Risk Effects of Local Commercial Banks Establishing Rural Banks

【Authors】

HUANG Xijia, MAO Changneng & YANG Lisi

【WorkUnit】

Nanchang University, 330031

【Abstract】

Timely management of risks in small and medium-sized financial institutions is important for China’s overall development and security. Identifying and mitigating systemic financial risks in small and medium-sized banks is the top priority. Most rural banks are initiated and established by local commercial banks, but they generally face high risks, potentially serving as a conduit for endogenous risk contagion within the broader network of local small and medium-sized banks.
To address this issue, this study constructs a behavioral interpretation framework grounded in the principal-agent theory, risk preference theory, and information asymmetry theory. It conducts an empirical analysis of the risk effects of local commercial banks’ initiation of rural banks, as well as the underlying mechanisms driving these effects. The study finds that the initiation of rural banks by local commercial banks has led to a structural “quantitative change” effect, characterized by an increased proportion of credit assets and interbank assets allocated by local commercial banks. It has also caused a risky “qualitative change” effect, with rising unit risk coefficients. The interplay of these quantitative and qualitative changes significantly amplifies the overall risks of local commercial banks. Further analysis reveals heterogeneity in this risk effect. Specifically, the higher the asset allocation efficiency, the more diversified the financing sources, and the stronger the income-generating ability of diversified businesses, the weaker the risk effect. On the contrary, the higher the proportion of rural banks’ assets, the stronger the risk effect.
This study makes several key contributions. First, by focusing on the common practice of local commercial banks initiating rural banks within the incremental reform of rural financial institutions, this study analyzes the risk effects of such initiatives on local commercial banks, which is conducive to a more systematic understanding of the risk issues of rural banks. Second, this study identifies the structural “quantitative change” effect and the risky “qualitative change” effect of such initiatives on the risk assets of local commercial banks, providing precise guidance for regulators and the banking system to identify root causes and implement targeted policies. Third, this study empirically proves that improving asset allocation efficiency, diversifying financing sources, and enhancing income generation from diversified businesses can mitigate these risk effects. This evidence provides useful guidance for preventing and resolving the sector-based financial risk transmission stemming from rural banks.
The ongoing reform and risk mitigation efforts for small and medium-sized banks underscore the need to institutionalize successful practices and establish sound long-term sustainable mechanisms for inclusive finance departments. Future research should delve deeply into how to make rational use of structural monetary policies and fiscal policies to promote the commercial sustainable development of local small and medium-sized banks.  

JEL: E44, G28

【KeyWords】

Rural Banks, Asset Allocation, Bank Risk, Risk Effect