The effect of ownership on bank prudential behavior - PowerPoint PPT Presentation

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The effect of ownership on bank prudential behavior

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Title: The effect of ownership on bank prudential behavior


1
The effect of ownership on bank prudential
behaviorthe case of China
  • Chunxin Jia

2
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.

3
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)

8

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.
9
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

10
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.

19
Thank you!
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