Ownership structure and risk taking: Comparative evidence from private and state controlled banks in China

This study examines the impact of ownership structure on Chinese banks’ risk-taking behaviours. We classify Chinese commercial banks into three categories based on the different types of controlling shareholder, and find that banks controlled by the government (GCBs) tend to take more risk than those controlled by state-owned enterprises (SOECBs) or private investors (PCBs). This can be attributed to severe political intervention and weak incentives to follow prudent bank management practices for GCBs. We also find that the results are more pronounced among banks with concentrated ownership, presumably because the large controlling power helps to enhance the monitoring of the management and promotes prudent operating procedures. Our findings have important implications for the ongoing reform in the Chinese banking sector.