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Deregulation and bank stability: Evidence from loan-to-deposit ratio requirement in China

Author

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  • Li, Jie
  • Lu, Liping
  • Wu, Jin
  • Zhou, Tianhang

Abstract

This paper examines the impact of financial deregulation, specifically, the removal of China's loan-to-deposit ratio (LDR) cap in 2015, on bank stability. We show that LDR deregulation strengthens the stability of LDR-constrained banks through three mechanisms. First, it alleviates competition for deposits, allowing banks to enhance their franchise value. Second, it enables banks to issue more long-term loans, supported by a more diversified funding base. Third, it reduces reliance on off-balance-sheet activities, such as principal-floating wealth management products, thereby lowering exposure to shadow banking risks. Collectively, these changes reinforce banks' maturity transformation abilities, ultimately improving their overall stability.

Suggested Citation

  • Li, Jie & Lu, Liping & Wu, Jin & Zhou, Tianhang, 2026. "Deregulation and bank stability: Evidence from loan-to-deposit ratio requirement in China," Journal of Corporate Finance, Elsevier, vol. 98(C).
    • Handle: RePEc:eee:corfin:v:98:y:2026:i:c:s0929119926000143
    DOI: 10.1016/j.jcorpfin.2026.102956
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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