Institutional quality, banking marketization, and bank stability: Evidence from China

- We examine the relationship between banking marketization and bank stability across different levels of institutional quality.
- Banking marketization does not inevitably have negative impacts on bank stability.
- Improving the institutional quality reduces the adverse influence of banking marketization on stability.
- We identify a critical role for institutional quality when examining the banking marketization-stability relationship.

This paper investigates the relationship between banking marketization and bank stability across different levels of institutional quality in China. Our results suggest that banking marketization does not inevitably have a negative impact on bank stability. One of the two banking marketization indicators, namely the proportion of deposits taken by non-state-owned commercial banks to total deposits, has a significant positive impact on bank stability; in contrast, the other indicator, the proportion of loans issued to non-state-owned hybrid-sector firms to total loans in China's banking sector, is negatively associated with bank stability. Furthermore, an improvement of the institutional quality can reduce the adverse influence of banking marketization on bank stability on the whole.