Bank Competition, Stability and Credit Constraints in the Chinese Banking System

  • Bing Gong

Student thesis: Doctoral Thesis

Abstract

This thesis investigates the characteristics of Chinese banking industry by presenting three em- pirical studies. The first study (Chapter Three) investigates considers various Z-scores to meas- ure banking stability.

Specifically, I apply this measure to a panel data of savings, cooperative and commercial banks from a wide range of countries (including China). The computed Z- scores are applied to measure the stability of banks in the following chapters as well. The second study (Chapter Four) looks at the effect of bank competition on bank stability in the Chinese banking system. The third study (Chapter Five) focuses on the association between bank com- petition and credit availability in China from the household’s credit constrained viewpoint. As is the current trend in the empirical literature, we analyze this topic using micro-level survey data.

Specifically, the first empirical chapter investigate the best way of measuring z-score in the banking industry. I propose a novel approach to computing time-varying Z-scores. Various approaches in the existing literature to constructing time-varying Z-score measures are com- pared based on two different panel datasets: one is drawn from Bankscope containing 17,035 banks across 150 countries over the period 1998-2012, and the other panel consists of 12,230 US banks drawn from call reports from 1984 to 2012. I further examine the best way of com- puting time-varying Z-scores in terms of goodness of fit to the data. Z-scores based on expo- nentially smoothed estimates tend to outperform the simple moving average ones for both Bankscope and the call reports datasets. Therefore, an exponential version of time-varying Z- scores is recommended for practical implementation.

Next, Chapter Four using an unbalance panel data covering 141 commercial banks in China from 2009 to 2018. Bank specific data is collected from Fitch Connect, and macro data is collected from the China Statistical Yearbook. I investigate the impact of competition on stability in the Chinese banking context. In this context, the second study empirically examines the status quo based on the latest data after the 2008 financial crisis. This study finds evidence to favor the traditional competition-fragility view. The main results show that market competi- tion has a significant and positive effect on bank stability. Additionally, regression results indi- cate a positive relationship between bank size and stability, and no significant relationship be- tween the ratio of non-interest income over gross revenue and stability.

The final empirical chapter of this thesis using the 2011 and 2013 waves of the China Household Finance Survey (CHFS) dataset to test the relationship between credit constraints and entrepreneurship in China, mainly focusing on Chinese households’ decisions with regards to starting up their own business. Again, I also take into account regional differences to control for culture and degrees of economic development.I find that credit constraints act as a strong deterrent to entrepreneurship. I also find that households in China who suffer from credit con- straints have lower probabilities of starting up their own businesses, especially in regions char- acterized by strict credit constraint policies ,such as the central and western areas.
Date of AwardMar 2021
Original languageEnglish
Awarding Institution
  • University of Northampton
SupervisorShaowei He (Supervisor), Xiaoyu Tian (Supervisor), Nadeem Aftab (Supervisor) & Peng Zhao (Supervisor)

Keywords

  • Banking competition
  • Z-score
  • Credit constraint
  • entrepreneurship

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