Exploring the Nexus of Liquidity Regulation, Bank Risk-Taking, and Shadow Banking: A Comprehensive Analysis of Chinese Commercial Banks

The banking industry plays a pivotal role in any economy, and its stability is paramount for societal and economic well-being. This research paper delves into the intricate relationship between liquidity regulation, bank risk-taking, and the shadow banking sector, focusing on Chinese commercial banks. With the introduction of the Net Stable Funding Ratio (NSFR) and its integration into the macroprudential regulatory framework, this study takes a novel approach to comprehensively analyze how adjustments in bank asset structures impact risk-taking behavior and the scale of shadow banking from a micro perspective. This paper’s contributions are manifold. Firstly, it innovatively incorporates NSFR and Capital Adequacy Ratio into the DLM model, providing a unified theoretical framework to analyze liquidity management, risk-taking, and shadow banking. It uncovers the micro-level mechanisms driving commercial banks’ liquidity behavior and their relationship with the shadow banking sector. Secondly, it goes beyond empirical verification and examines the logical relationship between liquidity regulation, bank risk-taking, and shadow banking. Thirdly, the paper introduces the “ $${\text{LA}}$$ LA ” indicator for NSFR, offering a differential approach to liquidity supervision and macroprudential regulation. Empirical analysis, spanning from 2012 to 2021 and covering 116 banks, supports the findings. The results suggest optimizing the internal structure of non-credit assets can significantly reduce bank risk-taking while improving NSFR for banks with “ $${\text{LA}}$$ LA ” greater than 0. Conversely, for banks with “ $${\text{LA}}$$ LA ” less than 0, adjusting the internal structure of credit assets can achieve similar objectives. These insights pave the way for more effective liquidity management practices and contribute to the dual goals of liquidity supervision and risk control. Policy recommendations include differentiated supervision based on “ $${\text{LA}}$$ LA ” values, encouraging banks to optimize their asset structures, and diversifying stable funding sources to enhance banking stability and safety. This research contributes to the ongoing discourse on enhancing financial stability and aligning with the goals of modern banking regulation.