Tax-based information sharing and bank risk: Evidence from China's Bank–Tax Interaction policy

We examine whether tax-based information sharing can make banks safer, using China's Bank–Tax Interaction (BTI) policy as a quasi-natural experiment. BTI connects banks to verified tax data on small and medium-sized enterprises, helping them assess creditworthiness more accurately. Drawing on panel data for Chinese commercial banks from 2008 to 2020 and the staggered rollout of BTI, we find that adoption of the policy significantly reduces banks' insolvency risk, and this result is robust to alternative risk measures and multiple identification checks. Mechanism tests suggest that BTI allows banks to expand total lending and shift their loan portfolios toward pledge-backed loans, and provide suggestive evidence of improved loan quality in segments where tax information is especially informative. The risk-reducing effect is primarily found among state-owned banks, non-listed banks, and banks in lower marketized regions. Overall, our evidence suggests that tax-based data sharing can strengthen financial stability, offering a scalable policy tool for other economies.