The Usual Suspects Sample Clauses

The Usual Suspects. Obvious candidates for explaining the difference in risk-taking behavior between large and small banks relate to balance sheet information that reveals how banks respond to monetary and regulatory policies. The monetary and regulatory authorities in China had in place three major regulations on all commercial banks during 2007- 2013: capital requirement, reserve requirement, and LDR requirement. We provide evidence on whether there was a notable difference between large and small banks in meeting each of the three requirements. First, both large and small banks met the capital requirement by a comfortable margin as shown in Table 2.13. One can see from the table that the difference in capital adequacy ratios between large and small banks was inconsequential and that both their capital ratios were far above the capital requirement ratio of 8%. Second, small banks had a considerably higher excess reserve ratio than large banks. The numbers reported in Table 2.13 are not available in any electronic data format. We read the annual report of each commercial bank in a pdf file downloaded from WIND (each pdf file has over-100 pages) and find the numbers for excess reserves and total deposits in the chapter called “Notes of Financial Statement.” We compute the excess reserve ratio for each bank in every year, take a weighted average of these ratios for all the banks within the group (the large or small type) in each year, and then average these ratios across years. As clearly shown in Table 2.13, small banks, like large banks, had no problem managing their reserves and the reported excess reserve ratios indicate that small banks had more cushion than large banks in meeting the reserve requirement. Third, both large and small banks met the LDR requirement of 75% and the difference in LDR between large and small banks became smaller over time.16 For the period of monetary tightening (2010-2013), the difference almost did not exist. The issue for banks is not the LDR ceiling per se, but rather the risk of hitting the ceiling due to unexpected deposit shortfalls. Such a risk is an important ingredient in our theory developed in Section 2.4.2. In summary, all banks large or small met the three major policy requirements and in this respect there is no difference between large and small banks. It is therefore not these policies per se that helped explain the robust empirical findings of how small banks behaved differently from large banks in channeling entrusted loans. T...