Charter value, official implicit insurance and risk-taking behaviors of Chinese banks

Using a panel data of 14 representative commercial banks in China over the period of 1994-2003, interactions among chatter value, official implicit insurance and bank risk-taking behaviors are investigated. Empirical estimation occurs in two steps. Firstly, the relationships relating charter value and implicit insurance to bank risk-taking are examined. Under the assumption of implicit insurance absence, the results find a negative relation between charter value and bank risk, suggesting that banks may voluntarily self-restrain from risk. However, as the interaction of bank chaffer and implicit insuance is considered, the results show that implicit insurance greatly hurts the risk-control of charter value. Secondly, partitioned tests on bank groups with different ownership are performed. The results report that negative relation between bank charter and risk hardly exists, inconsistent with the standard view that higher chatter values reduce the incentives of banks to take excessive risks. The last evidence proves that implicit insurance almost covers the banking and self-discipline mechanism of charter value can not be fully achieved.