Local gambling preferences and bank risk–taking: Evidence from China

Abstract

This paper aims to identify whether local gambling preferences impact banks' risk–taking. Overall, there is a lack of literature linking local culture and bank risk–taking. Using data of local banks from China during 2008–2017, we examine the impact of local gambling preferences on banks' risk–taking by using the ordinary least square method and instrumental variable approach. We find a significant positive association between gambling preferences and banks' risk–taking. Higher gambling preferences can mitigate the positive effects of loan loss provisions and capital adequacy ratio on banks' risk–taking. The association is more pronounced for banks with fewer independent directors, local auditors or banks located in provinces with lower marketization levels. Moreover, local gambling preferences can increase banks’ non-performing loans by heightening bank risk–taking. The aforementioned results provide practical implications for regulators regarding controlling bank risk–taking and reducing non-performing loans.