Bank risk taking, efficiency, and law enforcement: Evidence from Chinese city commercial banks

We investigate bank risk taking, efficiency and their relation to law enforcement using a unique sample of 133 Chinese city commercial banks across 31 regions for the 1999-2008 period. We find that stronger law enforcement tends to promote greater bank risk taking in the region. Furthermore, employing a stochastic distance function approach, our analysis shows that the performance of Chinese city commercial banks, as measured by bank efficiency, is heavily influenced by the effectiveness of law enforcement in the region. Better legal environment, higher efficiency in the legal system, and stronger protection of intellectual property right are associated with a higher level of efficiency among these banks.