Has the regulation of high quality liquid asset adequacy ratio improved the risk-taking of small and medium-sized banks?--Empirical evidence from China

This article commences with the unique liquidity regulatory indicators faced by small and medium-sized commercial banks with asset sizes under CNY 200 billion and innovatively examines how their risk-taking behavior is influenced by these regulatory measures. Leveraging the design concepts and internal logic of the High Quality Liquid Asset Adequacy Ratio (HQLAAR), we depict banks' liquidity management behavior in the face of potential regulatory penalties by introducing unpledged securities. By incorporating these factors into the DLM analytical framework, we derive theoretical results on the impact of liquidity regulation on risk-taking for banks of corresponding sizes. Building on this theoretical foundation, we selected panel data from 232 Chinese commercial banks of small and medium, ranging from the fourth quarter of 2017 to the third quarter of 2022. We conducted empirical tests of the theoretical findings by estimating the impact of the indicator's values. The results indicate that the liquidity regulatory indicators for smaller banks initially suppress and then promote their risk-taking. Notably, when the indicator values meet the existing regulatory requirements (no less than 100 %), an increase in these values can significantly reduce risk-taking. Furthermore, compared to the upswing of the economic cycle, the impact of liquidity regulation on risk-taking is attenuated during downturns, necessitating additional regulatory policies during this phase. Lastly, in environments with higher levels of economic and financial development, the implementation of regulatory policies is more effective.