China has been implementing the reform of interest rate liberalization, which is vital for bank industry. However, the economic growth overall has slowed down and there is considerable economic imbalance between different regions within China. How to relax the cross-regional operations of local banks without causing liquidity issues becomes an important and imminent research topic for both banks and regulators. Regulators have attempted to accommodate policies for cross-regional operations. But at present, most regional banks are still restricted to operate within local area. After the deregulation of cross-regional operations, can the local banks adjust their liquidity in a timely manner to cope with the risks brought by environmental changes?
The existing literature is not clear about the relationship between the cross-regional operation supervision and liquidity adjustment in Chinese local banks. The Interstate Banking and Branching Efficiency Act（IBBEA）provides a basis for the study of this issue, which was promulgated by the United States in 1994. On the one hand, the macroenvironment between China and the 1990s’ US shares many similarities. For example, both nations have been experiencing a transitory phase showing a decelerated economic growth, have just completed the interest rate liberalization, and have been facing regional economic imbalance issues. On the other hand, the implementation of the IBBEA serves as a quasi-natural experiment, which effectively solves the endogeneity problem. In these respects, this article discusses the benefit function of different liquidity adjustment strategies and examines the implementation effect of the IBBEA on bank liquidity adjustment. The results show that: When the cross-regional operation supervision is relaxed, banks in the focal states will actively adjust liquidity; and this phenomenon is more pronounced in regions with poorer economic conditions and banks with stronger liquidity manipulation skills and larger branches. We find that banks with slow adjustment speed would escape from the deregulated areas and would not increase liquidity adjustment speed afterwards. Considering the current situation of liquidity supervision of local banks in China, we recommend that authorities selectively relax cross-regional supervision. Regulators can prioritize deregulation in areas with robust economic conditions, large population, and high interest margin. Meanwhile, areas with sufficient amount of bank branches or great bank asset base could also be selected for deregulation.
There are three contributions in this article: First, it establishes a model from the micro perspective of local bank operations, analyzes banks’ optimal liquidity adjustment strategy when cross-regional operating policies are changed, and explores the behavior of bank liquidity adjustment. Second, it explains how regional differences and bank heterogeneity affect the speed of liquidity adjustment. Third, through the study of the implementation effect of the IBBEA in the United States, we provide a theoretical basis for regulatory agencies to formulate policies.