Politically Connected Non-State Banks and the Credit Smoothing Behavior: Evidence from China

Posted: 4 Jun 2018

See all articles by Wenlong Bian

Wenlong Bian

Sunkyunkwan University

Yang Ji

Xiamen University - School of Economics

Date Written: May 22, 2018

Abstract

Given that state-owned banks are found to play a credit smoothing role over the business cycle, this paper adds to the literature by examining the lending behavior of non-state banks from the perspective of political connections. Using the sample of 128 Chinese banks over the period 2007-2014, we find that the lending behavior of politically connected non-state banks is less procyclical than their non-connected counterparts. Further analyses regarding the driven forces rule out the lazy manager hypothesis and better funding source hypothesis, while support the political rent-seeking hypothesis since politically connected non-state banks are found to grant more loans in election years and experience a higher growth rate of the number of branches. In addition, this credit smoothing behavior causes the deterioration of the credit quality, but it is masked in special-mention loans instead of being reflected as higher non-performing loans, which may threaten the stability of the banking sector inconspicuously. The results suggest that regulators should scrutinize the political connections of banks more thoroughly and pay more attention to the supervision of the special-mention loans.

Keywords: political connected chairmen, non-state banks, lending behavior, credit smoothing

JEL Classification: E44, G21, H11

Suggested Citation

Bian, Wenlong and Ji, Yang, Politically Connected Non-State Banks and the Credit Smoothing Behavior: Evidence from China (May 22, 2018). Available at SSRN: https://ssrn.com/abstract=3183110

Wenlong Bian

Sunkyunkwan University ( email )

Sungkyunkwan University
Seoul, Seoul 30063
Korea, Republic of (South Korea)

Yang Ji (Contact Author)

Xiamen University - School of Economics ( email )

China

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