1. Oct 8, City University of Hong Kong
2017/4/24
The value of relationship banking: Evidence from interbank liquidity crunch in China
Yiyi Bai
CentER – Tilburg University
Qing He
School of Finance, Renmin University of China
Liping Lu
VU University Amsterdam
Oct 8, City University of Hong Kong

2. Motivation -accounting performance
The value of relationship banks is an important issue yet to be fully understood (Chava and Purnanandam, 2011; Ongena, et al., 2003).
Identification is a major concern.
Traditional methods: firms with bank loans V.S. firms without bank loans
-accounting performance
- market reactions around financial crisis period (firm performance should be sensitive to unexpected shocks to bank’s ability to supply credit (Fama,1980;King and Plosser,1984; Chava and Purnanandam, 2011)

3. What we do
Question:
When banks suffer from exogenous liquidity shocks,
Do borrowers who have lending relationships with banks suffer?
Is lending relationship with suffering banks harmful to borrower’s performance?
Whether types of lenders and borrowers matters?
Exogenous liquidity shocks: Interbank liquidity crunch in June 2013 in China serves as a natural experiment to evaluate the bank-firm relationship in the eyes of investors when banks suffer liquidity shock.
Bank lending relationship: the largest lender of long-term loans in a firm is consider as its main bank

4. cont’d Findings: Yes. No!
Firms on average have negative CARs during interbank liquidity crunch
No!
Firms with lending relationships with banks outperform others in terms of firm CARs
Lending relationships with local banks are associated with lower firm CARs
A positive relation between firms’ CARs and banks’ CARs, as well as banks’ interbank liquidity position, when the bank is a big 4 bank or local bank.
Firms on average have negative CARs during interbank liquidity crunch
Lending relationships with local banks are associated with lower firm CARs, while lending relationships with big 4 banks do not have any significant effect
A positive relation between firms’ CARs and banks’ CARs, as well as banks’ interbank liquidity position

5. Interbank liquidity crunch on June 20th 2013

6. Background-Before Interbank liquidity crunch
Chinese economy is slowing down
The M2/GDP ratio has been rising in recent years. Highest Money Supply M2 in the world, supply of money has been plentiful.

7. Economic performance
Blue line: quarterly growth rate (GDP)

8. M2/GDP ratio
Red line: China

9. New intuitional loans in each
Red line: monthly growth rate; Blue line: total new institutional loans in a month.

10. Financial resources are misallocated.
Banks and nonbank financial institutions aggressively fund their lending or offer their loans (newly loans increased by 863 billion in June 2013, i.e % (monthly growth rate)
The central banks aimed to maintain financial stability. (take most risks)

11. Exogenous and Unexpected:
Moral-hazard problem: PBOC always injected liquidity into the market whenever there is a dry-up, which created a moral-hazard problem.
It’s a big challenge for Chinese economy
New leadership: The new leadership came to power in March 2013, Premier Keqiang Li emphasized the financial reform: reinvigorate idle capital and allocate incremental capital more effectively (用好增量、盘活存量). a dramatic policy change from rapid growth to quality growth
PBOC usually injects liquidity into the market whenever there is a dry-up, which creates a moral-hazard problem.
When the new leadership came to power in March 2013, Premier Li refused to do so and started a financial reform.
Due to this expectation, banks adopted aggressive loan strategies in June 2013 to meet the semi-annual performance goals: newly loans increased by 863 billion in June 2013, i.e % increase from the previous month
PBOC initiated the issuance of bills again in May 2013, which further aggravated the liquidity dry-up

12. Premier Keqiang Li
Reinvigorate idle capital and allocate incremental capital more effectively

13. Securities daily

14. What happens
Banks continue aggressive lending practices in June 2013 to meet the semi-annual performance goals
the PBOC refused to inject additional funds to cover the liquidity shortfall (implying a dramatic policy change from rapid growth to quality growth)
The central bank intended the cash crunch to serve as a warning to overextended banks
Short-term, but with significant effect

15. Date Progress 2013/6/5 2013/6/14 2013/6/19 2013/6/20 2013/6/21
The bond issuance of Agriculture Development Bank of China failed to attract enough subscriptions.
2013/6/14
The issuance of treasury bonds failed to attract enough subscription.
2013/6/19
Premier Li expressed a determination for the financial reform by the government. The overnight rate increases to 7.66%.
2013/6/20
The overnight rate hikes to 13.44%. PBOC initiated the issuance of bills. A rumor flies that Bank of China was in default in the interbank market.
2013/6/21
PBOC supplied 50 billion RMB to ICBC. The overnight interbank interest rate decline to 8.49%, i.e. a decrease about 500 basis points from the previous day.
2013/6/23
Several branches of the ICBC in Beijing and Shanghai closed unexpectedly.
2013/6/24
Shanghai composite index plummet by about 5%, and the stock prices of Ping An Bank, China Minsheng Bank, falls by around 10%.
2013/6/25
The PBOC suspended the issuance of bills and supplied liquidity for financial institutions.
2013/6/26
The overnight interbank interest rate further decreased to 5.55%.

16. Literature
Relationship banking can add value as it facilitates the information exchange and production (Ongena et al., 2003)
Firms will disclose more information and banks are also motivated to invest more in acquiring proprietary information (Ongena and Smith, 2000; Boot, 2000)
Positive market reactions of bank loan announcements (James, 1987; Lummer and McConnell, 1989) certification effect
Firms that primarily relied on banks for capital suffered larger valuation losses during crisis period (Chava and Purnanandam, 2011)

17. Literature
Small and less prestigious firms have more benefits from screening and monitoring services associated with bank loans (Solvin et al., 1992).
The quality, organizational structure, and the origin of lender also matter for market reactions (Slovin et al, 1988; Billet et al., 1995; Ongena and Roscovan, 2013).

18. Hypotheses
Hypothesis 1: Cumulative abnormal returns (CARs) of the listed firms during the liquidity crunch are negative
Hypothesis 2: CARs of firms without lending banks are significantly lower than those of firms with lending relationships.
Hypothesis 3: Firms’ relationship bank type matters for CARs. (i.e. local bank lenders V.S. non-local bank lenders, Big 4 bank lenders V.S. non-big4 bank lenders)
Hypothesis 4: Firm’s CARs are larger if their relationship banks experience higher CARs

19. Data and Methodology Estimation window: [-120, -21]
Estimation window: [-120, -21]
Event windows: [-1, 1], [-1, 0], [0, 1], [-2, 2], [-3, 3] and [-5, 5].

20. Bank classifications
4 state-owned banks (i.e. national banks), 12 joint-stock banks (i.e. regional banks), and other small and medium-sized banks including city / rural commercial banks, urban / rural credit cooperatives, rural cooperative banks, village-town banks (i.e. local banks).
4 state-owned banks that dominate the Chinese banking sector as Big 4 banks, i.e. Industrial and Commercial Bank of China, China Construction Bank, Bank of China, and Agricultural Bank of China.

21. Market shares of Chinese Banks
Big 4 state-owned Banks account for 44% of total credit (2013)

22. Identification: Lending Relationship with Banks
TOP 5 lendings. ICBC is the largest lender of long-term loans for firm
Firm ID
Year
Bank Name (Branch)
Bank Name (Headquarter)
Start date
Finish date
Interest
Amount 2011 (mil CNY)
Amount 2012 (mil CNY)
600023
2012
China Construction Bank Corporation Zhijiang Branch in Hangzhou city
CCB
2010/10/21
2029/06/27
5.895
2,300
Industrial & Commercial Bank of China, Zhejiang Branch
ICBC
2011/02/01
2026/11/27
2,250
2,080
Industrial & Commercial Bank of China, Leqing Branch
2008/01/03
2023/12/10
1,060
China Development Bank Corporation, Zhejiang Branch
CDC
2012/08/30
2032/08/30
960
600
Bank of Communications Co. Ltd, Zhejiang Branch
BoComm
2012/04/28
2025/04/28
440
Average share largest long-term lender among top 5 long-term loans is 53%.
Average share top 5 long-term loans among all long-term loans is 51%.
Average share top 5 long-term loans among total debt is 34%.

23. Firm-bank relationship
Our sample consists of all firms traded on the Chinese stock market in ,355 firms, including 42 financial firms and 2,313 non-financial firms
Mean
Std. Dev
Obs
Bank
0.873
0.334
1021
Local bank
0.416
0.493
Big 4 bank
0.077
0.267

24. Market reactions around cash crunch( all non-financial firms)
Mean
Std.Dev
# of obs.
CAR[-1, 1]
-0.003***
(0.002)
2,313
CAR[-2, 2]
-0.008***
(0.000)
CAR[-3,3]
CAR[-5, 5]
-0.004*
(0.082)
CAR[-1,0]
-0.000
(0.936)
CAR[0,1]
-0.004***

25. CARs by firm-bank relationship
[-1, 1]
[-2, 2]
[-3, 3]
[-5, 5]
[-1, 0]
[0, 1]
Bank = 1
Mean
-0.001
-0.008
-0.012
-0.016
0.001
-0.002
Std. Dev.
(0.001)
(0.002)
(0.003)
Bank = 0
-0.009
-0.019
-0.022
-0.035
-0.004
Std.Dev.
(0.004)
(0.006)
(0.007)
Difference T-test
0.008**
0.011*
0.011
0.019**
0.005*
0.007**
Big 4 bank = 1
0.000
-0.005
-0.011
-0.015
0.003
Big 4 bank = 0
-0.014
-0.020
0.004
0.007*
0.005
0.003*
0.002
Local bank = 1
-0.010
-0.025
-0.028
-0.031
(0.009)
Local bank = 0
-0.017
-0.003
-0.009*
-0.017**
-0.016*
-0.014*
-0.009**

26. Determinants of CARs (1) (2) (3) (4) (5) (6) CAR[-1,1] CAR[-2,2]
　(1)
　(2)
　(3)
　(4)
　(5)
　(6)
CAR[-1,1]
CAR[-2,2]
CAR[-3,3]
CAR[-5,5]
CAR[-1,0]
CAR[0,1]
Bank
0.010***
0.013**
0.011**
0.019**
0.006**
0.008***
(0.001)
(0.013)
(0.033)
(0.046)
(0.029)
State-owned
-0.004**
-0.006**
-0.005
-0.018***
-0.001
-0.003*
(0.014)
(0.036)
(0.193)
(0.627)
(0.087)
Log total assets
0.001
0.003
0.002
(0.485)
(0.258)
(0.511)
(0.276)
(0.622)
(0.476)
Leverage
-0.006
-0.016
-0.038**
0.004
(0.826)
(0.572)
(0.302)
(0.047)
(0.844)
(0.458)
EBIT
-0.060***
-0.044
0.051
-0.051***
-0.009
(0.009)
(0.149)
(0.641)
(0.314)
(0.002)
(0.702)
Tobin’s Q
-0.000
0.005
-0.002
(0.794)
(0.974)
(0.608)
(0.185)
(0.441)
(0.329)
R-squared
0.036
0.038
0.019
0.059
0.044
0.058
Industry FE
yes

27. Bank types Bank State-owned Log total asset Leverage EBIT Tobin’s Q
Local bank
Big 4 bank
CAR[-1, 1]
-0.011**
(0.027)
0.002
(0.233)
Bank
0.011***
0.008***
(0.000)
(0.003)
State-owned
-0.004***
-0.004**
(0.009)
(0.012)
Log total asset
0.001
(0.506)
(0.476)
Leverage
(0.818)
(0.828)
EBIT
-0.060**
-0.059***
Tobin’s Q
(0.717)
(0.781)
R-squared
0.040
0.036
Industry FE
yes

28. The influence Bank CARs on Firm’s CAR (sub-sample)
　(1)
　(2)
　(3)
　(4)
Local bank ˟ Bank CAR
1.532**
2.012***
(0.046)
(0.002)
Local bank
-0.042***
-0.045***
(0.007)
(0.008)
Big 4 bank ˟ Bank CAR
0.495**
0.505**
(0.033)
(0.026)
Big 4 bank
0.005
0.000
(0.274)
(0.994)
Bank CAR
0.018
-0.016
-0.448*
-0.505**
(0.679)
(0.669)
(0.063)
(0.023)
State-owned
-0.003
(0.495)
(0.505)
(0.571)
(0.585)
Log total asset
0.001
0.002
(0.509)
(0.317)
(0.549)
(0.337)
Leverage
-0.013
-0.015
-0.014
(0.219)
(0.163)
(0.232)
(0.187)
EBIT
-0.116**
-0.112**
-0.109**
-0.105**
(0.034)
(0.042)
(0.044)
Tobin’s Q
(0.822)
(0.832)
(0.846)
(0.860)
Bank total assets
-0.001
(0.803)
(0.864)
Bank liquidity ratio
-0.053*
-0.052
(0.085)
(0.268)
Bank equity ratio
-0.008**
-0.009**
(0.043)
Observations
602
R-squared
0.065
0.071
Industry FE
yes

29. Bank Interbank Liquidity Position
A bank’s interbank liquidity position: interbank assets over interbank liability of the bank in the second quarter of 2013
(1)
(2)
(3)
(4)
(5)
(6)
CAR[-1, 1]
CAR[-2, 2]
BIG 4 * Bank Interbank Position
0.012*
0.011*
0.008
0.029***
0.026***
0.021***
(0.080)
(0.088)
(0.127)
(0.000)
(0.001)
(0.003)
Bank Interbank Position
-0.005
-0.004
0.013
-0.007
-0.031*
(0.521)
(0.596)
(0.234)
(0.563)
(0.751)
(0.090)
BIG 4
-0.001
-0.017*
-0.014
-0.010
(0.378)
(0.327)
(0.825)
(0.075)
(0.118)
(0.376)
Observations
443
R-squared
0.064
0.066
0.077
0.065
0.073
Firm level controls
yes
Bank balance sheet controls
Bank FE no
Industry FE
Cluster
Industry

30. Conclusion and implications
Firms on average have negative CARs during interbank liquidity crunch
Firms with lending relationships with banks outperform others in terms of firm CARs. Bank-firm relationship is valuable
Lending relationships with local banks are associated with lower firm CARs.
A positive relation between firms’ CARs and banks’ CARs, as well as banks’ interbank liquidity position

31. 2017/4/24
Thank you