Professor Yongbin Lv, Deputy Director of the Base, has published his paper entitled How Do Regulatory Penalties Affect Bank Financial Performance- With a Discussion on the Moderating Effect of Regulatory Innovation in FinTech in Modern Finance Research, a prominent academic journal.

Abstract:To curb regulatory arbitrage by banks and mitigate financial risks, Chinese regulators have intensified on-site inspections and penalties for misconduct. Since 2004, the Administrative Measures for Penalties by the China Banking Regulatory Commission has undergone multiple revisions and updates, resulting in increased frequency and magnitude of penalties. Consequently, regulatory penalties have become an important corrective tool for maintaining financial stability. However, heightened regulatory pressure has imposed a dual impact on banks' operations. On one hand, strict supervision may lead banks to adopt overly cautious behaviors, tightening credit conditions, thereby constraining economic growth and generating potential economic losses. On the other hand, banks may lobby regulators under the guise of financial technology innovation to bypass certain regulatory requirements, effectively becoming "loopholes" in the system. Against this backdrop, key questions emerge: Can regulatory enforcement effectively enhance banks' financial performance? Through which mechanisms do regulatory penalties influence bank performance? Answering these questions holds substantial practical significance for improving regulatory frameworks and optimizing financial system operations. Based on penalty data collected from the official website of the financial regulator and bank-level data from 2010-2020, this study empirically examines the impact of regulatory penalties on banks' financial performance. The results indicate that being penalized, the number of penalties, and the size of fines significantly suppress banks' financial performance. This conclusion remains robust after a series of robustness checks and endogeneity tests. Mechanism analysis shows that the decline in bank liquidity creation and the rise in compliance costs are two critical channels through which penalties affect financial performance. Moreover, the moderating effect analysis demonstrates that regulatory innovation in financial technology can partially mitigate the adverse impact of penalties on bank performance by improving the precision and efficiency of supervision. Long-term effect analysis further reveals that the negative impact of penalties is mainly short-term and diminishes over time, lacking persistence. Heterogeneity analysis shows that penalties exert more pronounced adverse effects on small-scale banks, unlisted banks, and those with higher risk exposure, highlighting their greater vulnerability to regulatory shocks. In addition, economic-related administrative penalties, compared with other types of penalties, exert the most significant suppressive impact on financial performance. The contributions of this study are as follows. First, it empirically examines the impact of regulatory penalties on banks' financial performance, thereby extending the existing research perspective on regulatory enforcement and providing new evidence on the underlying mechanisms. Second, by exploring the heterogeneity across bank characteristics and penalty types, it sheds light on the relationship between penalties and financial performance, offering theoretical foundations for assessing the appropriateness of regulatory intensity and for formulating differentiated supervisory policies. Finally, from the perspective of financial technology regulation, this paper systematically analyzes its moderating role in the relationship between regulatory penalties and bank performance, providing both theoretical and empirical support for understanding its key function in mitigating regulatory shocks and improving supervisory efficiency.

Keywords: regulatory penalties, banks' financial performance, liquidity creation, compliance costs

Link: http://dianda.cqvip.com/Qikan/Article/Detail?id=7201851009

Teacher profile

Yongbin Lv,Vice Dean, Professor and PhD Supervisor of the School of Finance at Zhongnan University of Economics and Law, and Deputy Director of the International Joint Research Center for Digital Technology and Modern Finance. His primary research interests include digital finance, climate finance and inclusive finance. He has published numerous papers in core domestic and international academic journals such as Journal of Financial Research, Public Finance Research, Finance Research Letters and China Finance Review International, including achievements indexed in JCR Q1 with an impact factor of 9.0. He has authored and compiled multiple monographs and textbooks such as Digital Inclusive Finance: Theoretical Logic and Economic Effects. He has presided over or participated in major and general projects of the National Social Science Fund of China, as well as a number of research projects commissioned by government agencies and enterprises. His research outcomes have repeatedly won provincial-level outstanding achievement awards, and his policy advisory reports have received written comments and approvals from provincial leaders. Meanwhile, he has guided students to win numerous awards in national competitions on multiple occasions, and has been honored with many titles including "Young Research Star" and "Excellent Communist Party Member".