Does financial flexibility affect systemic risk of commercial banks? — Based on excessive credit expansion and off-balance sheet business

This paper constructs a panel model to conduct an empirical analysis on the impact of financial flexibility on the banking systemic risk and its mechanism with quarterly data of listed banks in China from 2010 to 2021. The research shows that: 1) Financial flexibility has a positive effect on banking systemic risk. Compared with the state-owned banking sector and the economic downtrend period, the promotion of financial flexibility to the systemic risk of banks only exists in non-state-owned banks and the economic uptrend period. 2) Excessive credit expansion and off-balance sheet business play a mediating role in the relationship between financial flexibility and banking systemic risk. Financial flexibility promotes banking systemic risk mainly through increasing excessive credit scale and improving off-balance sheet business channels. The transmission channels of “financial flexibility-excessive credit expansion/ off-balance sheet business-banking systemic risk” are all effective. 3) The new asset management regulation and monetary policy uncertainty have asymmetric moderating effect on the relationship. Implementation of new asset management regulation will weaken the promotion effect of financial flexibility on banking systemic risk, while increase of monetary policy uncertainty will aggravate the promotion effect. 4) Further research on different dimensions of financial flexibility shows that both cash flexibility and debt flexibility have a positive effect on the systemic risk of banks. The results will provide important theoretical guidance and decision-making reference for improving the efficiency of bank financial flexible supervision and preventing and controlling the systemic risk of China’s banking industry. © 2024 Systems Engineering Society of China. All rights reserved.