Risk, Competition, and Efficiency in Chinese Banking: The Role of Interest Rate Liberalization

Abstract

The current study contributes to the banking literature by being the first research investigating the competitive conditions of different banking markets using a sample of Chinese commercial banks over the period 2003-2013. It further contributes to banking literature by testing the inter-relationships between competition, different types of efficiencies and different types of risk under a three-stage least square estimator. The results show that competition leads to higher capital, liquidity and credit risk, while higher revenue efficiency leads to lower risk. It is found that efficiency is significantly and negatively related to competition. Finally, the findings show that competition-inefficiency hypothesis holds.