Macro-prudential policy, digital transformations and banks’ risk-taking

Abstract

This study examines the influence of macro-prudential policies on risk-taking among systemically important banks using unbalanced panel data from 126 commercial banks in China between 2010 and 2021. Under a difference-in-differences setup, the empirics demonstrate that macro prudence in China effectively enhances large banks’ risk prevention measures and risk-mitigation efforts. Specifically, macro-prudential policy implementation facilitates the digital transformation of banking and subsequently reduces risk-taking behavior. According to heterogeneity test results, the concerned effect becomes more significant for systemically important banks having higher capital adequacy ratios. Moreover, the most important banks with strong interbank dependence exhibit more pronounced changes in risk profiles responding to stricter capital supervision requirements. Our findings shed light on the economic consequences of monitoring strengthening from the perspective of regulatory authorities.