How Do Short-Term Cross-Border Capital Flows Affect Bank Risk-Taking? Evidence from China

ABSTRACTThis study examines the impact of short-term cross-border capital flows on banks’ risk-taking using panel quarterly data from all 37 A-share listed commercial banks in China. We demonstrate that short-term cross-border capital flows increase both ex ante and ex post risk-taking by banks. The impact of short-term cross-border capital flows upon banks’ ex ante and ex post risk-taking is heterogeneous across different kinds of commercial banks and at different phases of the financial cycle. Besides, short-term cross-border capital flows exhibit a non-linear effect on banks’ ex ante risk-taking and ex post risk-taking with changes in capital account openness.KEYWORDS: Short-term cross-border capital flowsbank risk-takingfinancial cyclecapital account opennessChinese A-share listed commercial banksJEL: F32G01G21 AcknowledgmentsWe would like to thank the Editor-in-Chief and Subject Editor of the journal Emerging Markets Finance and Trade for their suggestions on the article, and the reviewers for the journal Emerging Markets Finance and Trade for their comments.Disclosure statementNo potential conflict of interest was reported by the authors.Additional informationFundingThis research was funded by the Humanities and Social Science Planning Fund of the Ministry of Education of China [No. 19YJA790040] and the Xinjiang Social Science Foundation Project [No. 19BJL028].