Skip to main content
SpringerLink
Log in

Do banking system transparency and market structure affect financial stability of Chinese banks?

  • Published:
Economic Change and Restructuring Aims and scope Submit manuscript

Abstract

This study examines whether banking transparency and competition affect financial stability of banks and transparency acts as a conduit in effecting the competition among banks to increase or decrease their financial stability. This study uses multiple variations of a two-step system generalized method of moments approach on annual data from 164 Chinese commercial banks from 2000 to 2014. The results of this study showed that transparency with market power lessens the insolvency risk of banks as well as credit market risk; one could infer that market discipline works more robustly in the presence of disclosure requirements. This study supports existing market literature that China’s banking transparency is a significant determinant of changes in financial stability given the market structure of its banking system while controlling for several exogenous and endogenous variables. The results are robust by using alternate proxies for market structure, banking transparency and financial stability.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Keeley (1990) claimed that deregulation of the US banking sector in the 1970s and 1980s increased competition and, through the accompanying decrease in monopoly rents, directed to an intensified equilibrium risk of failure.

  2. The details regarding implementation of the BASEL framework in the Chinese economy can be viewed at the following link given on the bank for international settlement website. https://www.bis.org/press/p130927.htm.

  3. For details on the subcategories of the index see the study of Nier (2005).

  4. http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTGLOBALFINREPORT/0,,contentMDK:23267421~pagePK:64168182~piPK:64168060~theSitePK:8816097,00.html.

  5. Cordella and Yeyati (1998) and Furman et al. (1998) suggested that greater transparency practices could worsen the situation of banks when they are hit by an exogenous shock resulting in banks to shut down. This claim points toward lowering of competition and increasing of market power of certain banks, which might be because mergers, acquisitions and bankruptcies reduce competitors in market. Gorton and Huang (2002) pointed out that the banks are hit by systematic or idiosyncratic shocks. Investors cannot observe the idiosyncratic risk of information-opaque banks. Chen and Hasan (2006) claimed that strong market discipline mechanism due to greater transparency could lead to stimulating competition. However, in case of large number of banks being risky would lead to accumulation of market power by small number of highly stable banks.

References

  • Agoraki M-EK, Delis MD, Pasiouras F (2011) Regulations, competition and bank risk-taking in transition countries. J Financ Stab 7:38–48

    Google Scholar 

  • Alhassan AL, Tetteh ML, Brobbey FO (2016) Market power, efficiency and bank profitability: evidence from Ghana. Econ Change Restruct 49:71–93

    Google Scholar 

  • Alqahtani F, Mayes DG, Brown K (2016) Economic turmoil and Islamic banking: evidence from the Gulf cooperation council. Pac Basin Financ J 39:44–56

    Google Scholar 

  • Anand BN, Galetovic A (2000) Information, nonexcludability, and financial market structure. J Bus 73:357–402

    Google Scholar 

  • Andrievskaya I, Semenova M (2016) Does banking system transparency enhance bank competition? Cross-country evidence. J Financ Stab 23:33–50

    Google Scholar 

  • Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58:277–297

    Google Scholar 

  • Arellano M, Bover O (1995) Another look at the instrumental variable estimation of error-components models. J Econom 68:29–51

    Google Scholar 

  • Ariss RT (2010) On the implications of market power in banking: evidence from developing countries. J Bank Financ 34:765–775

    Google Scholar 

  • Barth JR, Caprio G Jr, Levine R (2013) Bank regulation and supervision in 180 countries from 1999 to 2011. J Financ Econ Policy 5:111–219

    Google Scholar 

  • Bashir U, Yu Y, Hussain M, Wang X, Ali A (2017) Do banking system transparency and competition affect nonperforming loans in the Chinese banking sector? Appl Econ Lett 24:1519–1525

    Google Scholar 

  • Bashir U, Yugang Y, Hussain M (2020) Role of bank heterogeneity and market structure in transmitting monetary policy via bank lending channel: empirical evidence from Chinese banking sector. Post Commun Econ. https://doi.org/10.1080/14631377.2019.1705082

    Article  Google Scholar 

  • Beck T, Demirgüç-kunt A, Maksimovic V (2004) Bank competition and access to finance: international evidence. J Money Credit Bank 36(3):627–648

    Google Scholar 

  • Berger AN, Deyoung R (1997) Problem loans and cost efficiency in commercial banks. J Bank Financ 21:849–870

    Google Scholar 

  • Berger AN, Klapper LF, Turk-Ariss R (2009) Bank competition and financial stability. J Financ Serv Res 35:99–118

    Google Scholar 

  • Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econom 87:115–143

    Google Scholar 

  • Boone J (2008) A new way to measure competition. Econ J 118:1245–1261

    Google Scholar 

  • Boot AW, Schmeits A (2000) Market discipline and incentive problems in conglomerate firms with applications to banking. J Financ Intermed 9:240–273

    Google Scholar 

  • Boot AW, Thakor AV (2000) Can relationship banking survive competition? J Financ 55:679–713

    Google Scholar 

  • Boyd JH, De Nicolo G (2005) The theory of bank risk taking and competition revisited. J Financ 60:1329–1343

    Google Scholar 

  • Chen Y (1999) Banking panics: the role of the first-come, first-served rule and information externalities. J Polit Econ 107:946–968

    Google Scholar 

  • Chen Q-A, Du F (2016) Financial innovation, systematic risk and commercial banks’ stability in China: theory and evidence. Appl Econ 48:3887–3898

    Google Scholar 

  • Chen Y, Hasan I (2006) The transparency of the banking system and the efficiency of information-based bank runs. J Financ Intermed 15:307–331

    Google Scholar 

  • Claessens S, Klingebiel D (2001) Competition and scope of activities in financial services. World Bank Res Observer 16(1):19–40

    Google Scholar 

  • Claessens S, Laeven L (2004) What drives bank competition? Some international evidence. J Money Credit Bank 36:563–583

    Google Scholar 

  • Committee B (2001) The new Basel capital accord. Consultative Document, Basle

    Google Scholar 

  • Cordella T, Yeyati EL (1998) Public disclosure and bank failures. Staff Pap 45:110–131

    Google Scholar 

  • Cordella T, Yeyati EL (2002) Financial opening, deposit insurance, and risk in a model of banking competition. Eur Econ Rev 46:471–485

    Google Scholar 

  • Darrough MN (1993) Disclosure policy and competition: Cournot vs. Bertrand. Account Rev 68:534–561

    Google Scholar 

  • De Guevara JF, Maudos J, Pérez F (2005) Market power in European banking sectors. J Financ Serv Res 27:109–137

    Google Scholar 

  • Demirgüç-Kunt A, Levine R (1996) Stock markets, corporate finance, and economic growth: an overview. World Bank Econ Rev 10(2):223–239

    Google Scholar 

  • Demirgüç-Kunt A, Martínez Pería MS (2010) A framework for analyzing competition in the banking sector: an application to the case of Jordan. In: World bank policy research working paper series

  • Diamond DW, Dybvig PH (1983) Bank runs, deposit insurance, and liquidity. J Polit Econ 91:401–419

    Google Scholar 

  • Dutta N, Mukherjee D (2018) Can financial development enhance transparency? Econ Change Restruct 51:279–302

    Google Scholar 

  • Elliott M, Golub B, Jackson MO (2014) Financial networks and contagion. Am Econ Rev 104:3115–3153

    Google Scholar 

  • Feltham GA, Gigler FB, Hughes JS (1992) The effects of line-of-business reporting on competition in oligopoly settings. Contemp Account Res 9:1–23

    Google Scholar 

  • Ferrell A (2007) The case for mandatory disclosure in securities regulation around the world. Brook J Corp Fin Com L 2:81

    Google Scholar 

  • Fu XM, Lin YR, Molyneux P (2014) Bank competition and financial stability in Asia Pacific. J Bank Financ 38:64–77

    Google Scholar 

  • Furman J, Stiglitz JE, Bosworth BP, Radelet S (1998) Economic crises: evidence and insights from East Asia. Brook Pap Econ Act 1998:1–135

    Google Scholar 

  • Gertner R, Gibbons R, Scharfstein D (1988) Simultaneous signalling to the capital and product markets. RAND J Econ 19:173–190

    Google Scholar 

  • Ghosh A (2015) Banking-industry specific and regional economic determinants of non-performing loans: evidence from US states. J Financ Stab 20:93–104

    Google Scholar 

  • Giannetti M (2003) Bank-firm relationships and contagious banking crises. J Money Credit Bank 35:239–261

    Google Scholar 

  • Gorton G, Huang L (2002) Banking panics and the origin of central banking. National Bureau of Economic Research, Cambridge

    Google Scholar 

  • Hayes RM, Lundholm R (1996) Segment reporting to the capital market in the presence of a competitor. J Account Res 34:261–279

    Google Scholar 

  • Hellmann TF, Murdock KC, Stiglitz JE (2000) Liberalization, moral hazard in banking, and prudential regulation: are capital requirements enough? Am Econ Rev 90(1):147–165

    Google Scholar 

  • Herd R (2013) The evolution of China’s social policies. Econ Change Restruct 46:109–141

    Google Scholar 

  • Houston JF, Lin C, Lin P, Ma Y (2010) Creditor rights, information sharing, and bank risk taking. J Financ Econ 96:485–512

    Google Scholar 

  • Hu JL, Li Y, Chiu YH (2004) Ownership and nonperforming loans: evidence from Taiwan’s banks. Dev Econ 42:405–420

    Google Scholar 

  • Hyytinen A, Takalo T (2004) Preventing systemic crises through bank transparency. Econ Notes 33:257–273

    Google Scholar 

  • Jiang C, Yao S, Feng G (2013) Bank ownership, privatization, and performance: evidence from a transition country. J Bank Financ 37:3364–3372

    Google Scholar 

  • Jiménez G, Lopez JA, Saurina J (2013) How does competition affect bank risk-taking? J Financ Stab 9:185–195

    Google Scholar 

  • Jordan JS, Peek J, Rosengren ES (2000) The market reaction to the disclosure of supervisory actions: implications for bank transparency. J Financ Intermed 9:298–319

    Google Scholar 

  • Keeley MC (1990) Deposit insurance, risk, and market power in banking. Am Econ Rev 80:1183–1200

    Google Scholar 

  • Leon F (2015) Measuring competition in banking: a critical review of methods. Series Etudes et documents du CERDI

  • Lerner AP (1934) Economic theory and socialist economy. Rev Econ Stud 2:51–61

    Google Scholar 

  • Marcus AJ (1984) Deregulation and bank financial policy. J Bank Financ 8:557–565

    Google Scholar 

  • Matutes C, Vives X (1996) Competition for deposits, fragility, and insurance. J Financ Intermed 5:184–216

    Google Scholar 

  • Morgan DP (1999) Whether and why banks are opaque. In: Federal reserve bank of Chicago proceedings, 1999

  • Nier EW (2004) Banking crises and transparency

  • Nier EW (2005) Bank stability and transparency. J Financ Stab 1:342–354

    Google Scholar 

  • Nier E, Baumann U (2006) Market discipline, disclosure and moral hazard in banking. J Financ Intermed 15:332–361

    Google Scholar 

  • Niinimäki JP (2004) The effects of competition on banks’ risk taking. J Econ 81(3):199–222

    Google Scholar 

  • Noman AHM, Gee CS, Isa CR (2017) Does competition improve financial stability of the banking sector in ASEAN countries? An empirical analysis. PloS One 12:e0176546

    Google Scholar 

  • Repullo R (2004) Capital requirements, market power, and risk-taking in banking. J Fin Intermed 13(2):156–182

    Google Scholar 

  • Roodman D (2009) A note on the theme of too many instruments. Oxf Bull Econ Stat 71:135–158

    Google Scholar 

  • Salas V, Saurina J (2002) Credit risk in two institutional regimes: Spanish commercial and savings banks. J Financ Serv Res 22:203–224

    Google Scholar 

  • Schaeck K, Cihak M (2012) Banking competition and capital ratios. Eur Financ Manag 18:836–866

    Google Scholar 

  • Schaeck K, Cihák M (2014) Competition, efficiency, and stability in banking. Financ Manag 43:215–241

    Google Scholar 

  • Semenova M (2012) Market discipline and banking system transparency: do we need more information? J Bank Regul 13:241–248

    Google Scholar 

  • Stern GH, Feldman RJ (2004) Too big to fail: the hazards of bank bailouts. Brookings Institution Press, Washington, DC

    Google Scholar 

  • Us V (2016) A dynamic approach to analysing the effect of the global crisis on nonperforming loans: evidence from the Turkish banking sector. Appl Econ Lett 24:186–192

    Google Scholar 

  • Us V (2017) Dynamics of non-performing loans in the Turkish banking sector by an ownership breakdown: the impact of the global crisis. Financ Res Lett 20:109–117

    Google Scholar 

  • Verrecchia RE (1983) Discretionary disclosure. J Account Econ 5:179–194

    Google Scholar 

  • Vishwanath T, Kaufmann D (2001) Toward transparency: new approaches and their application to financial markets. World Bank Res Observer 16:41–57

    Google Scholar 

  • Vives X (2010) Competition and stability in banking

  • Walter I, Gray HP (1983) Protectionism and international banking: sectorial efficiency, competitive structure and National policy. J Bank Financ 7(4):597–609

    Google Scholar 

  • Ye Q, Xu Z, Fang D (2012) Market structure, performance, and efficiency of the Chinese banking sector. Econ Change Restruct 45:337–358

    Google Scholar 

  • Zhang D, Cai J, Dickinson DG, Kutan AM (2016) Non-performing loans, moral hazard and regulation of the Chinese commercial banking system. J Bank Financ 63:48–60

    Google Scholar 

Download references

Acknowledgements

This paper was written while Usman Bashir was a research fellow at the School of Management, University of Science and Technology of China (SOM, USTC). He would like to thank USTC for its hospitality and financial support. We thank the Editor, George Hondroyiannis, and the anonymous referee for their comments. We also thank Xiao Wang, Dimitrios Tsomocos, and Shen Rui for their useful suggestions. The views expressed in this paper are those of the authors. Any remaining errors are ours.

Author information

Authors and Affiliations

  1. College of Business Administration, University of Ha’il, Hail, Kingdom of Saudi Arabia

    Usman Bashir, Shoaib Khan & Abdulhafiz Jones

  2. Faculty of business, Sohar University, Sohar, Oman

    Muntazir Hussain

Authors
  1. Usman Bashir
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Shoaib Khan
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Abdulhafiz Jones
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Muntazir Hussain
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Usman Bashir.

Ethics declarations

Conflict of interest

On behalf of all authors, the corresponding author states that there is no conflict of interest.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Bashir, U., Khan, S., Jones, A. et al. Do banking system transparency and market structure affect financial stability of Chinese banks?. Econ Change Restruct 54, 1–41 (2021). https://doi.org/10.1007/s10644-020-09272-x

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10644-020-09272-x

Keywords

Search

Navigation