Financial risk soft landing: Government regulatory strategies and the resolution of problematic financial institutions

Abstract

Effective Fintech regulation requires not only the establishment of regulatory policies but also effective enforcement of regulatory strategies by the government. In this paper, we focus on the role of local governments as financial regulatory enforcers and study the impact of government financial regulatory strategies on the resolution of local problematic financial institution risks. Using manually collected financial regulatory information from both central and local government websites in China, we quantify the financial regulatory strategies of local governments from three perspectives: the intensity of local regulatory enforcement, the depth of local responses to central policies, and the degree of alignment between local and central regulatory goals. We employ the Cox proportional hazards model and competing risk model on P2P platform event data, revealing that P2P platform risks are significantly lower in regions with more intensive regulation enforcement, deeper responses to central policies, and better alignment of local goals with those of the central government. We analyze the theoretical mechanisms of the above empirical findings using institutional theory, decentralization theory, and policy uncertainty theory. Robustness checks using alternative regulatory and P2P platform risk measurements, instrumental variable methods and alternative samples yield consistent results. Heterogeneity analysis reveals that government regulatory strategies have a greater impact on the risks of large platforms and platforms headquartered in provincial capitals. Our study contributes to a deeper understanding of the role of governments in financial regulation with new empirical evidence and reveals the theoretical mechanisms through which government regulatory strategies work, expanding the theoretical boundaries of research in the field of financial regulation.