Relationship of the Economic Cycle and the Performance of Commercial Banks
|School||Zhejiang University of Finance|
|Keywords||Economic cycle bank performance net interest margin net rate of returnon assets|
Since the2007subprime crisis, the global economy has experienced frustrations.The recovery is still difficult in2012. Unemployment is high in developed countries,and the economic growth of emerging markets and developing countries continue to fall,while the European debt crisis continue to extend. In the context of the weak globaleconomic growth, China’s economic growth slowed pace. At the same time, there hasbeen a significant drop of China’s banking industry growth rate in the second quarter of2012after years of high-speed development. Whether there is contact between theeconomic cycle and bank performance, whether pro-cyclical behavior of banks has alsoled to bank performance and parallel to the economic cycle, these are academiaproblems to be solved. From the shareholders’ point of view, the understanding of therelationship between the economic cycle and bank performance can help investors toinvest more rational in economic fluctuations. From the bank management point of view,the understanding of the relationship can make managements learn a more profoundcognition of risk in a changing market environment, and make their own bank’sperformance in the lead in the economic cycle.A large number of studies have found in the past, that banks exist obviouspro-cyclical. The study found that Chinese banking performance is procyclical.Economic boom, bank loan project has good earnings, and the risk is small, not easy toform the non-performing loans, so the loans expand, and bank performance improve.During the economic downturn, the business of the bank loan customers began todecline, the rising loan delinquencies, non-performing loans increased, and the volatilityof asset prices to further increase the risk of bank operations, and banks began shrinkingcredit, credit crunch, which not only makes the bank performance callback, in turn,exacerbated the economic volatility. In addition, mortgage asset prices, herding, thecalculation of the fair value and the system of loan loss provisions become conductionpathways of economic fluctuation affecting the bank operation. But our country depositand loan market interest rate commercializes degree to differ, cause of the difference ofdeposit and loan interest rate formation mechanism, so the economic cycle fluctuationhas asymmetric effect on the bank deposit rate and lending rates, in addition theperiodicity of the bank interest income and expenditure also has a non-symmetry. Eventually the two kinds of effects make the bank net interest margins pro-cyclical,become important factors affecting bank performance.Empirical research, this panel data for the first quarter of2012through the secondquarter of2007, China’s14listed banks to analyze the relationship of the economiccycle and bank performance, found that the GDP growth rate of return on net assets ofbanks effect is positive, but only weakly correlated. But on the other hand, due toChina’s banking industry is generally a traditional credit business, net interest margin isthe main source of bank profits, so we put the bank net interest margin as quantitymeasure of bank performance indicators. The empirical results show that therelationship of bank net interest margin and the economic cycle was quite remarkable.Economic upside will expand the bank net interest margin, and the economic downturnmakes bank net interest margin narrowed. In addition, the empirical results also foundthat the growth rate of broad money, the inter-bank lending rate, gross profit differencehad positive effects on the rate of return on net assets of banks, while the cost to incomeratio, capital adequacy ratio, non-performing loans for the reverse effect. The cost toincome ratio, the proportion of non-interest income and bank asset size had negativeeffect on the bank net interest margins.