The effects of bank ownership on lending behaviour for different types of loans throughout the business cycle

• Date: 01 August 2019
• Author: Bingjie Shen,Haifeng Huang,Tao Wang
• Published date: 01 August 2019
• DOI: http://doi.org/10.1111/infi.12332

DOI: 10.1111/infi.12332

ORIGINAL ARTICLE

The effects of bank ownership on lending

behaviour for different types of loans throughout

the business cycle

Haifeng Huang

1

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Bingjie Shen

1

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Tao Wang

2

1

HSBC Business School, Peking

University, Shenzhen, China

2

Department of Economics, University of

California, Riverside, California

Correspondence

Tao Wang, Department of Economics,

University of California Riverside, 900

University Avenue, Riverside, CA 92521,

USA.

Email: twang115@ucr.edu

Abstract

This paper examines the correlation between banks'

ownership structure and lending behaviour in China using

micro-level data on China's banks during the 2003–2015

period to identify possible different patterns in bank lending

supply responses to changes in the economic environment,

with a focus on understanding whether bank lending

patterns follow procyclical or countercyclical allocation

rules. We analyse how different types of loans correlate with

bank ownership and find that state-owned banks and banks

with relatively higher levels of government ownership

follow more countercyclical lending allocation rules, which

indicates that China's government uses the financial sector

as an instrument to mitigate procyclicality in lending

behaviour. We further find that the loan allocation patterns

vary significantly for different types of loans in China. In

particular, individual consumer loans and corporate loans

exhibit clear countercyclical patterns—particularly among

state-owned banks—while residential mortgages show

much smoother patterns over time and seem to be less

affected by the business cycle.

1

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INTRODUCTION

The US subprime mortgage crisis caused serious damage to the world's major economies beginning in

2007. Many scholars (Bertay, Demirgüç-Kunt, & Huizinga, 2012; Brissimis & Delis, 2010) who have

examined the cyclical characteristics of bank lending behaviour believe that the procyclicality of bank

International Finance. 2018;1–20. wileyonlinelibrary.com/journal/infi © 2018 John Wiley & Sons Ltd

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International Finance. 2019;22:201–220. wileyonlinelibrary.com/journal/infi © 2018 John Wiley & Sons Ltd

lending was the main cause of the spread of the crisis.

1

Although La Porta, Lopez-de-Silanes, and

Shleifer (2002) have shown that state-owned banks are associated with low efficiency and a low level

of profitability and generally tend to perform badly by misallocating resources, leading to low

economic growth (Bertay et al., 2012), relatively little is known about the lending allocation rules of

banks in reaction to the business cycle. Developing countries such as Brazil, China, and India, where

state-owned banks are systemically important and account for the vast majority of banks, recovered

quickly from the crisis, which has generated scholarly interest in the possibility that state ownership

can mitigate the procyclicality of bank lending behaviour and help to smooth the economy. Based on

these findings, in this paper we examine the correlation between bank ownership structure and lending

behaviour in China to identify possible different patterns in bank lending supply responses to changes

in the economic environment, with a focus on understanding whether bank lending patterns follow

procyclical or countercyclical allocation rules.

For historical reasons, China's financial system is mostly bank-based, where banks are in the

dominant position in providing liquidity, which means that there is a close relationship between bank

loans and the macroeconomy (Huang, Wang, & Zhan, 2018). In the late 1970s, China commenced

market-oriented banking reforms through measures such as recapitalizing the banking system,

privatizing state-owned banks, and upgrading its regulatory regime (Molyneux, Liu, & Jiang, 2014).

By attracting foreign minority ownership and increasing the public float, the ownership of China's

banking industry has diversified rapidly (Molyneux et al., 2014), leading to substantial changes in

banks' ownership structure and resulting in a mixture of state banks, domestic nonstate banks and

foreign institutions (Figure 1).

2

However, China's financial market is still relatively underdeveloped

and is ill-equipped to efficiently supply financing to enterprises (Xiong, 2013), as bank lending

accounted for close to 80% of the total social financing from 2000 to 2011 (Figures 2 and 3). Therefore,

it is interesting to examine whether the different ownership structures of banks have different effects on

their lending patterns, and analysing the cyclical behaviour of bank lending can be helpful for

authorities to develop more accurate regulatory tools to maintain the stability of China's financial

system.

There has been increased interest in the relationship between banks' ownership structure

and lending behaviour over the past few decades. Meanwhile, the relationship between

FIGURE 1 The total bank assets by ownership type. The data are from Tang (2015). According to Tang (2015),

state ownership is dominant in China's banking industry, domestic ownership of bank assets is growing steadily

each year, and foreign bank assets are low compared to China's entire banking industry

2

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HUANG ET AL.2

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HUANG ET AL.

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23.1 25.2 29.52 35.5 42.7 52.36 60.3 63.24

000.41

0.5

0.61

0.77

1.8 2.04

1.8 2.8

4.51

6.5

8.54

12.32

17.1

24.48

5.1 7

6.56

8

9.15

10.78

10.8

12.24

0

20

40

60

80

100

120

2005 2006 2007 2008 2009 2010 2011 2012

Total Bank Assets (Trillion CNY)

Year

State Foreign Domesc Joint