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The Vanishing Interest Income of Chinese Banks

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  • Karlo Kauko

    (Bank of Finland, BOFIT PO Box 160, 00101 Helsinki Finland)

Abstract

Chinese banks likely have more nonperforming loans (NPLs) than officially reported. Banks NPLs often deviate from Benford's law. As hidden NPLs earn no interest income, loan quality problems may erode the gross interest income of banks. Using stochastic frontier analysis, we estimate the interest income of a hypothetical profit-maximizing Chinese bank with no credit quality problems. Taking the deviation of actual interest income from the calculated efficient income, we then attempt to reveal the amount of hidden NPLs in Chinese banks. Our results uncover a substantial weakening in the quality of Chinese bank loan portfolios in 2016.

Suggested Citation

  • Karlo Kauko, 2021. "The Vanishing Interest Income of Chinese Banks," Asian Economic Papers, MIT Press, vol. 20(3), pages 94-113, Fall.
    • Handle: RePEc:tpr:asiaec:v:20:y:2021:i:3:p:94-113
    DOI: 10.1162/asep_a_00837
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    1. Yuan, Mengyi & Zhang, Lin & Lian, Yonghui, 2022. "Economic policy uncertainty and stock price crash risk of commercial banks: Evidence from China," Economic Analysis and Policy, Elsevier, vol. 74(C), pages 587-605.

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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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