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Digitalization as a double-edged sword: A deep learning analysis of risk management in Chinese banks

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  • Wang, Li
  • Huang, Yiting
  • Hong, Zhiwu

Abstract

Digitalization presents both opportunities and formidable challenges for risk management in commercial banks. This study addresses the critical question of how digitalization influences banks' risk-taking behaviors. Applying an InstructGPT-inspired deep learning model, we developed a multidimensional bank digitalization index to analyze its effects on risk-taking, using data from 149 Chinese commercial banks from 2011 to 2020. The empirical results show that (1) digitalization significantly curtails risk-taking on the balance sheet, while concurrently escalating off-balance sheet risk exposure; (2) digitalization diminishes on-balance sheet risk by lessening distortions in competition due to government guarantees, manifested as a competition effect of on-balance sheet guarantee; (3) digitalization increases the upper limit of expected returns on bank financial products, thereby elevating off-balance sheet risk-taking, evident as an off-balance sheet price competition effect; (4) bank digitalization has a more obvious boosting effect on off-balance sheet risk-taking of banks with a longer average maturiy of wealth management products. This paper enriches the measurement of the digitalization of banks and provides a reference for banks to deepen digital applications and strengthen risk management, which has important practical significance.

Suggested Citation

  • Wang, Li & Huang, Yiting & Hong, Zhiwu, 2024. "Digitalization as a double-edged sword: A deep learning analysis of risk management in Chinese banks," International Review of Financial Analysis, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:finana:v:94:y:2024:i:c:s1057521924001819
    DOI: 10.1016/j.irfa.2024.103249
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    Cited by:

    1. Yang, Jinglan & Liu, Jianghuai & Yao, Zheng & Ma, Chaoqun, 2024. "Measuring digitalization capabilities using machine learning," Research in International Business and Finance, Elsevier, vol. 70(PB).

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    More about this item

    Keywords

    Bank digitalization; Risk-taking; Deep learning;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics

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