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State Aid and Competition in Banking: the Case of China in the Late Nineties

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  • Xiaoqiang Cheng
  • Patrick Van Cayseele

Abstract

Many contributions to the literature on competition in banking use the Panzar and Rosse test (1987). This test encompasses a variety of market outcomes assuming firms maximize profits. However, when applied to the banking industry, this assumption may not be always valid as banks sometimes may carry social objectives or aim to be systemic players so as to be "too big to fail". This then motivates different objective functions, departing from profit maximization. We present a reduced form model where banks can pursue other goals than profit maximization. This allows us to test for behavioral changes of banks over time. Our model provides a framework to evaluate whether moral hazard issues may plague banks receiving state aid, which concerns greatly the recent debate on government intervention in financial markets during the global financial crisis in 2008. To test the impact of state aid, we examine a natural experiment in the banking sector in China in the 1990s. We cannot reject that the possibility of receiving state aid triggers moral hazard prone conduct.

Suggested Citation

  • Xiaoqiang Cheng & Patrick Van Cayseele, 2009. "State Aid and Competition in Banking: the Case of China in the Late Nineties," LICOS Discussion Papers 25009, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    • Handle: RePEc:lic:licosd:25009
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    References listed on IDEAS

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    Cited by:

    1. Hasan, Iftekhar & Marinc, Matej, 2013. "Should competition policy in banking be amended during crises? : Lessons from the EU," Research Discussion Papers 7/2013, Bank of Finland.
    2. Marinč, Matej & Rant, Vasja, 2014. "A cross-country analysis of bank bankruptcy regimes," Journal of Financial Stability, Elsevier, vol. 13(C), pages 134-150.
    3. Iftekhar Hasan & Matej Marinč, 2016. "Should competition policy in banking be amended during crises? Lessons from the EU," European Journal of Law and Economics, Springer, vol. 42(2), pages 295-324, October.
    4. Tedeschi, Gabriele & Recchioni, Maria Cristina & Berardi, Simone, 2019. "An approach to identifying micro behavior: How banks’ strategies influence financial cycles," Journal of Economic Behavior & Organization, Elsevier, vol. 162(C), pages 329-346.
    5. Matej Marinč & Mojmir Mrak & Vasja Rant, 2014. "Dimensions of Bank Capital Regulation: A Cross-Country Analysis," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(4), pages 415-439, September.

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    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • 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
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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