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Determinants of loan securitization in Chinese banking: Cost-benefit-based analysis

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  • Zhang, Jinqing
  • Yin, Yiwen
  • Zhang, Linlin

Abstract

This study examines the determinants of commercial banks' loan securitization in China. We consider five hypotheses for the securitization determinants—liquidity demand, regulatory arbitrage, performance promotion, risk transfer and cost advantage exploitation, based on the cost-benefit analysis framework of banks' incentives. To examine these hypotheses empirically, this study employs the factor analysis to summarize the information from some financial indicators that reveals the banks' determinants for securitization. Moreover, by using the Logistic model and Tobit model to study the Chinese commercial banks' data from 2012 to 2017, we find that the real determinants of Chinese banks' securitization include cost advantage exploitation, performance promotion and capital regulatory arbitrage. Based on these findings, we conclude that China's loan securitization market welcomes large state-owned commercial banks with higher ratings rather than small- and medium-sized banks with poor asset quality. These findings indicate that the regulatory authorities should promote the rating accuracy of credit asset-backed securities in order to increase the transparency of information and should restrict unregulated shadow banking channels, leading banks to extend credit assets and to improve the efficiency of capital with securitization tools.

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  • Zhang, Jinqing & Yin, Yiwen & Zhang, Linlin, 2019. "Determinants of loan securitization in Chinese banking: Cost-benefit-based analysis," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:pacfin:v:57:y:2019:i:c:s0927538x18300519
    DOI: 10.1016/j.pacfin.2018.08.014
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