Chinese banking failure: the case of Baoshang Bank and its implications

Kerry Liu

Journal of Financial Economic Policy, 2020, vol. 13, issue 4, 424-441

Abstract: Purpose - On May 24, 2019, the People’s Bank of China (China’s central bank) announced that the Baoshang Bank had been taken over because of credit risk. The Baoshang Bank failure has caused concerns over the stability of the Chinese financial system and the Chinese economy. This study aims to examine the case of Baoshang Bank’s failure and its theoretical implications including the relation between ownership structure and bank performance, the monetary transmission during a banking crisis and the market response to Baoshang Bank failure. Then this study discusses policy implications. Design/methodology/approach - This study adopts a two-stage least squared model to examine the relation between ownership structure and bank performance, a series of rolling regressions to examine the monetary transmission and event studies to examine the market response to Baoshang Bank failure. Findings - This study finds that there is a nonlinear relation between ownership structure and bank performance, the interest pass-through has broken down after the Baoshang Bank failure and the Baoshang Bank failure and the gradual exit of implicit guarantee from the Chinese government are considered to be positive to the Chinese banking sector. Originality/value - First, although previous studies on ownership structure and bank performance classified different types of larger shareholders and found that this nonlinear relation is insignificant, this study finds a significant relation by innovatively using a combined ownership. Second, further contributing to the studies on monetary transmission in banking crisis based on international data, this study based on Chinese data sets finds that the interest rate pass-through has broken down after the Baoshang Bank failure.

Keywords: Banks; Financial meltdown; Financing policy; Capital and ownership structure; Event studies; People’s bank of China; Baoshang bank; Ownership structure; Nonperforming loan; Interest rate pass-through; Event study; Implicit guarantee; E52; E58; G14; G21; G32 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-01-2020-0013

DOI: 10.1108/JFEP-01-2020-0013

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