Can digital transformation reduce bank violations? Evidence from China

This paper examines the impact of digital transformation on bank violations, offering insights for proactive compliance within banks. It assesses bank violations through penalty information obtained via web scraping technology from regulatory authorities, based on a sample of 181 large and medium-sized banks in China from 2011 to 2022. Estimates derived from a double fixed effects model indicate that for every one standard deviation increase in digital transformation, the incidence of bank violations decreases by 7.27%. Business digitalization has played a key role, and digital transformation has a significant inhibitory effect on credit violations. The capacity of digital transformation to mitigate bank violations is more pronounced when banks demonstrate higher operational efficiency, regional financial regulatory intensity, and levels of financial development. The potential mechanisms are that digital transformation enhances banks' information discernment capabilities and improves the internal control quality, thereby reducing the frequency of bank violations. These findings underscore the importance of digital transformation in the governance of bank violations and extend the literature on the micro-effects of digital transformation. • Every one standard deviation increase in digital transformation, the level of bank violations decreases by 7.27%. • Business digital transformation plays a crucial role in reducing bank violations, and digital transformation has the greatest effect on credit violations. • Digital transformation reduces bank violations by improving bank information discrimination capacity and internal control quality.