The Influence Of Liability Structure On Banks’ Risk Taking Behavior

The regulation on banking sector got tightened since 2017 in order to reverse the trend of money flowing from real economy to virtual economy.Under this macro background,I would like to explore the micro foundation of banks’ risk taking.In the transformation of Chinese commercial banks,the diversification of liability is one of the most significant changes,and this paper examines the influence of liability structure on banks’ risk taking.The change of liability structure mainly refers to the increase of using non-deposit liabilities.Under the risk-rebalancing framework,I use dynamic models to fit an unbalanced panel composed of 136 banks over 2007-2018.The estimation results using system GMM confirm the existence of two influence channels: asset allocation effect and risk control effect.Generally,the increase of using non-deposit liabilities significantly decreased banks’ risk taking level:(1)As the non-deposit liabilities are more expansive and less stable,banks will adjust their portfolio to a lower risk level by allocating more resources on non-loan investments,which is called “ asset allocation effect ”.(2)Enhancing risk control within their loans is also an option for risk-rebalancing,banks may choose to take fewer risks by decreasing the loan’s concentration,which is called “risk control effect”.(3)I also implement a sub-sample test to examine the possible heterogeneity among different types of banks,and I find that joint-stock banks and city banks are generally more sensitive to the change of liability strcture.By using multiple variables to indicate liability structure and risk taking,the results are generally robust,especially for asset allocation effect.My finding seems do not support the recent regulation on banking sector,but I should not take systematic risk as the simple sum of individual risk.With the change of liability structure,banks are making more interbank and financial investments rather than loans,which could stimulate the growth of asset bubbles and crowed out loans to real economy.To conclude,even the banks are taking less risks individually,the systemically risk could still increase and I should be highly cautious about that.