PRESENTATION TOPICInformation Disclosure, Market Discipline And The Management Of Bank Capital: Evidence From The Chinese Financial Sector

Group-5

Amina Khalil

Arsal Burhan

Bilal Ahmad

Muhammad Usman Islam

Agenda of Presentation Topic Introduction Objective of study Research question Methodology use, data source(s),

variables GAP Conclusion

About the Authors Yuliang Wu PhD in Risk Management & Insurance Professor in Queen’s University

Management school, UK Michael Bowe Mike Bowe is Professor of International

Finance in Manchester Business School.

Introduction Chinese Banking System Financial reforms of early 1990s Restructuring State owned Banks Encouraging banks to lists share

publically Liberalizing interest rate

Keywords: Market discipline Capital Risk Management Chinese Banking

Market Discipline Captured from four sets of factors1)Market concentration2)Interbank deposits3)Information Disclosure4)Ownership structure

Direction of the paper Comparative analysis of

State own v.s Privately own institution

Early History

Dominance of people banks of china

(PBOC)

Pre-reformed period 1949-1978

Acting central bank & only commercial

bank

1978 reforms separation of PBOC

PBOC

Central Banking

Commercial

operations

BIG-4 of China Commercial operations split four

specializes state owned banks(BIG4)1)Agriculture Bank of China(ABC)2)China Construction Bank(CCB)3)Bank of China(BOC)4)Industrial and commercial bank of

China(ICBC)

Second reforms Second financial reform starting in late

1980s Small and medium sized joint-equity banks

were established by Government with license

It offer banking services to household and firms nationwide

These banks mixed ownership structure; State, State-owned enterprises , private enterprises, & private individuals

Third Reforms Third financial reform periods in late

1990s just preceding 2001WTO meeting. China become member of world trade

organization(WTO) Allow foreign banks to operate in China

by 2006

GAP identification No empirical study on the external forces

and Chinese banking reforms

No impact of WTO 2001 china membership on the domestic banking system

Objective of study Empirically development of link between

market discipline and bank capital

Relationship between rated banks and capital ratio

Information disclosure and interbank market performance

Research Questions Does financial information disclosure has

impact on the market discipline effect ? Does the rating of the banks has impact

on bank’s capital ? Does joint equity assets has more capital

ratio as compared to other banks ?

Model

CAP

Assets Mark

et Contr

ol

GDP

ROA

NPL

MD

Variables of the study CAP = Total Capital Ratio (Capital/RWA) Log Asset = Bank total asset's log MD = market discipline ROA = Probability ratio NPL = Bank prudential risk management

activity (NPL/Total assets) GDP = Gross domestic product Market Control = Herfindalh-Hirschman

index (HERF)

Data 120 chinese Banking institutions 10 year of data (1998-2008) Source Bankscope-Fitch international Bank

Database Almanac of Chinese Finance and banking Annual Issue of China Statistical Year

Book

Analysis 2 stage least square instrumental

variable estimation procedure• First stage information disclosure and

bank fundraising was tested in inter banks markets

• Joint equity banks capital ratio was tested against in respect of prudential risk management

Conclusion Coefficient of information is 0.034

External forces has change the Chinese banking system.

Capital buffer in listed banks are significantly higher than bench mark.

Conti…. The results shows that market discipline

operate through information disclosure

Joint equity banks maintain a higher equity ratio