Risk Information Disclosure and Bank Soundness: Does Regulation Matter? Evidence from China*

Published date01 December 2020
Date01 December 2020
Risk Information Disclosure and
Bank Soundness: Does Regulation
Matter? Evidence from China*
School of Business, Central South University, Changsha, China and
Jindal School of Management, University of Texas at Dallas, Dallas, TX
This paper examines the impact of the Regulation for Commercial Bank Cap-
ital Management in China on banksrisk taking and disclosure behavior. We
construct a risk disclosure index for Chinese commercial banks around this
Regulation and nd that compliance with the Regulation through a higher
risk disclosure index improves bank soundness. We also nd that the compo-
nent of the risk disclosure index associated with risk compensation is the
main driving factor of our ndings. Moreover, our results show the effect of
the Regulation is much smaller for publicly listed banks, suggesting a
substituting regulation effect of the public capital market.
Accepted: 16 October 2018
The scope and quality of bank risk information disclosure are directly related
to the effectiveness of capital market and investor protection. Effective infor-
mation disclosure should reect the fundamental economic activities, and it
could serve as an important function of market discipline. Regulations are
important in disciplining effective information disclosures, particularly for
the banking system in emerging markets. Previous studies (Barth et al. 2004;
Das et al. 2005; Hirtle 2007; Demirgüç-Kunt et al. 2008; Laeven and Levine
2009; Demirgüç-Kunt and Detragiache 2011) suggest that regulations which
force accurate information disclosure can increase bank stability. However,
few articles study whether such regulations could improve the effectiveness
of information disclosure in reecting bank risk taking behavior in emerging
markets. To help ll this gap, we analyze whether compliance with bank reg-
ulation has some relationship with lower bank risk using the Regulation for
Commercial Bank Capital Management (Trial) in China. The Regulation was
* We thank the editor and anonymous referees for their patient work. We thank the National
Natural Science Foundation of China (no. 71631008 and no. 71371194) for supporting the research
described in this article.
© 2018 International Review of Finance Ltd. 2018
International Review of Finance, 20:4, 2020: pp. 973981
DOI: 10.1111/ir.12244

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