Risking or de-risking? The effect of banking competition on large state-owned banks and small and medium-sized enterprise lending: Evidence from China

• Published in: International review of financial analysis 2024-07, Vol.94, p.103258, Article 103258
• Main Authors: Liang, Yunjia, Zhou, Bo, Zhao, Shaoyang
• Format: Article
• Language: English
• Subjects: Banking deregulation; Large state-owned banks; Small and medium-sized banks
• ISSN: 1057-5219; 1873-8079
• DOI: 10.1016/j.irfa.2024.103258

This study examines the effect of the expansion of small and medium-sized bank branches on large state-owned banks in China based on bank branch-level financial data and detailed loan-level data from 2008 to 2015. We find that the expansion of small and medium-sized banks favorably impacts the operating income of large state-owned banks without intensifying bank risk-taking. Large state-owned banks, used to lack competition, expand their total lending scale to achieve more operating revenue by servicing more firms, especially small and medium-sized enterprises (SMEs). This promotes SMEs' access to finance, while also raising the operating costs of large state-owned banks. More importantly, the lending standards and loan quality of large state-owned banks do not deteriorate, implying that they do not employ risky lending tactics to deal with increased competition. •The expansion of banks branch network increases the operating income of large state-owned banks.•The increase in competition between banks increases credit availability.•Lending rates and secured loans standards have remained the same.