Use this URL to cite or link to this record in EThOS: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.622089
Title: Market discipline in emerging financial markets : evidence from the chinese banking system
Author: Wu, Yuliang
Awarding Body: University of Manchester
Current Institution: University of Manchester
Date of Award: 2007
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Abstract:
Since the Basel Committee on Banking Supervision (200lc) includes market discipline as the third "pillar" of the New Basel Accord, the topic of market discipline acting as a market mechanism to control bank risk management has been the centre of academic and policy debate. Although research in developed financial markets finds empirical evidence supporting the existence of market discipline (Park and Peristiani, 1998; Sironi, 2003; Maechler and McDill, 2006), to date there exists little research undertaken in the context of emerging markets. This thesis takes the Chinese banking sector as an institutional setting for empirical analysis. We use the BankScope Database to acquire accounting information from a comprehensive sample of 7S Chinese financial institutions over the period from 1994-2003. This data set makes it possible to systemically examine depositor behaviour associated to bank risk-taking activities and the effectiveness of market discipline across banks with different ownership structures. First, we investigate whether required returns on deposits are sensitive to bank risk profiles (the price approach). We find that (i) depositor required returns from stateowned banks are less influenced by their risk profiles; (ii) depositors exert a significant disciplining effect on non state-owned banks; and (iii) the disciplining effect is relatively weak in the whole banking sector, evidenced by the fact that only the Equity variable among three risk variables exhibits a negative and significant sign with respect to the interest rate. Second, we incorporate the quantity approach by which depositors withdraw their deposits from risky banks. We find that (i) banks with a higher level of capital can attract more time deposits; (ii) the time deposit growth rate in state-owned banks appears to be neither driven by bank fundamentals nor the risk variables, implying that market discipline is fairly weak for this particular bank group; and (iii) the three risk variables and bank fundamentals exert a significant impact on time deposit growth in non state-owned banks, suggesting that they are subject to market discipline to more extent. Third, we employ the generalized-method-of-moments (GMM) estimators developed by Arellano and Bond (1991) to examine the dynamic relationship between the price and quantity effect in the context of market discipline. We find that Chinese banks cannot simply increase their deposit base by raising their interest rates. This result is generally consistent with the market discipline hypothesis. Finally, we address the issue of the effectiveness of market discipline in the Chinese banking sector. We find that (i) a higher share of interbank deposits (uninsured funding) in a bank's portfolio leads the bank to operate with a larger capital buffer; (ii) banks disclosing more information also choose to limit their probability of default by holding a larger capital buffer; and (iii) a higher degree of government support may engender moral hazard, reducing the sensitivity of changes in the bank capital buffer to levels of risk, ceteris paribus. These results support the proposition that enhancing market discipline through improved information disclosure, and by exposing banks to more uninsured liabilities appears to be beneficial for risk management, in that both mechanisms seem to generate incentives for banks to augment their capital.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID: uk.bl.ethos.622089  DOI: Not available
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