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| Market Method, Government Method, and Liquidity Risk Resolution of City Commercial Banks: An Analytical Framework for a Three-Stage Game |
| LIU Xiangming, DENG Xiangou, ZANG Bo
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The School of Finance, Renmin University of China;
Industrial and Commercial Bank of China |
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Abstract In recent years, the asset scale of urban commercial banks has grown rapidly, and the liquidity risk of individual urban commercial banks has attracted market attention. Therefore, it is important to standardize the business environment and reduce the liquidity risk of urban commercial banks by analyzing how the government and market can reduce this risk and exploring the key factors that lead to increased liquidity risk.
In response to liquidity risk, urban commercial banks can choose the market model, and ask for help from large banks, borrow money from another bank, sell and buy back, etc. Alternatively, they can choose the government model and solve their short-term difficulties by increasing the government shareholding ratio. It is worth noting that the government shareholding ratio not only includes the direct investment of financial funds, but also the introduction of government support by becoming a state-owned enterprise: examples include China Construction Bank taking over Baoshang Bank or the Industrial and Commercial Bank of China taking over Jinzhou Bank. It can be seen that in this case, China's state-owned big banks embody both the market model and the government model. In the normal course of operations, large commercial banks carry out inter-bank business with urban commercial banks according to the market model. However, in extreme cases, some large commercial banks need to rescue urban commercial banks according to the government model.
Because liquidity risk is a complex concept, there are many indicators for measuring it. Foreign scholars have included inter-bank liability in liquidity risk analysis. The China Banking and Insurance Regulatory Commission has also used the inter-bank liability ratio as an indicator for liquidity risk monitoring. Although in theory, there is no direct relationship between inter-bank liabilities and liquidity risk, due to the phenomenon of inter-bank dependence, the inter-bank payable bonds of some city commercial banks account for more than one fifth of their total liabilities. In addition, city commercial banks with low market ratings must often pay a higher risk premium to obtain inter-bank liabilities, which further increases their subsequent liquidity management pressure. Thus, from the perspective of inter-bank liability, we establish a tripartite governance framework based on the liquidity risk resolution of large banks, urban commercial banks, and local governments to clarify the liquidity risk game mechanism of large banks and urban commercial banks and to obtain the balanced decisions of all parties according to their behavioral preferences. The theoretical results show that the higher the government shareholding ratio, the more likely it is that the city commercial banks can obtain inter-bank liabilities; the stronger the demand for social funds, the higher the opportunity cost of large-scale inter-bank lending, and the less likely it is that the city commercial banks will obtain inter-bank liabilities.
Based on our model, we take a further step, using data from 80 city commercial banks to confirm our theoretical result and hypotheses. Our empirical analysis uses a two-step system GMM, and the regression result shows that the higher the government shareholding ratio, the more likely it is to lead to the increase of inter-bank liabilities of urban commercial banks; this impact is also stronger for high inter-bank debt banks. This may be related to the scale and management strategy of city commercial banks. City commercial banks with low debt levels are generally large listed city commercial banks. Their government shareholding ratios are usually low, their credit ratings are high, and an increase in government shareholding has little impact on their inter-bank debt ratio. City commercial banks with high debt levels are often small-scale city commercial banks whose business scope is concentrated locally. Increasing the government shareholding ratio helps these city commercial banks to improve their credit rating, transmits a signal of increased government credit, and raises the possibility of obtaining inter-bank liability.
The regression results also show that if monetary policy intervention is excluded, the external macroeconomic cycle will also affect the game equilibrium between city commercial banks and large banks. The higher the social financing growth rate, the lower the probability that the city commercial banks will obtain inter-bank liability, and this has a greater impact on banks with high inter-bank debt. Because city commercial banks with high inter-bank debt are usually small in scale and less able to mitigate debt, they are more vulnerable to macroeconomic shocks.
Based on its theoretical and empirical analysis, this paper puts forward policy suggestions on the limits of government behavior, the elimination of an implicit guarantee, the establishment of an internal pricing mechanism for urban commercial bank funds, and the improvement of the supervision system for urban commercial banks. The first is to maintain the neutral principle of competition and establish a modern corporate governance mechanism for urban commercial banks. The second is to build liquidity support and mutual aid mechanisms by taking advantage of weak cycle window periods. The third is to improve the timeliness of risk resolution and strengthen the systematic construction of liquidity risk management.
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Received: 24 September 2019
Published: 30 June 2020
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