Do banking system transparency and market structure affect financial stability of Chinese banks?

This study examines whether banking transparency and competition affect financial stability of banks and transparency acts as a conduit in effecting the competition among banks to increase or decrease their financial stability. This study uses multiple variations of a two-step system generalized method of moments approach on annual data from 164 Chinese commercial banks from 2000 to 2014. The results of this study showed that transparency with market power lessens the insolvency risk of banks as well as credit market risk; one could infer that market discipline works more robustly in the presence of disclosure requirements. This study supports existing market literature that China’s banking transparency is a significant determinant of changes in financial stability given the market structure of its banking system while controlling for several exogenous and endogenous variables. The results are robust by using alternate proxies for market structure, banking transparency and financial stability.