Expected government support and bank risk-taking: evidence from China

This research examines the impact of expected government support on banks’ risk-taking behaviour and, in particular, how its impact can be stronger on state-owned or listed banks. Using 75 banks in China for the 2007-2016 period, we find that the willingness for and capacity of government support enhance a bank's risk-taking behaviour by increasing non-performance loans as well as doubtful loans and decreasing the Z-score and the liquidity ratio. Furthermore, the moral hazard problem is further enhanced in state-owned banks but mitigated in listed banks. Our analysis enhances our understanding of the willingness for and capacity of government support and finds that more attention should be paid to the impact of market discipline on banks’ risk-taking behaviour.