Bank Size and SME Lending：Evidence from China.pdf

Bank Size and SME Lending: Evidence from China Yan Shena b c d ,Minggao Shen , Zhong Xu , Ying Bai aAssociate Professor, China Center for Economic Research, Peking University, P.R. China, yshen@, (86)-10(O) b Associate Professor, China Center for Economic Research, Peking University, P.R. China. cSenior Researcher, Bureau of Financial Stability, People’s Bank of China, P.R. China. d Division of Social Science, Hong Kong University of Science Technology. April, 2008 1 Abstract Using panel data collected in 2005, we evaluate how bank size, discretion over credit, incentive schemes, competition, and the institutional environment affect lending to small- and medium-sized enterprises in China. We deal with the endogeneity problem using instrumental variables, and a reduced-form approach is also applied to allow for weak instruments in estimation. We find that total bank asset is an insignificant factor for banks’ decision on SME lending, but more local lending authority, more competition, carefully designed incentive schemes, and stronger law enforcement encourage commercial banks to lend to SMEs. Key words: SME lending, bank size, loan approval rights, reduced-form approach, soft information 2 Acknowledgements We would like to thank Professor Yao Yang, Professor Linder Y. Yeuh, and three anonymous referees for very helpful comments. All remaining errors are ours. This research is a part of the research project “Formal Finance, Informal Finance, FDI and