Analysis of the Mitigating Effect of Financial Regulatory Penalties on Bank Systemic Risk

Financial regulatory penalties are a critical tool for curbing bank violations and play an important role in safeguarding the banking system against systemic risk. This study examines the effects of regulatory penalties imposed by the People’s Bank of China (PBOC) and the National Financial Regulatory Administration (NFRA) on bank systemic risk. We construct a unique dataset of 10,462 penalty decisions manually collected from 2014 to 2023, and employ a two-way fixed effects model to identify the impact of regulatory penalties. The results show that financial regulatory penalties exert a significant mitigating effect on bank systemic risk. This effect operates through two primary channels: first, by reducing the idiosyncratic risk of individual banks; and second, by weakening the intensity of risk transmission across institutions. The risk-controlling effect is further amplified under higher regulatory pressure and stronger creditor oversight. Heterogeneity analysis reveals that the penalty effect varies by penalty type, bank level, and regulatory authority, and is more pronounced for monetary fines, penalties imposed on provincial and municipal branches, and enforcement actions conducted by the NFRA. Notably, when banking institutions and the broader banking system are already in an extreme risk state, financial regulatory penalties may cease to serve as an effective tool for containing systemic risk and preserving financial stability. Our findings suggest that strengthening the enforcement and coordination of macroprudential and microprudential supervision, along with reinforcing market discipline, can enhance the effectiveness of financial penalties in safeguarding financial stability.