Can internal regulatory technology (RegTech) mitigate bank credit risk? Evidence from the banking sector in China

We empirically investigate the impact of internal RegTech on bank credit risk with panel data from 141 Chinese banks from 2011 to 2022. We initially constructed a bank-level RegTech index by mining banks' annual reports. We reveal that internal RegTech can significantly mitigate bank credit risk. Concretely, a one-standard-deviation increase in internal RegTech level leads to a 7.39–11.90 % decrease in bank credit risk. Regulatory intensity, income diversification, and charter value are identified as potential channels. The cross-sectional analysis demonstrates that the credit risk mitigation effect of internal RegTech is more pronounced in non-listed and low administrative-expense banks. Our main conclusions remain robust after addressing potential endogeneity issues, ruling out the potential effect of bank financial technology, alternative proxies for the dependent variable, alternative sample periods, and clustering of standard errors. In further analysis, we show the influential roles of the compliance application and technological foundation in the internal RegTech subindices and reveal the de-branching effect of internal RegTech.