Qin Xiaoyu, Liu Fang, Liu Liya
Studies of International Finance. 2025, 0(9): 49-61.
In recent years, as instability in the global financial system has intensified, risk management issues among banks have become increasingly prominent. Small and medium-sized banks（SMBs）, in particular, are more vulnerable to market shocks, exposing weaknesses in capital adequacy, risk tolerance, and liquidity management. As a crucial financial safety net, the deposit insurance system was originally designed to protect depositors' funds, prevent bank runs, and maintain financial stability. However, how deposit insurance influences banks' risk-taking behavior and operational soundness remains a question warranting further exploration.
Since the implementation of the deposit insurance system in China in 2015, it has played a positive role in protecting depositors' interests and managing risk events. Nevertheless, how to better leverage this system to strengthen bank stability and curb excessive risk-taking remains a pressing issue. To address this question, this paper conducts an empirical analysis of 124 rural SMBs in China participating in the deposit insurance program. The study aims to reveal how the system affects banks' risk-taking by shaping the deposit structure and liability stability.
Empirical results show that banks with a higher proportion of insured deposits exhibit stronger operational stability and significantly lower risk-taking. Specifically, the deposit insurance system improves liability stability, reducing exposure to market fluctuations, while also restraining banks' excessive risk-seeking behavior on the asset side. Hence, the system plays a key role in strengthening SMBs' resilience and preventing bank runs.
This paper further identifies two mechanisms through which insured deposits affect risk-taking. Firstly, they stabilize the liability side, enabling banks to better manage liquidity pressures and reduce reliance on external financing. Secondly, they suppress asset-side risk-taking by lowering incentives to pursue short-term high-yield investments. The combined effect enhances SMBs' internal risk control capacity. Heterogeneity analysis reveals that the effects are more pronounced in regions with intense competition, high marketization, and limited government intervention. Additionally, the effect is stronger for banks with smaller asset sizes and higher capital adequacy ratios.
Through empirical research, this paper demonstrates the positive role of the deposit insurance system in enhancing the stability of SMBs and reducing risk-taking. Based on these findings, the paper offers the following policy recommendations for regulatory authorities and SMBs. Firstly, regulators should enhance dynamic supervision of unsteady deposits, regularly disclose their proportion, and offer risk guarantees to reduce banks' reliance on short-term, high-risk liabilities. Secondly, early-warning systems and stress-testing mechanisms should be strengthened to dynamically assess and manage risks under different economic scenarios. Thirdly, efforts should be made to improve the deposit insurance system, especially in weakly supervised regions, through better policy coordination and increased public awareness. Fourthly, cross-regional risk linkage mechanisms should be established to improve local SMBs' risk management, including regional risk mitigation funds and inter-regional regulatory collaboration. Finally, the application of financial technology in SMBs should be promoted, leveraging big data and artificial intelligence to improve risk warning and management capabilities.
