The Vanishing Interest Income of Chinese Banks

25 Pages Posted: 22 Jan 2021

Date Written: February 5, 2020

Abstract

Chinese banks likely have more non-performing loans (NPLs) than officially reported. As hidden NPLs earn no interest income, loan quality problems may erode the gross interest income of banks. Using stochastic frontier analysis, we estimate the interest income of a hypothetical profit-maximising Chinese bank with no credit quality problems. Taking the deviation of actual interest income from the calculated efficient income, we then attempt to reveal the amount of hidden NPLs in Chinese banks. Our results uncover a substantial weakening in the quality of Chinese bank loan portfolios in 2016. Big banks are found to have the largest reservoirs of hidden NPLs. Dependence on interbank funding also seems to be a determinant in the size of hidden NPL portfolios.

JEL Classification: G21, O53

Suggested Citation

Kauko, Karlo, The Vanishing Interest Income of Chinese Banks (February 5, 2020). BOFIT Discussion Paper No. 2/2020, Available at SSRN: https://ssrn.com/abstract=3764757

Karlo Kauko (Contact Author)

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

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