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

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  • Muhammad Umar

    (Dongbei University of Finance & Economics)

  • Gang Sun

    (Dongbei University of Finance & Economics)

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.

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  • Muhammad Umar & Gang Sun, 2016. "Non-performing loans (NPLs), liquidity creation, and moral hazard: Case of Chinese banks," China Finance and Economic Review, Springer, vol. 4(1), pages 1-23, December.
    • Handle: RePEc:spr:chfecr:v:4:y:2016:i:1:d:10.1186_s40589-016-0034-y
    DOI: 10.1186/s40589-016-0034-y
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    3. Bhabani Shankar Nayak & Jia Xu, 2018. "Historical Trends and Transitions in Credit Risk Management of Chinese Commercial Banks," International Journal of Business Administration, International Journal of Business Administration, Sciedu Press, vol. 9(5), pages 96-104, September.
    4. Grover, Naina & Sinha, Pankaj, 2019. "Determinants, Persistence and value implications of liquidity creation: An evidence from Indian Banks," MPRA Paper 94280, University Library of Munich, Germany.
    5. Bai, Haifeng & Ba, Shusong & Huang, Wenli & Hu, Wentao, 2020. "Expected government support and bank risk-taking: Evidence from China," Finance Research Letters, Elsevier, vol. 36(C).

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    More about this item

    Keywords

    Bank; Liquidity creation; Non-performing loans; Moral hazard; China;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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