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Abstract
Owing to a lack of consensus on whether the competition among the banks brings stability, or vulnerability in the financial system, this research is aimed towards investigating the Chinese banking industry. For this purpose, we have used the Granger and sub-sample time varying rolling window, in order to estimate the dynamic causality of the competition in the banking sector, and the systematic risk factors that follow, in China. The purpose of exploring the two-way causality is to make the banking system more stable, and also to provide new and first-hand evidence that can aid in reducing the occurrence of systematic risks. The results show that the competition in the banking sector has a negative impact on the systematic risk. This means that the increased competition in the banking sector will eventually lead to a reduction in the systematic risk. The results of the study are supported by the competition-stability hypothesis. Also, following the results, the policy direction we propose is that the banks may aim at reducing their systematic risks. They may achieve this by increasing their market share and accelerating transformation, in order to improve their competitiveness, which will help the banking system in China to achieve a sustainable form of stability. Moreover, our findings will also be helpful for the Chinese Ministry of Commerce (MOFCOM), which has been, over the years, in the process of developing an assessment framework for bank mergers, while also trying to minimize the tradeoff between competition and financial stability.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 Moral hazard is the act of economically active people who do not benefit others while maximizing their effectiveness.
2 Reverse selection refers to the phenomenon that the inferior goods generated by the information asymmetry of the two parties and the market price are degraded to expel quality products, and then the average quality of market trading products declines.
3 Financial disintermediation means that in the case of financial regulation, the supply of funds bypasses the commercial banking system and is directly transmitted to the demanders and financiers to complete the extracorporeal circulation of funds.
4 The four major state-owned banks include: Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Construction Bank.
5 N represents the top n companies in the industry.
6 Measured as the total assets of the four large state-owned banks, as a percentage of the total assets of all banks.
7 The large-scale credit investment, after the financial crisis in 2008, caused the credit scale of the commercial banks to increase substantially, which in turn led to a significant drop in the NPLR.
8 When we choose the window size, one can consider that the large window size may bring more precision; the other is that the small window size will eliminate the risk of interruption in the window size sample. Therefore, we chose a small window size of 20 quarters. We also selected window sizes of 24 quarters and 30 quarters, for the empirical analysis. The results proved very similar to the results of the 20 quarter window size. Therefore, the windows size of 20 quarters is deemed to be appropriate.
9 Five private banks are included the Shenzhen qianhai weizhong bank, Wenzhou civil and commercial bank, Tianjin jincheng bank, Zhejiang e-business bank and Shanghai huarui bank.
10 The financial system includes a financial institution system that is indirectly financed, a financial market system that directly finances, and a financial regulatory institution system that implements the supervision and management.
11 Third-party payment refers to an independent organization with certain strengths and credit guarantees, which facilitates the online payment mode of transactions between the two parties, through docking with the network.