Peer effects in bank liquidity hoarding and its impact on bank risk: Evidence from Chinese commercial banks

This study investigates whether banks strategically incorporate the liquidity hoarding behaviors of their peers when shaping their own liquidity management strategies, and how these dynamics impact financial stability. Using a dataset of Chinese commercial banks and a comprehensive identification strategy, we find that the liquidity hoarding decisions made by banks are significantly influenced by those of their peers. These correlated decisions are evident across assets, liabilities, and off-balance-sheet activities. The mechanism analysis indicates that peer effects in bank liquidity hoarding are primarily driven by learning behavior and blame avoidance. Under higher economic policy uncertainty and regulatory pressure, peer effects become more pronounced, leading banks to align more closely with their peers' behavior. We further find that, although liquidity hoarding behaviors may reduce risk at the individual bank level, they heighten systemic risk by amplifying shared vulnerabilities across the sector. This underscores the need for macroprudential regulation to address liquidity risk in the banking sector.