Does cross-industry loan diversification reduce bank systemic risk? Evidence from listed banks in China

Chuanhui Ma and Junxiong Fang

China Journal of Accounting Studies, 2023, vol. 11, issue 4, 719-755

Abstract: Banking plays a crucial role as the most significant financial intermediary, and the effectiveness of its diversification strategy aimed at reducing individual bank systemic risk is a significant topic in both theory and practice. In this study, we investigate the impact of cross-industry loan diversification on bank systemic risk using data from listed banks, and reveal a significant positive correlation, indicating a clear‘diversification systemic risk’ effect. This effect remains robust across a series of robustness tests. Further research reveals the influence of cross-industry loan diversification on bank systemic risk operates primarily through the channel of interbank asset similarity. Additionally, we find the‘diversification systemic risk’ effect is particularly prominent among joint-stock banks, those with high interbank deposits，and those with high real estate loans. These findings hold important reference value for the ongoing reforms and practices in China aimed at preventing bank systemic risk.

Date: 2023
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DOI: 10.1080/21697213.2023.2300294

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