The digital revolution in banking: Unpacking risk management in the age of transformation

Abstract

Digital transformation has become a strategic imperative for commercial banks, reshaping their risk management and operational frameworks. We examine the impact of digital transformation on risk-taking behaviors in China's commercial banking sector, using a unique dataset of 238 banks from 2010 to 2021. The outcomes reveal that digital transformation significantly reduces banks' overall risk-taking levels. Notably, mechanism analysis highlights that enhanced operational efficiency and corporate governance mediate this relationship. Our results demonstrate substantial heterogeneity: smaller banks, urban and rural commercial banks, and institutions in Eastern China benefit more from risk reductions via digital transformation compared to their larger counterparts and those in Central and Western regions. Furthermore, strategic and business-level digitalization exert a more pronounced effect on risk-taking mitigation than managerial-level digitalization. Our findings offer theoretical and practical implications for advancing digital transformation strategies, refining risk management frameworks, and formulating differentiated policies for diverse banking institutions.

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