An analysis of loan loss provisioning behaviour in the China’s banking sectorTools MA, XIAO LIN (2016) An analysis of loan loss provisioning behaviour in the China’s banking sector. [Dissertation (University of Nottingham only)]
AbstractThis paper focuses on the loan loss provisioning behaviour of the Chinese banks after the global financial crisis (GFC) from 2009 to 2014. Following Bryce et al. (2015), I have tested four hypotheses which are Business Cycle Hypothesis, Income Smoothing Hypothesis, Capital Management Hypothesis and X-efficiency Hypothesis. Since the first three hypotheses are interacting with each other, the model in this paper is estimating these three hypotheses jointly. The results of these three hypotheses reflect the influences of macroprudential policies regarding countercyclical tools and discretionary behaviour regarding managerial objectives. The fourth hypothesis is testing whether X-efficiency (or X-inefficiency arising from bad management) has an impact on banks’ loan loss provisioning behaviour, where a risk control variable (Equity) is included whilst the time-varying X-efficiency is estimated. The empirical results of Business Cycle Hypothesis indicate there is no counter/pro-cyclical provisioning in China’s banking sector. However, it is suspected that countercyclical tools have been effective and have greatly mitigated or even have offset the pro-cyclical provisioning behaviour caused by IAS 39. The evidence of counter-cyclical income smoothing is found. Banks in China are very-well capitalised on average and have built up two capital buffers since 1 Jan 2012 under the Chinese version of Basel III. A positive significant relationship between common equity and loan loss provisions (LLPs) suggests that capital variation is more associated with excess LLPs than retained earnings. The empirical result of X-inefficiency provides evidence of bad management theory which states cost-inefficient managers are also unskilful at loan portfolio management. Moreover, some other bank specific variables are incorporated in the model. The positive significant relationship with Net off Balance Sheet Trading Income confirms the importance of sizable shadow lending activities in China emerging since 2010, which has recently driven up default risks albeit hidden off balance sheet. Thus, regulators in China should pay more attention to systemic risk arising from the crosssectional (contagion) dimension and a firewall between traditional banking sector and shadow banking sector is suggested to be set up so that spillover risks could then be minimised. As for systemic risk which arises from the time (procyclicality) dimension, it seems it is under control due to the effects of macroprudential policies and management discretionary actions on LLPs. Individual banks are suggested to put more efforts and allocate more resources on bank manager recruitment and internal training programmes in order to ensure managers are capable of taking charge of daily operations and loan portfolio management. A salary-related stimulation system linked to banks' internal credit control procedures is also recommended so as to reduce managers’ risk-taking behaviour.
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