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| Policy Continuity and Bank Systemic Risk |
| ZHANG Lin, LIAN Yonghui, FANG Yi
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School of Economics, Beijing Technology and Business University;
School of Finance, Capital University of Economics and Business;
School of Finance, Central University of Finance and Economics |
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Abstract In the complex, volatile domestic and international economic situation in recent years, China has actively used various economic policies to establish macroeconomic control, with good results. As an important intermediary of macroeconomic policy transmission, the risk profile of commercial banks is highly sensitive to policy continuity. In this context, it is of great practical significance to study how policy continuity affects the systemic risk of commercial banks to forestall systemic financial risks.
Using unbalanced panel data from 32 listed banks in China from Q1 2007 to Q4 2019, we empirically test the impact of policy continuity on bank systemic risk. The results show that enhancing policy continuity significantly reduces bank systemic risk. To clarify the impact path, we decompose systemic risk into two dimensions: individual bank risk and individual bank-system correlation. The results show that an increase in policy continuity reduces both individual bank risk and individual bank-system correlation. On the one hand, further analyses show that while policy continuity increases banks' willingness to take risks, it reduces their actual risk level. On the other hand, while policy continuity has no significant impact on interbank business, which helps to strengthen the degree of direct interbank correlation, it can reduce the degree of banks' indirect correlation by reducing the similarity of their asset allocations. The effect of policy continuity on reducing bank systemic risk is greater when the real economy is down and monetary policy is accommodative. The systemic risk for commercial banks with higher insolvency risk and lower information transparency is more affected by policy continuity than banks with a lower insolvency risk and higher information transparency. In addition, by distinguishing between different types of economic policy continuity, we find that the policy continuity in monetary, fiscal, exchange rate, and capital accounts of banks significantly reduce bank systemic risk, while monetary policy continuity has the strongest impact on bank systemic risk.
The contributions of this paper are as follows. First, our results expand the literature on the financial risk consequences of policy continuity. While most scholars examine the impact of policy continuity on individual bank risk from a microprudential perspective, we examine the impact of policy continuity on bank systemic risk from a macroprudential perspective. Second, our findings enrich the literature on the factors influencing bank systemic risk. Most scholars focus on examining the influential factors for systemic risk at the micro bank level, while fewer scholars examine the relationship between the external macro environment and bank systemic risk. Third, we illuminate the paths and conditions under which policy continuity affects bank systemic risk through systemic risk decomposition, heterogeneity analysis, and differentiation between different types of policy continuity.
We draw the following policy insights. First, relevant departments should maintain the continuity, stability, and sustainability of their economic policies, especially major policy directions. Meanwhile, the policy interpretation and explanation mechanism should be improved further to enhance the transparency of economic policies. Second, commercial banks should track policies better to improve their forecasting, strengthen their prudent operations through sound development, seek differentiated and distinctive development paths, and improve their quality of information disclosure to enhance their overall ability to adapt to policy adjustments. Third, banking regulators should strengthen their prudential supervision of commercial banks during periods of frequent policy adjustments. On the one hand, banking regulators should prospectively guide commercial banks to make adjustments according to policy changes, with particular attention to banks with high financial risks and low information transparency. On the other hand, banking regulators should encourage commercial banks to differentiate their operations, promote the development of a multilevel, diversified banking service system, and increase the financial resilience of the banking sector.
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Received: 20 November 2020
Published: 01 June 2022
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