Loan Structure And Risks Of Commercial Banks

Credit structure refers to the loanable funds allocated among different sectors, different industries or different maturities. Generally speaking, it is the consequence of loan management, but the macro economy and the government policy influence it a lot too, and to some extent these factors determine the final structure of banks. The feature of Chinese commercial banks is credit concentration, and the most obvious points are industrial concentration and geographical concentration. After2008financial crisis, affected by the business cycle and policy, a large scale of credit flow to a few sectors, real estate, steel, infrastructure, Jiangsu, Zhejiang and Fujian province are all the focus. However, when the macro economy experience a period of stagnation or decline, the risks of banks will increase, the whole system as a consequence will become very fragile.There is another possibility as well, if the loan were invested in the sectors supported by the government, the risks of banks will not as big as we have mentioned.Which one is close to the truth, we have no idea. Since of this, the main topic of this paper is to test the relationship between credit structure and the risks of commercial banks under the control of the bank features and the macroeconomic environment.We choose credit risk among many kinds of risks for the following reasons. Firstly, it is the direct response of credit quality. In addition, the proxy variables which we used for bank risks are all mainly reveal credit risk.Our most important finding is the2nd lag of credit concentration will decrease the bank risks, which means the reaction period is about2years. Whereas the conclusion is not totally consistent with expectations, early literatures incline to have a positive effect. In fact, this is a unique phenomenon in China. The support from government will guarantee the repayment of company in one hand, and then protect the solvency of banks on the other. The results of this are no default of borrower and no increase of lender’s risk.However, risk will never vanish unless you solve it. The flourish is so fragile that could be destroyed by any mini tiny shock. So, if the concentration was unavoidable, which kind of inner credit structure will reduce the risk?According to the modern portfolio theory, we try to test when the credit concentration index is high, whether the diversification of main sectors is useful. Unfortunately, the conclusion is not statistically significant. We also find when the credit concentration index is very high, it mainly concentrates on one or two sectors, there are small probabilities that the credit equally distributed among a few sectors.Overall, all of the findings should be understand under the special environment of our county.The contributions of this paper rest with the following. To start with, we for the first time collect a big sample to analyze the problem. The biggest drawback of the previous research is the lack of sample. And then, our empirical test is comprehensively. We use different type of proxy variables to implement the test which will give us a more reliable conclusion. In addition, the attempt of interaction analysis is the highlights of our paper.Although we did not proof the weak points of loan concentration, we indeed hope our analysis will inspire more researchers to care about this topic.