Research On Local Government Control And Banks Behaviour From The Perspective Of Ultimate Control Right

Existing research shows that government ownership of banks is prevalent in countries around the world, which brings complicated effects on the commercial banks’behavior, financial industry development and economic growth. However, there is too much controversy over the research on government ownership and control right of banks to meet the need of guidance to the reality. Government control over the Chinese banking industry has played an important role in the development of China’s financial industry and the sustained rapid economic growth, but it also brought a series of problems. In this thesis, the author sets80-95China’s city commercial banks as the research samples, which are range from2007to2011, with the perspective of the ultimate control right, to examine the relationship between the local government control and city commercial banks’behavior after Shareholding System Reform, and finally provide evidence to prove the effect of government control on banks.Firstly, it is the literature review. After evaluating on the existing research, the author educes a breakthrough and innovation that will be made in this thesis. Research on this part is mainly on the theoretical study on government ownership of banks. By systematically analyzing the theoretical literatures abroad, the author sums up the development route of government ownership of banks from’general equilibrium theory’to’contract theory’. Then, started from three themes, which are’the presence and evolution of government ownership of banks’,’micro effect of government ownership of banks’and’macro effect of government ownership of banks’, the author reviews the typical empirical research abroad. Then, literature of Chinese city commercial banks is reviewed as well. Finally, the research direction of this thesis trying to go is educed.Secondly, the author introduces and analyzes the institutional background and the realization form of the government control right on city commercial banks, mainly in three aspects. First, the institutional background that how did city banks’ government control generate is introduced. Since1978, the reform of fiscal and taxation system have made the local government become relatively independent, which motivated and enabled them to intervene and control city commercial banks. Moreover, the reform of the financial system and the development of city commercial banks provide local governments more opportunities to control them. Motivation of the local government’s control varied in different period of the development of city commercial banks, which made the control method experienced many changes from improper intervention to credit injection to shareholder governance. Then a new analysis framework is set up for ownership structure of China’s city commercial bank by follow La Porta et al.(1999)’s methodology of keeping track of chain of command to identify the ultimate shareholders. Four conclusions are drawn:(1) China’s city commercial banks have concentrated ownership structure.79percent of city commercial banks have ultimate shareholders and the rest (21percent) are characterized with highly dispersed equity. Control rights owned by ultimate shareholders reach39.23percent on average, which is below the nation level of the big commercial banks, but is higher than that in most of the countries in Southeast Asia. However, their cash flow rights and voting rights are almost the same.(2)Local government is the main controlling shareholder. The major ultimate controlling shareholder in city commercial banks is the government, rather than non-government control which just representing5%.Therefore, the capital structure of city commercial bank is still government-dominant so far. In a word, the main controlling shareholder is local government, not central government.(3)Local government manages the bank mainly by means of fiscal bureau and assets management company, but means of indirect management have been a mainstream. Ownership structure is stable.(4) The governance mechanism of the city commercial banks appears to be the ultimate controlling shareholder-dominant mode. It breaks the balance of governance structure, because under this model ultimate controlling shareholders control board of directors and managers.Thirdly, from the view of institutional environment and risk status, the impact on the local government’s control over city commercial banks is explored. Evidence shows that institutional environment and non-performing loan ratio do have essential impacts on the local government’s control over city commercial banks.In a city commercial bank which is controlled by the local government, the better the institutional environment is, the more likely the bank is controlled by junior government, accompanying with a lower government shareholding proportion. In that case, foreign investment is more likely to be introduced in the city commercial banks. Government control mode is irrelevant to the institutional environment. The higher the banks’non-performing ratio is, the bigger proportion of government shareholding, the lower local non-performing ratio, and the bigger possibility of introducing foreign investment will be. Moreover, the relationship between subsidiary indicators of institutional environment and local government control is analyzed, and result shows region’s economic base and local government control is irrelevant, which also proves that the local governments are willing to hold city commercial banks’equity. The research proved that when a city commercial bank was in bad institutional environment and undergoing high risk, as an alternative mechanism, government control ensured the operation of a bank and foreign strategic investors pay more attention to institutional environment of operating area of the city commercial banks rather than investing in high-risk banks.Fourthly, using z-score, sharp index and non-performing loan ratio as metric variables of banks’risk taking level, with the view of ultimate shareholders, the author systematically investigates the relationship between local government control and banks’risk taking, and how do the capital regulation and foreign capital entry affect it. The empirical results show that the local government control reduces the city commercial banks’risk taking level effectively, and the city commercial banks which are with higher leverage ratio and higher cost to income ratio can take more risk. The method of local government control hardly has any effect on the risk taking level of banks. However, levels of the local government bring effects on city commercial banks’risk taking level, that is to say the risk taking level of a city commercial bank is lower if it is controlled by provincial government rather than municipal government. Moreover, the improvement to the concentration of the local government ownership enhances the commercial banks’risk taking level. Capital regulation effectively reduce the city commercial banks’risk taking level, and capital regulation and local government control do not have substitution effect of corporate governance. Foreign strategic investors’entry enhances the city commercial banks’risk taking level, and the proportion of foreign investor’s shares have little influence on city commercial banks’risk taking level. Foreign capital’s entry and local government control do not have substitution effect of corporate governance as well. Empirical conclusion provides with new evidences to support the relationship between the government control and bank risk taking behavior, and how capital regulation and foreign capital entry affect this relationship.Fifthly, taking the cities where the city commercial banks mainly operated as sample, from2007-2010,in the perspective of local government control over the city commercial banks, the author systematically examines the relationship between the credit channel of urban economic growth and local government control. The empirical results show that the local government control effectively reduces the city commercial banks’credit growth rate, while the extent of the local government control hardly has any influence on city commercial banks’credit growth rate. The growth of city commercial bank’credit effectively promotes the city’s economy growth. Based on the government financing comparative advantage theory, the fact the commercial banks with local government control have greater effect on the growth of city economy. Empirical conclusion provides new evidences to support the macro effect of the banks’government ownership.In conclusion, local government control of Chinese city commercial banks has its rationality, which has big influence on robustness of corporate governance and behavior of city commercial banks. Based on this foundation, some policy suggestions are given as follow:the city commercial banks should insist on share diversification under the control of shareholder (local government), and achieve the shift from the government management to shareholder governance, from shareholder governance to the board governance, and even enhance corporate governance robustness; moreover, it is necessary to create a stable external environment to support sound corporate governance and also improve the transparency of corporate governance.