Evolution of financial intermediation and performance consequences in China’s commercial banks

Purpose: This study evaluates the evolution from traditional to nontraditional financial intermediation (NTFI) in Chinese commercial banks from 2006 to 2021, analysing its impact on bank performance and risk. Design/methodology/approach: Accounting measures are used to construct granular activity data, and factor analysis is employed to develop a financial intermediation evolution (FIE) index. The fully modified OLS (FMOLs) estimator is used for nonstationary data analysis, and difference-in-differences (DID) analysis is used for robustness check. Findings: Chinese banks exhibit unique evolution in financial intermediation compared to developed economies, with greater inter-bank variations over time than intra-bank differences. From 2006 to 2017, three paths were identified: Investment, Fee and Repo models, with a fourth path (the Investment2 model) emerging post-2017. Only the Repo model enhances bank returns (ROA & ROE), while shifts towards NTFI increase liquidity and leverage risks across all models. The evolution of bank business models and their consequent implications on performance and risks are influenced by regulatory objectives and banks’ endeavours in regulatory arbitrage. Practical implications: Major stakeholders in the banking sector can gain a better understanding of financial intermediation and associated market behaviour, performance and risks, with significant implications for banking regulations and crisis management. Originality/value: This study provides the first comprehensive overview of the evolution of Chinese commercial banks’ financial intermediation activities over an extended period, uncovering the unique characteristics distinct from the developed economies.