Does trade policy uncertainty increase commercial banks’ risk-taking? Evidence from China

Debao Hu, Jingming Lu and Sibo Zhao

International Review of Economics & Finance, 2024, vol. 89, issue PB, 532-551

Abstract: This paper aims to investigate the transmission mechanism through which trade policy uncertainty (TPU) impacts bank risk-taking via firms' capital market performance. The research reveals that TPU significantly affects firms' capital market performance, leading to reduced stock liquidity, increased stock price crash risk, decreased stock price synchronicity, and lower stock returns. These effects are transmitted to bank risk-taking, resulting in an overall increase in banks’ passive risk-taking and a decrease in their willingness to undertake active risk-taking. Furthermore, we discover that the impact of TPU on bank risk-taking varies across different categories of firms, revealing heterogeneity in this transmission process. This study uncovers the critical mechanism through which TPU propagates in financial markets, offering important theoretical insights and policy implications for understanding and managing financial risk.

Keywords: Trade policy uncertainty; Bank risk-taking; Capital market performance (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:89:y:2024:i:pb:p:532-551

DOI: 10.1016/j.iref.2023.10.044

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