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Banking Openness, Foreign Ownership and Bank Risk-Taking

【Authors】
LI Zhen, SONG Ke & YANG Jiawen
【WorkUnit】
LI Zhen (Zhuhai Fudan Innovation Institute, 518057)SONG Ke (Renmin University of China, 100872)YANG Jiawen (George Washington University, 20052)
【Abstract】

Opening up the banking sector is a doubleedged sword. While improving bank risk control, it also increases the complexity of financial risk prevention. Therefore, understanding the relationship between openness and risk is essential for further opening up of the banking sector. Based on data of 160 Chinese commercial banks from 2002 to 2017, this paper analyzes the relationship between foreign ownership and bank risk-taking. The results offer more comprehensive support for the view of “open-stability”. Foreign ownership brings the knowledge spillover effect and external supervision, thus reducing risk-taking by Chinese banks, as is evidenced by lower overall default risk, capital shortage risk, asset risk and financial intermediary risk. This conclusion withstands a series of robustness tests and endogeneity analyses. Directors or executives appointed by foreign shareholders can help reduce bank risk-taking, though to varying degrees depending on the type of the foreign shareholder. Further analysis reveals that foreign ownership leads to the increase of capital buffer, and the decline of leverage ratio, thus reducing bank risk-taking. This is mainly the result of external supervision. Once foreign investors partly takes over the ownership of Chinese banks, the banks with relationship lending and listed banks will face higher risks, while banks that are in periods of higher economic risks or in a better institutional environment may face lower risks.

JEL:G21, G32, G34

【KeyWords】
Banking Openness, Foreign Ownership, Bank Risk, Intermediary Effect