Bank executive incentives and liquidity creation: Evidence from China

The creation of bank liquidity is the primary function of banks. In China, because bank executives generally have both political and salary incentives, a bank's liquidity creation is susceptible to both factors. This study uses micro data on commercial banks from 2006 to 2017 to examine this topic and draws four conclusions. First, political and salary incentives are important factors influencing the liquidity creation of commercial banks in China. In particular, these incentives are stronger for bank presidents than for chairpersons. Second, under banks' executive promotion and compensation system, the political incentives for the president and chairperson in large (small and medium-sized) banks are effective (ineffective), whereas the opposite holds for the salary incentives. Third, the introduction of the “restricted salary order” in 2015 severely restricted the salary incentives of the presidents of small and medium-sized banks but not those of the chairperson. Fourth, the liquidity injected by the “Four Trillion” stimulus package changed the political incentives for the presidents and chairpersons of large banks but not those of the presidents and chairpersons of small and medium-sized banks.