Does digital transformation reduce proactive risk-taking in banks? Evidence from risk governance mechanisms in China

Abstract

Purpose This study examines how digital transformation influences proactive risk-taking behavior in commercial banks. This study aims to determine whether digitalization functions as a governance-enhancing capability that improves banks’ risk identification and capital allocation efficiency, thereby reducing their exposure to risk-weighted assets. Design/methodology/approach Using panel data on 138 Chinese commercial banks from 2010 to 2023, this study constructs a comprehensive digital transformation index based on the Peking University DTI and applies fixed-effects, instrumental-variable and matching estimations (propensity score matching and entropy balancing) to identify the causal impact of digitalization on banks’ risk-taking. Findings The empirical results demonstrate that digital transformation significantly reduces the proportion of risk-weighted assets (RWAR), indicating improved control over banks’ overall risk exposure. The mechanism analysis identifies two key internal governance channels – enhanced risk recognition and more efficient capital allocation – through which digitalization indirectly mitigates proactive risk-taking. Research limitations/implications This study is limited to Chinese banks and may not fully capture cross-country institutional differences. Future research can expand on multi-country panel comparisons to generalize findings. The endogenous nature of digitalization remains a challenge despite robust identification strategies. Practical implications The findings of this study underscore the importance of developing artificial intelligence-driven risk governance platforms. Regulators are encouraged to design digital policy incentives that account for regional and institutional heterogeneity. Meanwhile, banks should incorporate digital tools into their compliance oversight and capital planning processes. Social implications Enhancing digital governance in banking contributes to financial stability, mitigates capital misallocation and fosters sustainable growth in emerging markets. Strategically targeted digital transformation can help reduce regional disparities in banking system resilience. Originality/value This paper introduces the concept of digital risk governance mechanisms and reframes the digital–finance nexus through the lens of risk governance theory. This study contributes to the literature on technology-enabled financial regulation and offers actionable insights for emerging markets aiming to develop resilient, technology-driven frameworks for capital optimization and supervisory compliance.