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The effect of excess lending on bank liquidity : Evidence from China

Author

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  • Chen, Ting-Hsuan
  • Chou, Hsiu-Hsia
  • Chang, Yuan
  • Fang, Hao

Abstract

This paper investigates the effect of excess lending on bank liquidity in China during the period 2006–2012. Previous studies have examined the determinants of bank liquidity. However, excess lending is neglected, especially the role of different lending channels. We consider a theoretical measure of liquidity, liquidity creation, and compare the results with an officially recommended measure suggested by the Basel III Committee. Excessive lending is captured in three dimensions, namely, relative lending, non-performing loan ratio, and diversification in lending channel. We find that the results of non-performing loan ratio support the trade-off hypothesis, whereas the results of lending channel diversification are consistent with our liquidity spiral hypothesis, especially for state-owned banks. Moreover, the interactions between capital and liquidity are negative for joint-stock commercial banks and state-owned banks rather than city commercial banks. Finally, the ownership structures significantly affect banks' liquidity preferences.

Suggested Citation

  • Chen, Ting-Hsuan & Chou, Hsiu-Hsia & Chang, Yuan & Fang, Hao, 2015. "The effect of excess lending on bank liquidity : Evidence from China," International Review of Economics & Finance, Elsevier, vol. 36(C), pages 54-68.
    • Handle: RePEc:eee:reveco:v:36:y:2015:i:c:p:54-68
    DOI: 10.1016/j.iref.2014.11.007
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    Cited by:

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    4. Van Dan Dang, 2020. "Bank funding and liquidity in an emerging market," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, vol. 13(3), pages 256-272.
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    6. Mohd Amin, Syajarul Imna & Mohd, Shamsher Mohamad Ramadili & Mohd. Rasid, Mohamed Eskandar Shah, 2017. "Does Cost Efficiency Affect Liquidity Risk in Banking? Evidence from Selected OIC Countries," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 51(2), pages 47-62.
    7. Gupta, Juhi & Kashiramka, Smita & Ly, Kim Cuong & Pham, Ha, 2023. "The interrelationship between bank capital and liquidity creation: A non-linear perspective from the Asia-Pacific region," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 793-820.
    8. Jo, Yonghwan & Kim, Jihee & Santos, Francisco, 2022. "The impact of liquidity risk in the Chinese banking system on the global commodity markets," Journal of Empirical Finance, Elsevier, vol. 66(C), pages 23-50.
    9. Chen, Ting-Hsuan & Lee, Chien-Chiang, 2020. "Spatial analysis of liquidity risk in China," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    10. Jiajia, Liu & Kun, Guo & Fangcheng, Tang & Yahan, Wang & Shouyang, Wang, 2023. "The effect of the disposal of non-performing loans on interbank liquidity risk in China: A cash flow network-based analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 105-119.
    11. Ardekani, Aref Mahdavi & Distinguin, Isabelle & Tarazi, Amine, 2020. "Do banks change their liquidity ratios based on network characteristics?," European Journal of Operational Research, Elsevier, vol. 285(2), pages 789-803.

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    More about this item

    Keywords

    Bank Liquidity; Excess lending; China;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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