effect of bank competition on bank risk-taking.…”