A groundbreaking study in China Finance Review International ( CFRI ), “ The Effect of Deregulation on Bank Risk-Taking in China: A Balance Sheet Capacity Perspective ”, reveals how China’s 2009 banking deregulation reshaped risk-taking behavior among financial institutions while expanding credit access for small businesses. Existing research often overlooks how deregulation impacts bank risk-taking, but this work uncovers a pivotal trade-off: relaxed regulations boosted banks’ balance sheet capacity (via higher net interest margins), increasing risk exposure (evidenced by rising non-performing loans). However, it also enhanced long-term credit availability for SMEs in underserved regions, demonstrating financial liberalization’s dual role in supporting growth and raising systemic risks. Grounded in a 2009 quasi-natural experiment—China’s relaxation of market entry rules for joint-stock and city commercial banks—the study innovates by linking deregulation to balance sheet dynamics, offering critical insights for emerging markets striving to balance economic resilience and financial stability.
Methodology and Scope
1. Difference-in-Differences (DID) Analysis :
This study employs a DID framework, treating deregulated joint-stock and city commercial banks as the treatment group and other bank types as controls. Post-deregulation, treated banks exhibited a significant increase in non-performing loan ratios, confirming heightened risk-taking.
2. Mechanism Analysis via Three-Stage Regression :
The analysis identifies "balance sheet capacity" as the mediating channel. Deregulation boosted net interest margins, strengthening banks’ balance sheet capacity. This, in turn, increased risk appetite and contributed to elevated non-performing loans.
Original Contributions
This study advances the literature in three key dimensions:
Why It Matters
Readers are welcome to download the pdf to read the full text and hope it can inspire a wide range of readers.
China Finance Review International
News article
The effect of deregulation on bank risk-taking in China: a balance sheet capacity perspective
24-Feb-2025