Cross-regional expansion and risk-taking in city commercial banks: Evidence from China

This paper examines how cross-regional expansion by city commercial banks (CCBs) affects bank risk-taking, from the perspectives of internal organizational conditions and the external institutional environment. Using a hand-collected dataset on CCB branch establishment and bank-level financial data from 2002 to 2021, we employ a multi-period difference-in-differences (DID) design. We obtain three main findings. (1) Overall, cross-regional expansion-especially within-province cross-city expansion-significantly increases CCBs’ risk exposure, while the effect of cross-province expansion is statistically insignificant. (2) Mechanism evidence suggests that internal organizational changes increase management costs and thus raise risk-taking. External environmental changes also matter. On the one hand, expansion increases supervisory disparities across locations, which heightens risk. On the other hand, expansion strengthens market power of banks, which partially offsets the risk-increasing effect. Local government behavior plays an important moderating role: growth targets, fiscal pressure, and the tenure of municipal Party secretaries significantly amplify the positive effect of expansion on risk-taking, whereas the moderating effect of mayoral tenure is insignificant. (3) Heterogeneity analyses show that the risk effect of expansion is stronger for larger banks. It is also more pronounced-and more readily reflected in bank outcomes-in regions with stricter supervision and higher marketization. Our findings provide new evidence on the expansion-risk nexus in an emerging-market setting and offer policy-relevant implications for improving the regulation of cross-regional banking expansion.