Research On The Impact Of Deposit Insurance System On The Profit Margin Of Small And Medium-sized Commercial Banks In China

As one of the three major tools of the financial safety net defined by the Basel Committee,the implementation of the deposit insurance system helps the entire financial industry respond to changes in the financial environment and maintain the stability of the financial market.China also promulgated the "Deposit Insurance Regulations" on February 17,2015,and officially implemented the deposit insurance system on May 1 of the same year.As a solid step in China’s financial marketization reform,the implementation of the deposit insurance system can protect the rights and interests of depositors,provide a more fair development environment for different types of deposit based financial institutions,and reduce systemic risks in the financial industry.But while its implementation brings benefits,it inevitably has some drawbacks,such as leading to moral hazard and increasing the operating costs of commercial banks.Commercial banks in China can generally be divided into three categories:state-owned commercial banks,joint-stock commercial banks,and small and medium-sized commercial banks.These three types of commercial banks are not equally affected by the deposit insurance system.Among them,small and medium-sized commercial banks are most significantly affected by the negative impact of the deposit insurance system.This is because compared to state-owned commercial banks and joint-stock banks,small and medium-sized commercial banks have weaker comprehensive business capabilities,making it difficult to adjust their business strategies in a timely and effective manner.Therefore,while enjoying the benefits of deposit insurance,they can effectively cope with its drawbacks.In China,small and medium-sized commercial banks occupy the dominant position in terms of quantity,and their development status is crucial for the development of China’s financial market.Therefore,it is necessary to closely monitor the implementation of deposit insurance and its impact.Therefore,this article chooses small and medium-sized commercial banks as the research object to study the impact of the implementation of deposit insurance system on their profit margins.Firstly,this article reviews relevant literature,mainly covering three aspects:the influencing factors of commercial bank profits;The impact of the implementation of deposit insurance system on the micro behavior of commercial banks;The impact of the implementation of the deposit insurance system on the profits of commercial banks.On this basis,a literature review will be conducted to analyze how the implementation of the deposit insurance system affects the profitability of commercial banks by influencing their micro behavior.Secondly,using the annual data of 83 commercial banks in China from 2010 to 2019 for 10 consecutive years,including 4 state-owned four major banks and 79 small and medium-sized commercial banks,the implementation of the deposit insurance system is regarded as a quasi natural experiment,with state-owned commercial banks as the control group and small and medium-sized commercial banks as the experimental group.Empirical analysis is conducted using the double difference method.The empirical results indicate that:(1)the implementation of the deposit insurance system has significantly reduced the profit margin of small and medium-sized commercial banks;(2)Heterogeneity analysis shows that the implementation of the deposit insurance system has significantly reduced the profit margins of both urban and rural commercial banks,with urban commercial banks experiencing a greater decrease.(3)The impact mechanism test found that the implementation of the deposit insurance system reduces the profitability of small and medium-sized commercial banks by reducing their risks and increasing costs,while increasing their total assets increases their profitability.However,the increase in total assets is not enough to offset the decrease in risk and cost channels.In the DuPont decomposition,we found that the implementation of the deposit insurance system mainly reduces the net profit margin and leverage ratio of small and medium-sized commercial banks to reduce their net asset profit margin.(4)Expanding research has found that the implementation of the deposit insurance system promotes the transformation of small and medium-sized commercial banks’ business models and optimizes their profit structure by reducing their profit margins,and urban commercial banks undergo faster transformation.Finally,based on the theoretical analysis and empirical results of the impact of the deposit insurance system on the profit margin of small and medium-sized commercial banks,the article proposes the following policy recommendations:(1)We must firmly promote the healthy and perfect development of the deposit insurance system,and build a deposit insurance system with Chinese characteristics that is in line with China’s national conditions;(2)Small and medium-sized commercial banks should develop diversified businesses,improve their profit structure,and seek a rebound in profit margins at low risk levels;(3)Small and medium-sized commercial banks should actively strengthen the promotion of the deposit insurance system,improve the confidence of depositors,and absorb more deposits.