The impact of social trust on loan grants and default risk: Evidence from China’s regional commercial banks during branching policy changes

Abstract

We investigate the impact of social trust on loan grants and default risk among regional commercial banks in China by using exogenous shocks stemming from the unique regulatory reforms of bank branch deregulation and re-regulation. We find that social trust has different impacts during the two periods. In particular, banks located in regions with higher levels of social trust exhibit a more pronounced increase (decrease) in loan grants following deregulation (re-regulation). We also find a stronger positive relationship between social trust and default risk after deregulation and re-regulation. Our results highlight the relevance of changes in banking regulation for the impact of social trust on loan grants and default risk. They also provide valuable insights for banking regulators and bank managers in evaluating the outcomes of banking regulation reforms.