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Abstract As local financial institutions with the characteristics of “localization,” city commercial banks (CCBs) have indeed played an important role in the allocation of regional financial resources since their establishment in China. Previous studies suggest that CCBs would perform better than large banks, such as state-owned banks and joint-share banks, since CCBs are smaller, flexible and have local information advantages. However, since their establishment, CCBs have been facing the problems of high default rates and increasing non-performing assets, which even triggered several regional financial risk crises. In that case, questions arise: whether the entry of CCBs optimized the allocation of financial resources or exacerbated the mismatch of financial resources? What is the mechanism behind its influence?
To answer the above questions, this study introduces the first deregulation on city commercial bank entry and exploit a staggered difference-in-difference regression model. We first manually collect the list of cities that established CCBs during 1998 and 2007. Among them, 55 cities established a CCB (experimental group), and 146 cities did not establish a CCB (control group).
Referring to Toni and White, we then estimate the extent of financial resource mismatch on city-industrial level over the sample period using the China Industrial Enterprises Database for 1999-2007. The descriptive statistics show that after subgrouping, the mean values of the control group and experimental group are 0.746 and 0.707, respectively, indicating there is a significant difference in the efficiency of financial resource allocation between experimental and control groups.
The benchmark regression results show that the entry of CCBs significantly exacerbated the extent of financial resource mismatch. The results still hold after a variety of robustness tests. In the heterogeneity analysis, we find that the negative impact is mainly concentrated in the central and western regions where the development of the financial market is more backward in China, as well as in capital-dependent industries. Further analysis shows that the entry of CCBs increased access to credit for local firms, but also caused more credit resources flow to lower efficient state-owned firms. After taking local government intervention into account, we find that as the degree of local government intervention increased, the negative impact strengthened, and also made more credit resources allocate to firms affiliated with the local government, leading to inefficient allocation.
This study makes contributions to the existing literature that focusing on bank deregulation. Contrary to the majority of studies that the entry of banks leads to increased regional competition and improves the efficiency of credit resource allocation, this study argues that local bank markets that receive more government intervention can cause an inefficient allocation of financial resources. Additionally, this study also provides an important theoretical basis and practical experience for promoting the development of local financial institutions and enhancing the efficiency of regional financial resource allocation in developing countries like China.
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Published: 10 December 2023
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