Abstract
With the accelerated opening of China’s capital account, China’s banking sector is exposed to the impacts of cross-border capital flows. This article explores the impact of cross-border capital flows on banks’ risk-taking in China. Employing bank-level data of 50 Chinese commercial banks from 2005 to 2018 and a sys-GMM (system generalized method of moments) estimation method, we show that cross-border capital flows are positively associated with the risk-taking of Chinese commercial banks. Moreover, banks that are larger, more capital adequate, and more profitable are more sensitive to the degree of capital account openness toward risk-taking, and the capital account openness has the greatest influence on the profitability-driven bank risk-taking. Nevertheless, such positive effects of capital account openness on bank risk-taking may be weakened under bad macro-environment, indicated by low economic growth, poor legitimate law enforcement, and unstable political condition.
Highlights
Prior literature put forward traditional bank risk-taking channel theory that relates monetary policy to bank risk-taking, which proposes that the adjustment of monetary policy affects the risk attitude of commercial banks and further affects the risk of the banks’ portfolios, their market prices, and financing costs, eventually shaping the commercial banks’ decision-making in many aspects (Borio & Zhu, 2012; Dell’Ariccia et al, 2014; Jiménez et al, 2014)
Traditional bank risk-taking channel theory is confined under close economy assumptions, which does not take account of cross-border capital flows in an open economy (Borio et al, 2014)
The most prominent is the research of Bruno and Shin (2015), which is based on Miranda-Agrippino and Rey’s (2015) study of the “global financial cycle” and empirically reveals that currency appreciation pushes up the leverage of the banking sector and increases financial risks
Summary
The outbreak of the subprime mortgage crisis in 2008 has drawn researchers’ attention to the potential risks underneath the decision-making of the banking sector, and academic studies of bank risk-taking have emerged ever since (Adrian & Boyarchenko, 2012; Adrian & Shin, 2014; Agur, 2014; Altunbas et al, 2010; Angeloni et al, 2015; Brissimis & Delis, 2010; Brunnermeier & Sannikov, 2014; Buch et al, 2014; Dell’Ariccia et al, 2014, 2017; He & Krishnamurthy, 2013; Hilscher & Raviv, 2014; Ioannidou et al, 2009; Laeven et al, 2010; Maddalonia & Peydro, 2013; Paligorova & Santos, 2017). As the opening of the capital account has increased, China has faced a growing cross-border capital flow impact; is the change in bank risk-taking behavior an important factor? This article intends to systematically analyze the transmission pathways of cross-border capital flows affecting bank risk exposure, by referring to existing research results at home and abroad, and aims to draw on the bank risk exposure model of Delis and Kouretas (2011) to illustrate the relationship between capital account openness and bank risk exposure Based on this benchmark model, the system GMM (generalized method of moments) estimation method is used to empirically test the sample data of 50 commercial banks in China from 2005 to 2018, to verify whether there is an “international risk-taking channel effect” in our banking system. The “international risk-taking channel effect” exists in China’s commercial banking system
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