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Expected government support and bank risk-taking: Evidence from China

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  • Bai, Haifeng
  • Ba, Shusong
  • Huang, Wenli
  • Hu, Wentao

Abstract

This research examines the impact of expected government support on banks’ risk-taking behaviour and, in particular, how its impact can be stronger on state-owned or listed banks. Using 75 banks in China for the 2007–2016 period, we find that the willingness for and capacity of government support enhance a bank's risk-taking behaviour by increasing non-performance loans as well as doubtful loans and decreasing the Z-score and the liquidity ratio. Furthermore, the moral hazard problem is further enhanced in state-owned banks but mitigated in listed banks. Our analysis enhances our understanding of the willingness for and capacity of government support and finds that more attention should be paid to the impact of market discipline on banks’ risk-taking behaviour.

Suggested Citation

  • Bai, Haifeng & Ba, Shusong & Huang, Wenli & Hu, Wentao, 2020. "Expected government support and bank risk-taking: Evidence from China," Finance Research Letters, Elsevier, vol. 36(C).
    • Handle: RePEc:eee:finlet:v:36:y:2020:i:c:s1544612319303289
    DOI: 10.1016/j.frl.2019.101328
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    Cited by:

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    2. Shen, Yu & Ren, Meixu & Zhao, Jingmei, 2023. "Bank competition and zombie company: Empirical evidence from China," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 297-318.
    3. Yanqi Xie & Apurbo Sarkar & Md. Shakhawat Hossain & Ahmed Khairul Hasan & Xianli Xia, 2021. "Determinants of Farmers’ Confidence in Agricultural Production Recovery during the Early Phases of the COVID-19 Pandemic in China," Agriculture, MDPI, vol. 11(11), pages 1-22, October.
    4. Zhang, Ailian & Wang, Shuyao & Lien, Donald & Yu, Chia-Feng (Jeffrey), 2023. "Are banks rewarded for financial consumer protection? Evidence from a quasi-natural experiment," Finance Research Letters, Elsevier, vol. 52(C).
    5. Zhou, Mingquan & Yang, Yang, 2022. "Shadow price of equity and political connectedness: A study of Chinese commercial banks," International Review of Financial Analysis, Elsevier, vol. 83(C).
    6. Changjun Zheng & Shiying Chen & Zhenhuan Dong, 2021. "Economic Fluctuation, Local Government Bond Risk and Risk-Taking of City Commercial Banks," Sustainability, MDPI, vol. 13(17), pages 1-26, September.
    7. Pejman Peykani & Mostafa Sargolzaei & Mohammad Hashem Botshekan & Camelia Oprean-Stan & Amir Takaloo, 2023. "Optimization of Asset and Liability Management of Banks with Minimum Possible Changes," Mathematics, MDPI, vol. 11(12), pages 1-24, June.
    8. Zhao, Hong & Li, Jiayi & Lei, Yiqing & Zhou, Mingming, 2022. "Risk spillover of banking across regions: Evidence from the belt and road countries," Emerging Markets Review, Elsevier, vol. 52(C).

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    More about this item

    Keywords

    Expected government support; Bank risk-taking; China; State-owned banks; Listed banks;
    All these keywords.

    JEL classification:

    • G4 - Financial Economics - - Behavioral Finance
    • 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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