This paper examines the impact of stock market liquidity on bank stability in China using financial and stock market data. Based on 2,141 bank-year observations from 2008–2018, I finds that higher stock market liquidity enhances bank stability by reducing non-performing loans. Post-crisis analysis reveals that this positive relationship persists after the 2008 global financial crisis. Further, the crisis and bank ownership structure influence the effect of market liquidity: the crisis increased non-performing loans more during illiquid periods, and state-owned banks are more vulnerable to declining liquidity than non-state-owned banks. The findings offer new insights and practical implications for financial stability and policy.

Yan Tong. Stock Market Liquidity and Bank Non-performing Loans: Evidence from China. Academic Journal of Business & Management (2025), Vol. 7, Issue 2: 16-25. https://doi.org/10.25236/AJBM.2025.070203.

[1] Samarasinghe, A. (2023). Stock market liquidity and bank stability. Pacific-Basin Finance Journal, 79, 102028. https://doi.org/10.1016/J.PACFIN.2023.102028

[2] Hanselaar, R. M., Stulz, R. M., & van Dijk, M. A. (2019). Do firms issue more equity when markets become more liquid? Journal of Financial Economics, 133(1), 64–82. 

[3] Samarasinghe, A., & Uylangco, K. (2022). Stock market liquidity and traditional sources of bank business. Accounting & Finance, 62(3), 3107–3145. 

[4] Ding, X. (Sara), Ni, Y., & Zhong, L. (2016). Free float and market liquidity around the world. Journal of Empirical Finance, 38, 236–257. 

[5] Arnihud, Y., Mendelson, H., & Lauterbach, B. (1997). Market microstructure and securities values: Evidence from the Tel Aviv Stock Exchange. In Journal of Financial Economics (Vol. 45).

[6] Kiyotaki, N., & Moore, J. (2019). Liquidity, Business Cycles, and Monetary Policy. Journal of Political Economy, 127(6), 2926–2966. 

[7] Apergis, N., Artikis, P. G., & Kyriazis, D. (2015). Does stock market liquidity explain real economic activity? New evidence from two large European stock markets. Journal of International Financial Markets, Institutions and Money, 38, 42–64. 

[8] Wang, H., Mao, K., Wu, W., & Luo, H. (2023). Fintech inputs, non-performing loans risk reduction and bank performance improvement. International Review of Financial Analysis, 90, 102849. 

[9] Nwafor, C. N., & Nwafor, O. Z. (2023). Determinants of non-performing loans: An explainable ensemble and deep neural network approach. Finance Research Letters, 56, 104084. 

[10] Vuong, G. T. H., Phan, P. T. T., Nguyen, C. X., Nguyen, D. M., & Duong, K. D. (2023). Liquidity creation and bank risk-taking: Evidence from a transition market. Heliyon, 9(9), e19141.

[11] Berger, A. N., & DeYoung, R. (1997). Problem loans and cost efficiency in commercial banks. Journal of Banking & Finance, 21(6), 849–870. 

[12] Benavides-Franco, J., Carabalí-Mosquera, J., Alonso, J. C., Taype-Huaman, I., Buenaventura, G., & Meneses, L. A. (2023). The evolution of loan volume and non-performing loans under COVID-19 innovations: The Colombian case. Heliyon, 9(4), e15420. 

[13] Jiajia, L., Kun, G., Fangcheng, T., Yahan, W., & Shouyang, W. (2023). The effect of the disposal of non-performing loans on interbank liquidity risk in China: A cash flow network-based analysis. The Quarterly Review of Economics and Finance, 89, 105–119. 

[14] Park, H., & Oh, B. (2022). Common ownership and bank stability: Evidence from the U.S. banking industry. Journal of Financial Stability, 58, 100832. 

[15] Shim, J. (2019). Loan portfolio diversification, market structure and bank stability. Journal of Banking & Finance, 104, 103–115. 

[16] Song, F., & Thakor, A. V. (2010). Financial System Architecture and the Co‐evolution of Banks and Capital Markets. The Economic Journal, 120(547), 1021–1055. 

[17] Brogaard, J., Li, D., & Xia, Y. (2017). Stock liquidity and default risk. Journal of Financial Economics, 124(3), 486–502. 

[18] Tran, D. V., Bui, D. G., Nguyen, C., & Hoang, H. V. (2023). Bank liquidity hoarding during the COVID-19 pandemic. Finance Research Letters, 55, 104021. 

[19] Samarasinghe, A., & Uylangco, K. (2021). An examination of the effect of stock market liquidity on bank market power. International Review of Financial Analysis, 77, 101810. 

[20] Allen, F., Carletti, E., & Marquez, R. (2015). Deposits and bank capital structure. Journal of Financial Economics, 118(3), 601–619. 

[21] Hellwig, M. (1994). Liquidity provision, banking, and the allocation of interest rate risk. European Economic Review, 38(7), 1363–1389. 

[22] Von Thadden, E.-L. (1998). Intermediated versus Direct Investment: Optimal Liquidity Provision and Dynamic Incentive Compatibility. Journal of Financial Intermediation, 7(2), 177–197. 

[23] Amihud, Y. (2002). Illiquidity and stock returns: cross-section and time-series effects $. In Journal of Financial Markets (Vol. 5).

[24] Galariotis, E. C., Krokida, S.-I., & Spyrou, S. I. (2016). Herd behavior and equity market liquidity: Evidence from major markets. International Review of Financial Analysis, 48, 140–149. 

[25] Goyenko, R. Y., Holden, C. W., & Trzcinka, C. A. (2009). Do liquidity measures measure liquidity?. Journal of Financial Economics, 92(2), 153–181. 

[26] Fong, K. Y. L., Holden, C. W., & Trzcinka, C. A. (2017). What Are the Best Liquidity Proxies for Global Research?*. Review of Finance, 21(4), 1355–1401. 

[27] Berglund, T., & Mäkinen, M. (2019). Do banks learn from financial crisis? The experience of Nordic banks. Research in International Business and Finance, 47, 428–440. 

[28] Dietrich, A., & Wanzenried, G. (2011). Determinants of bank profitability before and during the crisis: Evidence from Switzerland. Journal of International Financial Markets, Institutions and Money, 21(3), 307–327. 

[29] Martins, A. M., Serra, A. P., & Stevenson, S. (2019). Determinants of real estate bank profitability. Research in International Business and Finance, 49, 282–300. 

[30] Moutsianas, K. A., & Kosmidou, K. (2016). Bank earnings volatility in the UK: Does size matter? A comparison between commercial and investment banks. Research in International Business and Finance, 38, 137–150. 

[31] Pasiouras, F., & Kosmidou, K. (2007). Factors influencing the profitability of domestic and foreign commercial banks in the European Union. Research in International Business and Finance, 21(2), 222–237. 

[32] Zhang, D., Wu, Y., Ji, Q., Guo, K., & Lucey, B. (2023). Climate impacts on the loan quality of Chinese regional commercial banks. Journal of International Money and Finance, 102975. 

[33] Athreye, S., Saeed, A., & Baloch, M. S. (2021). Financial crisis of 2008 and outward foreign investments from China and India. Journal of World Business, 56(3), 101190. 

[34] Tsuruta, D. (2023). Bank loans, trade credit, and liquidity shortages of small businesses during the global financial crisis. International Review of Financial Analysis, 90, 102905. 

[35] Yuan, H., Zhou, Y., & Zou, H. (2022). Serving multiple ‘masters’: Evidence from the loan decisions of a publicly listed state-owned bank around a massive economic stimulus programme. Journal of Corporate Finance, 72, 102156.