On March 27, 2022, the Micro-Finance Salon (No. 178) or the 21st session of the series entitled “Finance Propels the Opening of the Fourteenth Five-Year Plan”, jointly organized by the IMI and the Department of Monetary Finance, School of Finance, RUC, was held online and live streamed. The theme of this seminar was “Organizational Changes of Small and Medium-sized Banks and Local Financial Risk Prevention”.

Lu Liping, Associate Professor of the School of Finance, RUC, made a keynote speech. IMI Director Zhang Jie; Li Guangzi, Director of the Banking Research Group of the Institute of Finance of the Chinese Academy of Social Sciences; Zhang Jiguang, Director of the Shanghai Finance Society and Deputy Director of the Research and Development Special Committee of the Shanghai Interbank Association; and Wang Jian, Chief Analyst of the financial industry at the Institute of Economics of Guoxin Securities, participated in the discussion. The salon was moderated by Tu Yonghong, IMI Deputy Director and Director of the Yangtze River Economic Belt Research Institute.

Lu Liping shared his views on the topic with a report entitled “Organizational Changes of Small and Medium-sized Banks and Local Financial Risk Prevention”. He first put forward the following three hypotheses. First, the stronger the local government intervention, the larger the average size of banks in a province; the fewer primary legal entities, the higher the verticality of banks, which reflected the effect of local intervention on the verticality of banks. Second, banks are more likely to locate their head offices in central cities subject to less local government intervention. Third, the stronger the local government intervention, the more likely it is for the province to have a provincial bank.

Secondly, he made a relevant empirical analysis for these hypotheses and found that urban commercial banks mainly chose the vertical structure for organizational changes, which is a self-protection mechanism developed under the government intervention system. In practice, local governments may have various kinds of interventions if they have certain control over local banks, which eventually lead to massive bad debts of small and medium-sized banks and result in risky events of banks. Small and medium-sized banks choose the vertical structure probably because they want detachment from local government interventions. In addition, the study tested the hypotheses using data at the provincial level and found that the stronger the government intervention in a province, the larger the relative size of urban commercial banks and the more vertical the banks’ organizational structures.

In terms of policy recommendations, he mentioned that the restructuring of small and medium-sized banks reduced the scale of financing for SMEs, which is consistent with traditional theories. If banks have better corporate governance, then flat small and medium-sized banks would be more suitable to provide financing for SMEs. From the perspective of mergers and restructuring, local governments in relatively economically backward regions and those with strong intervention in the economy should be allowed as much as possible to transfer the control of urban commercial banks to regions with relatively weak government intervention. In addition, it is necessary to consider further relaxing the restrictions on the establishment of branches of urban commercial banks. The current policy is relatively conservative. Too few restrictions will affect urban commercial banks’ ability to serve local SMEs, while too many restrictions will limit the business of urban commercial banks and impair those banks’ overall profitability.