Bank homogeneity and risk-taking: Evidence from China

Meixu Ren, Jingmei Zhao, Konglin Ke and Yidong Li

The Quarterly Review of Economics and Finance, 2023, vol. 92, issue C, 142-154

Abstract: Homogeneity is a prominent problem facing China's banking industry, which is essentially a low-level competition lacking core competitiveness and brings challenges to the security and stability of the financial system. We find that homogeneity increases bank risk-taking, and this result is heterogeneous among different bank characteristics. It is further shown that reducing franchise value and increasing liquidity creation are two rational mechanisms through which bank homogeneity increases risk-taking. We also find that homogeneity increases common risk exposure and intensifies competition among banks, and economic policy uncertainty, tight monetary policy, and bank competition will prompt them to take more risks. Overall, our research suggests that in a banking system with restricted business models and strong regulatory constraints, homogeneity fails to achieve risk-sharing but increases individual risk-taking.

Keywords: Bank homogeneity; Bank risk-taking; Franchise value; Liquidity creation; Common risk exposure (search for similar items in EconPapers)
JEL-codes: G18 G21 G28 G32 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:92:y:2023:i:c:p:142-154

DOI: 10.1016/j.qref.2023.09.002

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