Risk Information Disclosure and Bank Soundness: Does Regulation Matter? Evidence from China*

Abstract

This paper examines the impact of the Regulation for Commercial Bank Capital Management in China on banks' risk taking and disclosure behavior. We construct a risk disclosure index for Chinese commercial banks around this Regulation and find that compliance with the Regulation through a higher risk disclosure index improves bank soundness. We also find that the component of the risk disclosure index associated with risk compensation is the main driving factor of our findings. Moreover, our results show the effect of the Regulation is much smaller for publicly listed banks, suggesting a substituting regulation effect of the public capital market.