City commercial banks and credit allocation : Firm-level evidence

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Title: City commercial banks and credit allocation : Firm-level evidence
Author: Kang, Shulong ; Dong, Jianfeng ; Yu, Haiyue ; Cao, Jin ; Dinger, Valeriya
Organization: Bank of Finland
Department / Unit: Bank of Finland Institute for Emerging Economies (BOFIT)
Series: BOFIT Discussion Papers
Series number: 4/2021
Year of publication: 2021
Publication date: 9.3.2021
Pages: 42
Subject (yso): liikepankit; yritykset; pankit; rahoitus; luotot; luotonanto
Keywords: Bofit-kokoelma; Kiina
JEL: D7; G21; G32; G38; P2
Other keywords: banking liberalization; city commercial banks; bank lending; credit allocation; political economy in banking
Abstract: This paper investigates how government-led banking liberalization affects credit allocation by banks using as a quasi-natural experiment the establishment of city commercial banks (CCBs) in China. Based on more than three million corporate financial statements spanning over 16 years, we find that the establishment of CCBs led to a 6–14 % drop in debt funding for private firms, as well as a 1–2 % rise in their funding costs. At the same time, private infrastructure firms enjoyed a nearly 6 % increase in debt funding and more than 100-basis-point drop in interest costs despite their inferior credit quality. The debt financing of private firm appears most severely affected in municipalities where officials face high promotional pressures or fiscal constraints.
Table of contents: Contents Abstract ..... 4 1 Introduction ..... 5 2 Institutional background and data ...... 9 2.1 Financial liberalization and the rise of CCBs...... 9 2.2 Summary of the data...... 10 3 Empirical analysis...... 12 3.1 Baseline regressions...... 12 3.2 Validating our identification strategy...... 14 3.2.1 Ruling out exogenous local shocks that correlate with the establishment of a CCB ....14 3.2.2 Exogeneity of establishment of CCBs ..... 16 3.3 Which firms benefit from establishment of CCBs? ....... 18 4 What mechanisms drive credit shifts following the establishment of a CCB? ...... 22 4.1 CCB establishment and municipal GDP growth...... 22 4.2 Credit allocation and promotion pressure ....... 26 4.3 Credit allocation and fiscal condition...... 27 4.4 Social welfare implications....... 28 5 Robustness check ....... 30 5.1 Different fixed effects ....... 30 5.2 Impact on private start-ups....... 31 5.3 Sub-sample analysis...... 32 6 Conclusion...... 33 References ....... 35 Appendix ...... 39 A Summary statistics....... 39 B Estimates for all variables in baseline regressions..... 40 C Probability distribution of placebo test ..... 41
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