Digitalization as a double-edged sword: A deep learning analysis of risk management in Chinese banks

Li Wang, Yiting Huang and Zhiwu Hong

International Review of Financial Analysis, 2024, vol. 94, issue C

Abstract: Digitalization presents both opportunities and formidable challenges for risk management in commercial banks. This study addresses the critical question of how digitalization influences banks' risk-taking behaviors. Applying an InstructGPT-inspired deep learning model, we developed a multidimensional bank digitalization index to analyze its effects on risk-taking, using data from 149 Chinese commercial banks from 2011 to 2020. The empirical results show that (1) digitalization significantly curtails risk-taking on the balance sheet, while concurrently escalating off-balance sheet risk exposure; (2) digitalization diminishes on-balance sheet risk by lessening distortions in competition due to government guarantees, manifested as a competition effect of on-balance sheet guarantee; (3) digitalization increases the upper limit of expected returns on bank financial products, thereby elevating off-balance sheet risk-taking, evident as an off-balance sheet price competition effect; (4) bank digitalization has a more obvious boosting effect on off-balance sheet risk-taking of banks with a longer average maturiy of wealth management products. This paper enriches the measurement of the digitalization of banks and provides a reference for banks to deepen digital applications and strengthen risk management, which has important practical significance.

Keywords: Bank digitalization; Risk-taking; Deep learning (search for similar items in EconPapers)
JEL-codes: C45 G21 O33 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:94:y:2024:i:c:s1057521924001819

DOI: 10.1016/j.irfa.2024.103249

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