Does financial decentralization create financial risk?

Abstract

The reform of financial decentralization and fiscal decentralization between central and local governments in China is important to strengthen the role of local governments in preventing financial risks, and is a hot issue of concern for academics and the financial industry. This study employs panel data from 30 provinces and cities in China between 2006 and 2019 to examine the impact of financial decentralization on financial risk. The empirical results demonstrate that financial decentralization can effectively reduce financial risks, with significant spatial heterogeneity observed in the impact. Moreover, the study finds that there is no effective synergy between fiscal and financial decentralization in suppressing financial risks, and financial decentralization does not increase financial risk by strengthening promotion incentives. Therefore, as the reform of the central and local economic decentralization system continues, greater attention should be paid to the coordination between financial and fiscal decentralization, and financial risk indicators should be integrated into officials' promotion incentive assessments to better prevent financial risks.