Abstract
This article examines the effect of financial liberalization on bank risk-taking, using bank-level data of 169 Chinese banks from 2000-2014. Empirical results show that bank stability increases with the development of financial liberalization. We also provide evidence indicating that banks with larger size, longer operating periods, and state ownership are more salient with the development of financial liberalization. However, such positive effects of financial liberalization on bank stability may be weakened by worse macroenvironment gauged by low economic growth, poor law enforcement, and instable political conditions.
Highlights
Since the 1980s, a large number of emerging markets and developing countries have begun to implement financial liberalization schemes and programs, aiming at optimizing resource allocation, and promoting economic growth through competition and innovation (McKinnon, 1973)
This article investigates the impacts of financial liberalization on bank risk-taking by using a sample of 169 Chinese banks over the period from 2000 to 2014
Having controlled for other risk-taking determinants, we find that relaxed financial environment is positively associated with bank stability
Summary
Since the 1980s, a large number of emerging markets and developing countries have begun to implement financial liberalization schemes and programs, aiming at optimizing resource allocation, and promoting economic growth through competition and innovation (McKinnon, 1973). China’s unique national conditions determine that financial liberalization has its unique development process. China has maintained an unprecedented economic growth rate since 1978, and financial liberalization has undoubtedly played a vital role in promoting the market-oriented reform. After the 2008 global financial crisis, China’s economic growth slowed down and the government accelerated the reform process of financial liberalization. Financial liberalization plays a key role in every stage of China’s economic development and studying the impact of financial liberalization process will help developing countries in the similar path to design their financial liberalization policy in a better manner
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