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Funding Liquidity and Bank Risk-taking: Empirical Evidence from China

【Authors】
MA Yong, LI Zhen
【WorkUnit】
Renmin University of China, 100872.
【Abstract】

Liquidity risk has a significant impact on the prudent operation of financial institutions and the stability of financial system. Funding liquidity risk has played an important role in banking crises of the history. This paper uses the data of 338 commercial banks in China from 2002 to 2016 to analyze the relationship between funding liquidity and bank risk-taking. The findings show that: (1) Banks with lower funding liquidity risk take more risks, which is evidenced by the lower Z-score and capital adequacy ratio, as well as higher risk-weighted asset ratio and liquidity creation. (2) Funding liquidity has an impact on the factors of bank risks. Lower funding liquidity risk increases bank profitability and reduces capital level. (3) Funding liquidity risk can affect bank risk-taking behavior through the intermediary effect of bank loans. (4) With a lower funding liquidity risk, larger banks and banks with a higher leverage ratio can restrain from taking more risks, and the banks can take less risks during an international financial crisis or higher economic risk periods.
 
JEL:C33, G21, G33

【KeyWords】
Funding Liquidity, Deposits, Bank Risk, Intermediary Effect, Heterogeneity