The Degree of Bank Risks in the Chinese Banking Industry

The Degree of Bank Risks in the Chinese Banking Industry
Approach
This section employs data from five banks to estimate the degree of bank risks in the Chinese banking industry. The risks studied include bank-specific risks, market risks, and macro-economic risks such as inflation and growth in national GDPs. The common types of bank-specific risks in the banking sector include credit risks, capital risks, liquidity risks, and insolvency risks. The present analysis utilizes accounting ratios to measure credit risks and other bank risks in the Chinese banking sector. For instance, the ratio of non-performing loans (NPL) to total loans provides an estimate of credit risks of banks, such that the higher the ratio, the higher the credit risk. Secondly, the ratio of liquid assets to total assets estimates the liquidity risk of a bank and the higher this ratio, the lower the liquidity risk. The third risk that accounting ratios estimate is the total regulatory capital ratio, where lower capital risk is associated with higher total regulatory capital ratio. While Z-scores and accounting ratios have traditionally been used in measuring the three types of risks: credit, liquidity, and capital risks, Tan (2018) note that they fail to reflect the potential banks’ stabilities. Instead, an alternative of using translog specification offers accurate and robust estimates of stability inefficiency of banks. This approach is used to determine the impact or degree of risks that competition and other market-specific risks may have on banks’ performance and profitability. However, as Tan (2018) notes, the China Banking Regulatory Commission (CBRC) has since 2003 reduced the degree of risks such as credit risks, non-performing loan ratios, and capital risks. Despite these observations, market and credit risks continue to impact on performance of banks as demonstrated in several studies (Tan et al, 2017). The present paper analyzes the degree of risks that credit risks, market risks, and other factors have on commercial banks in China using Z-scores in different periods between 2017 and 2020. In measuring market risks such as competition, the Boone indicator, a method proposed by Boone (2008) states that the competition improves the performance of efficient firms while weakening the inefficient firms. In general, the determinants of bank profitability, which are potential bank risks, are grouped into three categories, including bank-specific, industry-specific, and macro-economic variables. Bank-specific variables include credit risk, capital risk, liquidity risk, bank size, insolvency risks, bank diversification, and overhead cost. Industry-specific variables include the stock-market development, competition in the market, and the development of the banking sector in general. Macro-economic variables such as inflation and GDP are beyond a bank’s control and differ across different countries.
In studying the impact of bank risks, it is assumed that the values of the studied variables remain constant regardless of time differences. This stationarity, a property of time series, does not account for the variation of time as a factor affecting the value of a variable. This approach aids in the construction of time-varying z-score measur...