How does macroprudential policy affect the relationship between financial openness and bank risk-taking

Abstract

This paper investigates how macroprudential policy affects the relationship between financial openness and bank risk-taking by utilizing Chinese commercial banking data from 2005 to 2021. We find that financial openness generally promotes bank risk-taking. Robustness checks consistently support this finding, including variable substitutions, sample period adjustments, controlling for other shocks, and endogeneity concerns. The impact of financial openness on risk-taking demonstrates potential heterogeneity, contingent upon factors such as bank financing constraints, risk management, and financial regulation. We delineate credit, interest rate, and asset price channels through which financial openness affects bank risk-taking, notably by amplifying bank credit volumes, diminishing credit asset ratios, compressing net interest margins and spreads, and elevating asset prices. Macroprudential policies are identified as effective countermeasures against the heightened bank risk-taking associated with financial openness, with the effectiveness of these policies varying by the specific regulatory instruments.