Ownership concentration and bank stability in China

ABSTRACT

Ownership concentration (OC) is important for improving bank stability, but its effect is arguable. Based on a sample of Chinese listed banks, we uncover a positive effect of OC on bank stability captured by Z-score, where the effect can be attributed to higher returns and capital levels of banks with more concentrated ownership. We also find that such banks have higher return volatilities and asset risks. These findings are more pronounced for smaller banks. An important policy implication is that bankers and regulators need to weigh the favourable and adverse effects of OC.

KEYWORDS:

• Ownership concentration
• bank stability
• Chinese listed banks
• bank risk-taking

JEL CLASSIFICATION:

• G21
• G28
• G32

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Usually, higher OC would increase the power and therefore the possibility of large shareholders to pursue their goals. Thus, no matter whether large shareholders intend to pursue excess returns probably at the expense of bank stability or long-term development through enhancing bank stability, the large shareholders with more share percentage are more likely to realize their goals.

² These studies find that state ownership (Boateng, Huang, and Kufuor 2015) and ownership concentration (Huang 2020) have positive effects on bank profitability. We refer to Dong, Girardone, and Kuo (2017) and Zhang, Li, and Ortiz (2021) for more information on bank governance in China.

³ Our finding holds when we calculate OC10 and H10Index based on the largest ten shareholders. Results are not reported for simplicity, but available upon request.

⁴ We divide the banks into four groups according to their status: 6 national large-scale commercial banks, 8 national joint-stock commercial banks, 14 city commercial banks and 7 rural commercial banks. In the spirit of Laeven and Levine (2009) and other studies (e.g. Huang and Xiong 2022) in corporate finance who use industry means as instrumental variables, we argue that banks in the same group have similar characteristics. The average OC across banks in the same group is related to the OC of each bank in the group and can be hardly affected by the stability of each bank. Therefore, the average OC across banks in different groups should be a suitable instrumental variable.

Additional information

Funding

This project was funded by the China Postdoctoral Science Foundation [grant number: 2019M660469], the Fundamental Research Funds for the Central Universities FRF-BR-20-04B,FRF-TP-19-060A1 [grant numbers: FRF-TP-19-060A1, FRF-BR-20-04B], and the National Natural Science Foundation of China [grant number: 72073009].