Summary:
In recent years, digital finance has rapidly developed in China, and financial technology has significantly improved the quality and efficiency of financial services by promoting the digital transformation of traditional financial institutions. However, some financial innovation businesses based on internet technology are free from conventional supervision, serving as hidden dangers to financial stability. In such circumstances, the fund source stability is poor, thereby challenging liquidity and risk management, violating the supervision and the self-discipline requirements of market interest rate pricing, and hampering the regional restrictions of local banks. The launch of JD Finance and Fumin Bank's “Fuminbao” in 2018 marked the beginning of third-party cooperative deposits. The third-party platform displays information on deposit products, using phrases such as “bank deposits, principal and interest guarantee,” “100% compensation within 500,000 yuan”. Third-party cooperative deposits cover several high-yield deposit products, becoming a necessary means for some small-and medium-sized banks to absorb deposits and alleviate their liquidity pressure. Third-party cooperative deposits are categorized as non-proprietary platforms and are strictly regulated; however, there is a lack of academic research on the associated risks. Owing to the convenience, large customer traffic, and high returns of third-party internet platforms, third-party cooperative deposits have resulted in a surge in liquidity to some banks. It remains unknown whether the rapid expansion of the liability side impacts the allocation and risk of the asset side; theoretically, no consensus has been reached. On the one hand, deposit inflows may incentivize banks to take on more risks by alleviating the liquidity pressure. On the other hand, the nature of flexible deposit withdrawal may impose market constraints and limit risk-taking by banks. Therefore, it is critical to clarify the relationship between third-party cooperative deposits and the asset-side risk-taking of commercial banks. This study provides valuable, in-depth insights into the impact of financial technology on risk management by banks and improves the supervision of internet deposits. This study collects the data of the 2012-2020 semi-annual and annual reports of China's listed banks. Using the difference-in-differences model and setting the start of the third-party cooperative deposit as 2018, we categorize the banks that cooperate with the third-party platform as the treatment group and the non-cooperative banks as the control group. This study finds that the banks in the treatment group took significantly more risks, as indicated by the expansion of risk-weighted assets and increased credit allocation in high-risk industries. Prior to this, a parallel trend existed between the treatment and control groups. The increased risk-taking commenced after the third-party cooperative deposit business began. Therefore, this paper provides causal evidence that third-party cooperative deposit businesses increase the risk-taking of banks. Analysis of the underlying mechanism shows that the size of the savings deposits of treatment group banks has increased significantly, shifting the risk-taking behavior of banks toward high-interest loans and high-risk industries. By controlling the average deposit costs of banks and the associated interactions, this study excludes the risk transfer hypothesis, i.e., that increases in the cost of deposits augments risk-taking. In robustness tests, we use propensity score matching to select the control and treatment groups for matching, conduct a placebo experiment using the 2015 data, eliminate the regulated industry sample, and add the interactive variables of the bank's wealth management products. It is noteworthy that these robustness checks do not alter the main results of this study. This study makes the following contributions. First, it focuses on the new perspective of cooperation between banks and internet deposit platforms, assesses the exogenous shock caused by third-party cooperative deposits, analyzes the effects of liability-side business innovations on the asset side, and enriches the literature related to internet finance, financial technology, and micro banking. Second, the mechanism analysis indicates that the surge in liquidity caused by third-party cooperative deposits is the key to improving banks' risk-taking, which implies that regulatory authorities should strengthen liquidity and internet deposit supervision.
Abadie, Alberto, Alexis Diamond, and Jens Hainmueller. 2015. “Comparative Politics and the Synthetic Control Method”, American Journal of Political Science, 59(2):495~510.
[17]
Acharya, Viral, and Hassan Naqvi. 2012. “The Seeds of a Crisis: A Theory of Bank Liquidity and Risk Taking over the Business Cycle”, Journal of Financial Economics,106(2):349~366.
[18]
Allen, Franklin, James McAndrews, and Philip Strahan. 2002. “E-Finance: An Introduction”, Journal of Financial Services Research, 22(1):5~27.
[19]
Calomiris, Charles W., and Charles M. Kahn. 1991. “The Role of Demandable Debt in Structuring Optimal Banking Arrangements”, American Economic Review, 81(3):497~513.
[20]
Carletti, Elena, Filippo De Marco, Vasso Ioannidou, and Enrico Sette. 2021. “Banks as Patient Lenders: Evidence from a Tax Reform”, Journal of Financial Economics, 141(1):6~26.
[21]
Cheng, Maoyong, and Yang Qu. 2020. “Does Bank FinTech Reduce Credit Risk? Evidence from China”, Pacific-Basin Finance Journal, 63:101398.
[22]
Delis, Manthos D., and Georgios P. Kouretas. 2011. “Interest Rates and Bank Risk-taking”, Journal of Banking & Finance, 35(4):840~855.
[23]
Drechsler, Itamar, Alexi Savov, and Philipp Schnabl. 2021. “Banking on Deposits: Maturity Transformation without Interest Rate Risk”, The Journal of Finance, 76(3):1091~1143.
[24]
Flannery, Mark J. 1994. “Debt Maturity and the Deadweight Cost of Leverage: Optimally Financing Banking Firms”, American Economic Review, 84(1):320~331.
[25]
Goodman-Bacon, Andrew. 2021. “Difference-in-differences with Variation in Treatment Timing”, Journal of Econometrics, 225(2):254~277.
[26]
Gatev, Evan, and Philip E. Strahan. 2006. “Banks' Advantage in Hedging Liquidity Risk: Theory and Evidence from the Commercial Paper Market”, The Journal of Finance, 61(2):867~892.
[27]
Gatev, Evan, Til Schuermann, and Philip E. Strahan. 2009. “Managing Bank Liquidity Risk: How Deposit-loan Synergies Vary with Market Conditions”, The Review of Financial Studies, 22(3):995~1020.
[28]
Goldstein, Itay, and Ady Pauzner. 2005. “Demand-deposit Contracts and the Probability of Bank Runs”, The Journal of Finance, 60(3):1293-1327.
[29]
Hanson, Samuel G., Andrei Shleifer, Jeremy C. Stein, and Robert W. Vishny. 2015. “Banks as Patient Fixed-income Investors”, Journal of Financial Economics, 117(3):449~469.
[30]
Hong, Han, Jing-Zhi Huang, and Deming Wu. 2014. “The Information Content of Basel III Liquidity Risk Measures”, Journal of Financial Stability, 15:91-111.
[31]
Jacklin, Charles J., and Sudipto Bhattacharya. 1988. “Distinguishing Panics and Information-based Bank Runs: Welfare and Policy Implications”, Journal of Political Economy, 96(3):568-592.
[32]
Kashyap, Anil K., Raghuram Rajan, and Jeremy C. Stein. 2002. “Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-taking”, The Journal of Finance, 57(1):33~73.
[33]
Keeley, Michael C., 1990. “Deposit Insurance, Risk, and Market Power in Banking”, American Economic Review, 80(5):1183~1200.
[34]
Khan, Muhammad Saifuddin, Harald Scheule, and Eliza Wu. 2017. “Funding Liquidity and Bank Risk-taking”, Journal of Banking & Finance, 82:203~216.
[35]
Li, Lei, Elena Loutskina, and Philip E. Strahan. 2019. “Deposit Market Power, Funding Stability and Long-term Credit”, NBER Working Paper Series, No. 26163.
[36]
Merton, Robert C. 1977. “An Analytic Derivation of the Cost of Deposit Insurance and Loan Guarantees an Application of Modern Option Pricing Theory”, Journal of Banking & Finance, 1(1):3~11.
[37]
Qi, Jianping. 1998. “Deposit Liquidity and Bank Monitoring”, Journal of Financial Intermediation, 7(2):198~218.
[38]
Wang, Rui, Jiangtao Liu, and Hang Luo. 2021. “Fintech Development and Bank Risk Taking in China” ,The European Journal of Finance, 27(4-5):397~418.
[39]
Wagner, Wolf. 2007. “The Liquidity of Bank Assets and Banking Stability”, Journal of Banking & Finance, 31(1):121~139.