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Generative AI: The transformative impact of ChatGPT on systemic financial risk in Chinese banks

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  • Zhao, Yikai
  • Dai, Runyu
  • Nagayasu, Jun

Abstract

We investigate the impact of ChatGPT, a generative artificial intelligence (GenAI) application, on the systemic financial risk of Chinese banks. Using a sample of 42 publicly traded banks and employing regression discontinuity (RD) and regression discontinuity difference-in-differences (RD-DID) methodologies, we assess the immediate effects following the launch of ChatGPT on November 30, 2022. Our findings reveal an immediate and significant increase in systemic financial risk, measured by ΔCoVaR. Robustness checks, including placebo tests, alternative risk measures, and varying sample windows, confirm the reliability of these results. Mechanism analysis highlights that transitional challenges during GenAI adoption exacerbate systemic vulnerabilities. Smaller banks, rural commercial banks, and banks with higher nonperforming loan ratios (NPL) face heightened risks, while large state-owned banks remain relatively insulated. These findings underscore the double-edged nature of disruptive innovations such that GenAI integration poses short-term risks to financial stability even if GenAI has transformative potential.

Suggested Citation

  • Zhao, Yikai & Dai, Runyu & Nagayasu, Jun, 2025. "Generative AI: The transformative impact of ChatGPT on systemic financial risk in Chinese banks," Pacific-Basin Finance Journal, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:pacfin:v:93:y:2025:i:c:s0927538x25001660
    DOI: 10.1016/j.pacfin.2025.102829
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    JEL classification:

    • 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
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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