How government regulation of interbank financing impacts risk for Chinese commercial banks

The rapid development of interbank financing in China has exposed financial institutions to increasing risk. In 2013, the China Banking Regulatory Commission implemented regulation on interbank financing for commercial banks. We assess the effectiveness of this regulation in reducing (i) the risk of commercial banks relative to non-bank financial institutions, where the latter are not subject to the regulation, and (ii) the risk of major commercial banks, which are more disposed to engage in interbank finance, relative to minor commercial banks. Our data are for the period 2006–2016 for 30 commercial banks (13 major, 17 minor) and 56 non-bank financial institutions. To control for other factors, we make use of a difference-in-difference estimation approach. Our measure of risk is the z-score, for which a higher value means a lower risk of bankruptcy. We find in support of the effectiveness of the regulation with z-scores for commercial banks rising relative to those of non-bank financial institutions and z-scores of major banks rising relative to those of minor banks following implementation of the regulation.