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Non-performing loans (NPLs), liquidity creation, and moral hazard: Case of Chinese banks

Muhammad Umar and Gang Sun
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Gang Sun: Dongbei University of Finance & Economics

China Finance and Economic Review, 2016, vol. 4, issue 1, 1-23

Abstract: Abstract Background This study analyzes the impact of non-performing loans (NPLs) on bank liquidity creation to investigate the existence of moral hazard problem in Chinese banks. Methods It uses data from 197 listed and unlisted Chinese banks, spanning the period 2005 to 2014. Generalized method of moments (GMM) estimation, fixed and random effect model, and pool data techniques have been used for analysis. Results Total liquidity creation by Chinese banks is declining, and NPLs ratio has started to increase following a continuous decline between 2005 and 2012. We find that liquidity creation by Chinese banks does not depend on NPLs ratio. We repeated the analysis for small and large banks and the results of these subsamples reinforced our findings for the aggregate sample. Conclusions We did not find the evidence of moral hazard problem in Chinese banks.

Keywords: Bank; Liquidity creation; Non-performing loans; Moral hazard; China (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1186/s40589-016-0034-y

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