The profitability of Chinese banks

Impacts of risk, competition and efficiency

Yong Tan, Christos Floros, John Anchor

Research output: Contribution to journalArticle

17 Citations (Scopus)

Abstract

Purpose:This study aims to test the impacts of risk-taking behaviour, competition and cost efficiency on bank profitability in China.
Design/methodology/approach:A two-step generalized method of moments system estimator is used to examine the impacts of risk, competition and cost efficiency on profitability of a sample of Chinese commercial banks over the period 2003-2013.
Findings:The paper finds that credit risk, liquidity risk, capital risk, security risk and insolvency risk significantly influence the profitability of Chinese commercial banks. To be more specific, credit risk is significantly and negatively related to bank profitability; liquidity risk is significantly and positively related to return on assets (ROA) and net interest margin (NIM) but negatively related to return on equity (ROE); capital risk has a significant and negative impact on ROA and NIM but a positive impact on ROE; there is a significant and negative impact of security risk on bank profitability (ROA and NIM). It is found that Chinese commercial banks with higher levels of insolvency risk have higher profitability (ROA and ROE). Finally, higher competition leads to lower profitability in the Chinese banking industry, and Chinese commercial banks with higher levels of cost efficiency have lower ROA. In other words, the structure–conduct–performance paradigm rather than the efficient–structure paradigm holds in the Chinese banking industry.
Originality/value:This is the first paper to investigate the impact of different types of risk, including credit risk, liquidity risk, capital risk, security risk and insolvency risk, on bank profitability. This is the first study which uses more accurate measurements of efficiency and competition compared to previous Chinese banking profitability literature and which tests their impact on bank profitability. The findings not only provide a general picture on the risk, efficiency and competition conditions in the Chinese banking industry, but also give valuable information to the Chinese Government and to the banking regulatory authorities to make relevant policies.
Original languageEnglish
Pages (from-to)86-105
Number of pages20
JournalReview of Accounting and Finance
Volume16
Issue number1
DOIs
Publication statusPublished - 1 Jan 2017

Fingerprint

Profitability
Bank profitability
Return on assets
Commercial banks
Liquidity risk
Interest margin
Return on equity
Insolvency risk
Credit risk
Banking industry
Risk capital
Paradigm
Banking
Authority
Design methodology
Generalized method of moments
China
Estimator
Risk-taking behavior
Government

Cite this

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The profitability of Chinese banks : Impacts of risk, competition and efficiency. / Tan, Yong; Floros, Christos; Anchor, John.

In: Review of Accounting and Finance, Vol. 16, No. 1, 01.01.2017, p. 86-105.

Research output: Contribution to journalArticle

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