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The Profitability of Chinese banks: impacts of risk, competition and efficiency

Tan, Aaron Yong, Floros, Christos and Anchor, J.R (2016) The Profitability of Chinese banks: impacts of risk, competition and efficiency. Review of Accounting and Finance. ISSN 1475-7702 (In Press)

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Abstract

Purpose- This study aims to test the impacts of risk-taking behaviour, competition and cost efficiency on bank profitability in China.
Design/methodology/approach- We use a two-step Generalized Method of Moments (GMM) system estimator to examine the impacts of risk, competition and cost efficiency on profitability of a sample of Chinese commercial banks over the period 2003-2013.
Findings- We find that credit risk, liquidity risk, capital risk, security risk and insolvency risk significantly influence the profitability of Chinese commercial banks. To be more specific, credit risk is significantly and negatively related to bank profitability; liquidity risk is significantly and positively related to Return on Assets (ROA) and Net Interest Margin (NIM) but negatively related to Return on Equity (ROE); capital risk has a significant and negative impact on ROA and Net Interest Margin (NIM) but positive impact on ROE; there is a significant and negative impact of security risk on bank profitability (ROA and NIM). It is found that Chinese commercial banks with higher levels of insolvency risk have higher profitability (ROA and ROE). Finally, higher competition leads to lower profitability in the Chinese banking industry and Chinese commercial banks with higher levels of cost efficiency have lower ROA. In other words, Structure-Conduct-Performance paradigm rather than Efficient-structure paradigm holds in the Chinese banking industry.
Originality/value- This is the first paper to investigate the impact of different types of risk, including credit risk, liquidity risk, capital risk, security risk and insolvency risk, on bank profitability. This is the first study which uses more accurate measurements of efficiency and competition compared to previous Chinese banking profitability literature and which tests their impact on bank profitability. Our findings not only provide a general picture on the risk, efficiency and competition conditions in the Chinese banking industry, but also give valuable information to the Chinese government and to the banking regulatory authorities to make relevant policies.

Item Type: Article
Contributors:
ContributionNameEmailORCID
UNSPECIFIEDTan, Aaron Yonga.y.tan@hud.ac.ukUNSPECIFIED
UNSPECIFIEDFloros, Christoschristos.floros@port.ac.ukUNSPECIFIED
UNSPECIFIEDAnchor, J.Rj.r.anchor@hud.ac.ukUNSPECIFIED
Subjects: H Social Sciences > HG Finance
Schools: The Business School
Related URLs:
Depositing User: Aaron Tan
Date Deposited: 05 Sep 2016 14:16
Last Modified: 01 Dec 2016 10:18
URI: http://eprints.hud.ac.uk/id/eprint/29326

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