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The impact of social trust on loan grants and default risk: Evidence from China’s regional commercial banks during branching policy changes

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  • Fonseka, Mohan
  • Richardson, Grant
  • Shekhar, Chander
  • Yang, Xing

Abstract

We investigate the impact of social trust on loan grants and default risk among regional commercial banks in China by using exogenous shocks stemming from the unique regulatory reforms of bank branch deregulation and re-regulation. We find that social trust has different impacts during the two periods. In particular, banks located in regions with higher levels of social trust exhibit a more pronounced increase (decrease) in loan grants following deregulation (re-regulation). We also find a stronger positive relationship between social trust and default risk after deregulation and re-regulation. Our results highlight the relevance of changes in banking regulation for the impact of social trust on loan grants and default risk. They also provide valuable insights for banking regulators and bank managers in evaluating the outcomes of banking regulation reforms.

Suggested Citation

  • Fonseka, Mohan & Richardson, Grant & Shekhar, Chander & Yang, Xing, 2023. "The impact of social trust on loan grants and default risk: Evidence from China’s regional commercial banks during branching policy changes," Economics Letters, Elsevier, vol. 229(C).
    • Handle: RePEc:eee:ecolet:v:229:y:2023:i:c:s0165176523002434
    DOI: 10.1016/j.econlet.2023.111218
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    More about this item

    Keywords

    Social trust; Commercial loan grants; Default risk; Banking regulation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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