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


  • Xiaoqiang Cheng
  • Patrick Van Cayseele


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

    1. Berger, Allen N. & Hasan, Iftekhar & Zhou, Mingming, 2009. "Bank ownership and efficiency in China: What will happen in the world's largest nation?," Journal of Banking & Finance, Elsevier, vol. 33(1), pages 113-130, January.
    2. Ramkishen S. Rajan & Sasidaran Gopalan, 2009. "Sales to Foreign Banks in Emerging Asia," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 7(3), pages 29-33, October.
    3. Frédérique Bracoud, 2002. "Sequential Models of Bertrand Competition for Deposits and Loans under Asymmetric Information," Keele Economics Research Papers KERP 2002/15, Centre for Economic Research, Keele University.
    4. Sapienza, Paola, 2004. "The effects of government ownership on bank lending," Journal of Financial Economics, Elsevier, vol. 72(2), pages 357-384, May.
    5. Dean Baker & Travis McArthur, 2009. "The Value of the “Too Big to Fail” Big Bank Subsidy," CEPR Reports and Issue Briefs 2009-36, Center for Economic and Policy Research (CEPR).
    6. Robert B. Avery & Raphael W. Bostic & Glenn B. Canner, 2000. "The performance and profitability of CRA-related lending," Economic Commentary, Federal Reserve Bank of Cleveland, issue Nov.
    7. Chen, Xiaogang & Skully, Michael & Brown, Kym, 2005. "Banking efficiency in China: Application of DEA to pre- and post-deregulation eras: 1993-2000," China Economic Review, Elsevier, vol. 16(3), pages 229-245.
    8. Iraj Hashi & Darko Hajdukovic & Erjon Luci, 2005. "Can Government Policy Influence Industrial Competitiveness: Evidence from Poland and the Czech Republic," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 8(2), pages 1-22, November.
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    Cited by:

    1. 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.
    2. 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.

    More about this item


    State Aid; banking industry; Panzar-Rosse model; Moral Hazard; To Big To Fail;

    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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