Risk, Profitability, and Competition: Evidence from the Chinese Banking Industry

By Tan, Yong; Floros, Christos | The Journal of Developing Areas, Summer 2014 | Go to article overview

Risk, Profitability, and Competition: Evidence from the Chinese Banking Industry


Tan, Yong, Floros, Christos, The Journal of Developing Areas


(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

The financial system in China plays an important role in the development of the economy, while the Chinese banking sector is the most important component of the financial system. However, some of the problems are still serious such as: 1) there is a relatively large volume of non-performing loans in Chinese banking sector which indicates that the risk of Chinese banks is still high; and 2) the profitability of Chinese banks is still below the international standards (Garcia-Herrero et al., 2009).

There are extensive literatures investigating the determinants of bank profitability (see Athanasoglou et al., 2008; Ramlall, 2009; Dietrich and Wanzenried, 2011). The bank profitability is significantly affected by the bank risk as accumulation of non-performing loans (high bank risk) normally reduces the bank profitability. Furthermore, in a more concentrated banking market where the competition is relatively lower, firms tend to collude with each other to obtain higher profit which is in accordance with the Structure-Conduct-Performance (SCP) theory.

The profitability is supposed to have an impact on the risk-taking behaviour undertaken by the banks. The higher profitability of banks reflects the fact that they have a good system of risk management, credit checking and risk monitoring which is expected to reduce the bank risk. In addition, in a highly competitive market, in order not to be kicked out from the market, all banks tend to increase their profit margins through increasing the risk due to the fact that the banks think that higher risks come with higher returns.

As argued by Fernandez de Guevara and Maudos (2007), banks with higher risk implies relatively lower margins which lead to lower market power (higher bank competition), while the higher profitability of banks indicates that there is a relatively inelastic demand of banking services by consumers, the abnormal profit made by the banks induces the potential competitors enter into the banking market which precedes an increase in the competition. Chinese banking industry underwent the financial reform during 2003-2009 to increase the bank competition which is supposed to improve the bank performance, however, it is expected that the reform will negatively affect the bank stability, understanding the relationship between competition, profitability and risk is highly important for the bank managers and helpful for the government and banking regulatory authorities to make relevant policies.

There are several studies investigating the impact of risk on bank profitability (see Athanasoglou et al., 2008, Goddard et al., 2004b, among others), while the impact of competition on bank risk is widely examined by Liu et al., 2012 and Liu et al., 2013; further, the relationship between bank competition and profitability is assessed by Llewellyn (2005), Bikker and Bos (2005), among others. Our paper contributes to the existing literature by evaluating the inter-temporal relationship among risk, profitability and competition in Chinese banking sector. In other words, we estimate the above relationship using the Lerner index as the key competition indicator, different risk and profitability indicators under the Seemingly Unrelated Regression (SUR) framework.

The paper is structured as follows: following this introduction, Section 2 describes the reforms and evolution in Chinese banking industry. Section 3 reviews the existing literature on the inter-temporal relationship between risk, profitability and competition. Section 4 outlines the empirical methodology. Section 5 presents the main results and section 6 summarizes and concludes.

REFORMS AND EVOLUTION IN CHINESE BANKING INDUSTRY

Until 1978, Chinese financial system followed the mono-bank model and was operated based on socialist principles. The People's Bank of China (PBOC) played the dual role as central and commercial bank. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Risk, Profitability, and Competition: Evidence from the Chinese Banking Industry
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.