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Chinese banking failure: the case of Baoshang Bank and its implications

Kerry Liu (China Studies Center, University of Sydney, Sydney, Australia)

Journal of Financial Economic Policy

ISSN: 1757-6385

Article publication date: 24 September 2020

Issue publication date: 28 June 2021

339

Abstract

Purpose

On May 24, 2019, the People’s Bank of China (China’s central bank) announced that the Baoshang Bank had been taken over because of credit risk. The Baoshang Bank failure has caused concerns over the stability of the Chinese financial system and the Chinese economy. This study aims to examine the case of Baoshang Bank’s failure and its theoretical implications including the relation between ownership structure and bank performance, the monetary transmission during a banking crisis and the market response to Baoshang Bank failure. Then this study discusses policy implications.

Design/methodology/approach

This study adopts a two-stage least squared model to examine the relation between ownership structure and bank performance, a series of rolling regressions to examine the monetary transmission and event studies to examine the market response to Baoshang Bank failure.

Findings

This study finds that there is a nonlinear relation between ownership structure and bank performance, the interest pass-through has broken down after the Baoshang Bank failure and the Baoshang Bank failure and the gradual exit of implicit guarantee from the Chinese government are considered to be positive to the Chinese banking sector.

Originality/value

First, although previous studies on ownership structure and bank performance classified different types of larger shareholders and found that this nonlinear relation is insignificant, this study finds a significant relation by innovatively using a combined ownership. Second, further contributing to the studies on monetary transmission in banking crisis based on international data, this study based on Chinese data sets finds that the interest rate pass-through has broken down after the Baoshang Bank failure.

Keywords

Acknowledgements

The author would like to thank the editor Professor John Jahera and anonymous referees for valuable comments on an earlier version of this paper. All errors are the author’s sole responsibility.

Citation

Liu, K. (2021), "Chinese banking failure: the case of Baoshang Bank and its implications", Journal of Financial Economic Policy, Vol. 13 No. 4, pp. 424-441. https://doi.org/10.1108/JFEP-01-2020-0013

Publisher

:

Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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