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Supervisory independence and banks’ non-performing loans: quasi-experimental evidence from China

ABSTRACT This paper utilizes the turnover of head of local banking supervisory branches accompanied with the merger of China’s banking and insurance regulatory authorities as a quasi-experiment and analyses the impact of supervisory independence on banks’ non-performing loans. The difference-in-difference estimates indicate that in regions with heads of local supervisory branches from other geographic branches, banks’ non-performing loan ratios will decline. The impact of supervisory independence is more pronounced in regions with lower financial marketization. It further shows that supervisory independence can reduce total loan amounts, medium-and-long-term loans, and enterprise loans, and clarifies the impacting mechanisms of supervisory independence on banks’ non-performing loans.