Real estate investments and financial stability: evidence from regional commercial banks in China

Dayong Zhang, Jing Cai, Jia Liu and Ali Kutan

The European Journal of Finance, 2018, vol. 24, issue 16, 1388-1408

Abstract: The 2008 US subprime mortgage crisis demonstrated how developments in real estate markets can cause instability in the banking sector and raised concerns in many emerging economies with significant real estate development and a rapidly growing commercial banking sector, particularly in China. There is clear evidence that commercial banks in China, especially regional commercial banks, have lent significantly to the real estate sector. The recent slowdown in the housing market in China and the increase in nonperforming loans (NPLs) in China's commercial banking sector motivated us to investigate the connection between real estate markets and banking stability. This paper proposes three testable hypotheses linking the growth of investment in real estate and the stability of regional commercial banks in China, measured by NPLs. Our empirical results reveal a close connection between the growth of investment in real estate and the NPLs among regional commercial banks, and its sensitivity to real estate market cycles. When real estate market activity declines, our results suggest, regional commercial banks can find themselves in trouble if they have significant exposure to one type of (real estate) asset. In addition, we find that regional bank competition plays a critical role in defining the relationship between bank stability and real estate investment activity.

Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (20)

Downloads: (external link)
http://hdl.handle.net/10.1080/1351847X.2016.1154083 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:24:y:2018:i:16:p:1388-1408

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/REJF20

DOI: 10.1080/1351847X.2016.1154083

Access Statistics for this article

The European Journal of Finance is currently edited by Chris Adcock

More articles in The European Journal of Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().