The effect of ownership on bank prudential behavior—the case of China

1. The effect of ownership on bank prudential behavior—the case of China Chunxin Jia

2. Motivation China has a large banking sector,relatively less studied. At the end of 2004, the assets of depositary institutions in China totaled 31,598.98 billion RMB, of which 53.6% was held by the four state-owned banks and only 14.9% was held by the eleven joint-equity banks. Does ownership matters? Performance V.S. prudential behavior Former research results of ownership and performance are mixed. Joint-equity banks are quite similar to privatized state-owned banks.

3. Main findings • Joint-equity banks tend to be significantly more prudent than state-owned banks • Four state-owned banks in China have been carrying out reforms, and have become more prudent over the years as a result

7. Literature review SOEs lack of managerial incentives: Alchian (1965),Vining and Boardman (1992) Ownership and bank performance: Clarke et al.(2005), Altunbas and Evan (2001) Investor protection and risk taking: Yeung, Litov and John (2006) Prudential behavior of private banks: Strock, and Travlos (1990)，Gorton and Rosen (1995) Berger and Udell,(1994), Milne (2002), Shrieves and Dahl (2003)

8. ContributionsThe first paper specialized in connecting ownership and bank prudence. The first paper to study ownership and bank portfolio allocation based on china’s bank ground. This paper can help to understand the main reasons of bank portfolio allocation difference.

9. Data and methodology The firm level data sample period is from 1985 to 2004, totally 14 banks and 21 years, 214 observations. Quarterly macro data of state and national joint-equity commercial bank observations for the period from quater1, 1993 to quarter 4, 2004, totally 96 observations. Most data are hand collected

10. Hypothesis 1(static effect): joint-equity banks will be more prudent than state banks due to their better corporate governance. Hypothesis 2(dynamic effect): state banks are getting more and more prudent due to management reform. Bank prudence measures = α+β1 * Bank dummy+β2 * List dummy, +β3 * GDP growth+β4 * Interest rate measures, +β5 *Bank fund source measures+β6* Bank assets +β7*Regulatory measures, +β8 * State-owned bank* Time + Error term.

12. Firm level regression results In most of the regressions, the bank dummy is significant at the one-percent level and has the correct sign. List dummy seems to have little explanatory power, State-owned bank* time is significant in five of the six regressions. Are state banks trying to maximize broader social objectives? Sub sample 1994-2004

16. Macro data regression results Bank dummy is significant all the time at one percent level State bank*time is significant and at 1 percent level in two regressions. For the bank excess reserve regression, state bank*time is insignificant, I think this is driven by the change of China’s money market.

18. Conclusions • Joint-equity banks have better corporate governance, they tend to have higher excess reserve and deposit loan ratio, and lower loan asset ratio. This shows that they operate significantly more prudent than state banks. • State-owned banks have been carrying out fairly efficient reforms and are becoming more prudent as a result While many people have been criticizing the state banks to be just a growing NPL producer, empirical results seem to be in favor of a positive view.

19. Thank you!