Bank branching deregulation and the credit risk of the regional banking sector: Evidence from city commercial banks in China

From 2006 to 2011, with the change in regulatory policies, most regions of China relaxed re-strictions on the intercity branching of city commercial banks, which led to a significant increase in the number of nonlocal branches of city commercial banks. We assess the impact of this bank branching deregulation on the credit risk of the regional banking sector across 286 prefecture-level cities in China. We find that deregulation has increased the credit risk of the regional banking sector in host cities by intensifying competition and encouraging risk-taking behaviors such as "lowering lending criteria" and "attracting deposits with higher interest". Moreover, this effect becomes more pronounced in regions with a higher initial level of the loan-to-deposit ratio and regions with a higher initial level of competition in the banking sector.