The effect of ownership on bank prudential behavior

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The effect of ownership on bank prudential
behaviorthe case of China

• Chunxin Jia

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Motivation

• China has a large banking sector,relatively less
  studied.
• At the end of 2004, the assets of depositary
  institutions in China totaled 31,598.98 billion
  RMB, of which 53.6 was held by the four
  state-owned banks and only 14.9 was held by the
  eleven joint-equity banks.
• Does ownership matters?
• Performance V.S. prudential behavior
• Former research results of ownership and
  performance are mixed.
• Joint-equity banks are quite similar to
  privatized state-owned banks.

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Main findings

• Joint-equity banks tend to be significantly more
  prudent than state-owned banks
• Four state-owned banks in China have been
  carrying out reforms, and have become more
  prudent over the years as a result

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Literature review

• SOEs lack of managerial incentives
• Alchian (1965), Vining and Boardman (1992)
• Ownership and bank performance
• Clarke et al.(2005), Altunbas and Evan (2001)
• Investor protection and risk taking
• Yeung, Litov and John (2006)
• Prudential behavior of private banks
• Strock, and Travlos (1990) ,Gorton and Rosen
  (1995)
• Berger and Udell,(1994), Milne (2002), Shrieves
  and Dahl (2003)

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ContributionsThe first paper specialized in
connecting ownership and bank prudence. The
first paper to study ownership and bank portfolio
allocation based on chinas bank ground. This
paper can help to understand the main reasons of
bank portfolio allocation difference.
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Data and methodology

• The firm level data sample period is from 1985
  to 2004, totally 14 banks and 21 years, 214
  observations.
• Quarterly macro data of state and national
  joint-equity commercial bank observations for the
  period from quater1, 1993 to quarter 4, 2004,
  totally 96 observations.
• Most data are hand collected

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Hypothesis 1(static effect) joint-equity banks
will be more prudent than state banks due to
their better corporate governance. Hypothesis
2(dynamic effect) state banks are getting more
and more prudent due to management reform.

• Bank prudence measures aß1 Bank dummyß2
  List dummy,
• ß3 GDP growthß4 Interest rate measures,
• ß5 Bank fund source measuresß6 Bank assets
  ß7Regulatory measures,
• ß8 State-owned bank Time Error term.
  

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Firm level regression results

• In most of the regressions, the bank dummy is
  significant at the one-percent level and has the
  correct sign.
• List dummy seems to have little explanatory
  power,
• State-owned bank time is significant in five of
  the six regressions.
• Are state banks trying to maximize broader
  social objectives?
• Sub sample 1994-2004

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Macro data regression results

• Bank dummy is significant all the time at one
  percent level
• State banktime is significant and at 1 percent
  level in two regressions. For the bank excess
  reserve regression, state banktime is
  insignificant, I think this is driven by the
  change of Chinas money market.

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Conclusions

• Joint-equity banks have better corporate
  governance, they tend to have higher excess
  reserve and deposit loan ratio, and lower loan
  asset ratio. This shows that they operate
  significantly more prudent than state banks.
• State-owned banks have been carrying out fairly
  efficient reforms and are becoming more prudent
  as a result While many people have been
  criticizing the state banks to be just a growing
  NPL producer, empirical results seem to be in
  favor of a positive view.

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Thank you!