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The value of relationship banking: Evidence from interbank liquidity crunch in China

by Yiyi Bai, Qing He & Liping Lu

Riikka Nuutilainen, BOFIT, Bank of Finland

Conference on China’s Financial IntermediationOctober 8, 2015 , City University of Hong Kong

Suomen Pankki – Finlands Bank – Bank of Finland 2

June 2013 liquidity crunch in China

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4

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8

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12

14

2010 2011 2012 2013 2014

Shibor 7D Shibor overnight

Deposit ref. rate 1Y Credit ref. rate 1Y

%

Source: Macrobond.

1500

2000

2500

3000

3500

2010 2011 2012 2013 2014

Shanghai Composite Index

Shanghai Composite Index

Source: Macrobond.

Suomen Pankki – Finlands Bank – Bank of Finland 3

Data

Event study of how firms lending relationship with banks affect their stock market reactions during the liquidity crunch

All firms traded in Shanghai and Shenzhen stock markets (with sufficient data available)– 2 313 non-financial firms, 42 financial firms– 14 % of the firms stated owned

For 1 021 of the firms loan information available– 87% borrow the largest proportion of long-term loans from a bank

(total of 87 different banks)– Of which; 48% of firms borrow from the Big 4 banks,

9% of firms from 29 local banks 43% of firms from 54 regional banks

– 13% borrow from a non-bank institution

Suomen Pankki – Finlands Bank – Bank of Finland 4

Main findings

Firm-bank relationships, in general– Smaller drop in returns if largest lender is a bank– And even smaller if largest lender is a Big 4 bank (though not

always significant)– Bigger drop in returns if lender is a local bank, and still in almost

all cases the drop larger than when the lender is not a bank at all Firms lending from the small banks are the worst off

Firm-bank stock response relations– Firms returns correlate positively with their largest lender bank’s

returns in the case of Big 4 and local banks

Firm return-bank market liquidity relations– Higher interbank market liquidity of the largest lender positively

correlated with firms’ returns in the case of Big 4 banks

Suomen Pankki – Finlands Bank – Bank of Finland 5

Few comments..

Data covers all listed companies in China Many smaller companies have low market liquidity– Firm control variables: size (total assets), leverage, EBIT,

Tobin’s q & state-owned dummy– Finding: state-owned companies perform the worst

Big state banks in China generally net suppliers of funds in the interbank market and the smaller banks net borrowers – Finding that the Big 4 as the largest lender affect firms’ returns

positively due to their liquidity in the interbank market. – When taking the interbank liquidity into account, the coefficient for

Big 4 negative (even within Big 4 higher liquidity positive) But interbank liquidity in general has negative effects on returns

(?)

Suomen Pankki – Finlands Bank – Bank of Finland 6

Few comments…

Positive correlation between firm and bank returns only for Big 4 and local banks, but negative for others (?)

For local banks– Positive correlation between firm and bank returns may depend

on the region they are located in– Firms/banks in some province less affected by the liquidity

squeeze?