Liping Lu (Renmin University): Deregulation and bank stability: Evidence from loan-to-deposit ratio requirement in China
Loan-to-deposit ratio may bring unintended consequences on the financial stability. We employ China’s LDR deregulation in 2015 to examine the effect of LDR on bank stability. We show that the deregulation of LDR increases the stability of banks with high LDR. Specifically, the deregulation of LDR alleviates deposit competition, decreases the reliance on customer deposit funding, and improves the loan structure among banks with high LDR, which increases the on-balance-sheet stability of these banks. Meanwhile, the deregulation of LDR resists high-LDR banks’ impulse to issue principal-floating wealth management products, a form of shadow banking, which thus increases their off-balance-sheet stability.
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