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Bank homogeneity and risk-taking: Evidence from China

Author

Listed:
  • Ren, Meixu
  • Zhao, Jingmei
  • Ke, Konglin
  • Li, Yidong

Abstract

Homogeneity is a prominent problem facing China's banking industry, which is essentially a low-level competition lacking core competitiveness and brings challenges to the security and stability of the financial system. We find that homogeneity increases bank risk-taking, and this result is heterogeneous among different bank characteristics. It is further shown that reducing franchise value and increasing liquidity creation are two rational mechanisms through which bank homogeneity increases risk-taking. We also find that homogeneity increases common risk exposure and intensifies competition among banks, and economic policy uncertainty, tight monetary policy, and bank competition will prompt them to take more risks. Overall, our research suggests that in a banking system with restricted business models and strong regulatory constraints, homogeneity fails to achieve risk-sharing but increases individual risk-taking.

Suggested Citation

  • Ren, Meixu & Zhao, Jingmei & Ke, Konglin & Li, Yidong, 2023. "Bank homogeneity and risk-taking: Evidence from China," The Quarterly Review of Economics and Finance, Elsevier, vol. 92(C), pages 142-154.
    • Handle: RePEc:eee:quaeco:v:92:y:2023:i:c:p:142-154
    DOI: 10.1016/j.qref.2023.09.002
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    More about this item

    Keywords

    Bank homogeneity; Bank risk-taking; Franchise value; Liquidity creation; Common risk exposure;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • 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
    • 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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