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Banks’ liability structure and risk taking: Evidence from a quasi-natural experiment in China

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  • Chen, Xiaoxiong
  • Liu, Guanchun
  • Liu, Yuanyuan
  • Zhang, Yanren

Abstract

This study examines whether banks’ liability structure matters for their risk taking. Using a three-period model, we argue that a high deposit ratio lowers banks’ monitoring effort due to a low liquidity risk, causing banks’ risk taking to be greater. Taking the introduction of Macro Prudential Assessment (MPA) into China’s bank regulatory system in 2016 as a quasi-natural experiment, our difference-in-differences estimate shows that a reduction in wholesale funding increases bank risk as evidenced by higher risk-weighted assets, and this effect is more pronounced for banks with small market power, low capital requirement and high profitability. Further, increasing bank risk has a significant and positive impact on firms’ output growth through the lending channel, particularly for firms with greater business risk. Our findings provide a deep understanding of the link between banks’ funding liquidity and risk taking.

Suggested Citation

  • Chen, Xiaoxiong & Liu, Guanchun & Liu, Yuanyuan & Zhang, Yanren, 2022. "Banks’ liability structure and risk taking: Evidence from a quasi-natural experiment in China," Finance Research Letters, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:finlet:v:49:y:2022:i:c:s1544612322003257
    DOI: 10.1016/j.frl.2022.103100
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    References listed on IDEAS

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    More about this item

    Keywords

    Banks’ liability structure; Risk taking; Liquidity risk; Difference-in-differences estimate; China;
    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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