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Moral hazard, external governance and risk-taking: Evidence from commercial banks in China

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  • Zhang, Zhiwei
  • Wu, Fei

Abstract

Using a sample of Chinese commercial banks from 2004 to 2017, this paper investigates whether and how external governance mitigates the moral hazard problem in these banks. China launched its first explicit deposit insurance program in 2015. Taking this program as an example, our empirical results show that the implementation of such a program indeed increases risk-taking of these commercial banks and provide evidence of the presence of moral hazard. We further document that improved external governance via a marketization process plays a role in reducing excessive risk-taking and mitigating the moral hazard problem in the Chinese banking sector.

Suggested Citation

  • Zhang, Zhiwei & Wu, Fei, 2020. "Moral hazard, external governance and risk-taking: Evidence from commercial banks in China," Finance Research Letters, Elsevier, vol. 37(C).
    • Handle: RePEc:eee:finlet:v:37:y:2020:i:c:s1544612319312577
    DOI: 10.1016/j.frl.2019.101383
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    4. Ding, Bin Yan & Wei, Feng, 2023. "Overlapping membership between risk management committee and audit committee and bank risk-taking: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 86(C).

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    More about this item

    Keywords

    Commercial banks; Deposit insurance; External governance; Moral hazard; Risk-taking;
    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
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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