Bank Competition, Interest Rate Liberalization, and Systemic Risk: Evidence from China

As interest rate liberalization (IRL) reshapes banks’ pricing behavior and competitive dynamics, the implications of bank concentration and competition for systemic risk warrant closer examination. This study investigates the nonlinear relationships between bank concentration, bank competition, and systemic risk and examines the moderating role of IRL in China. Using panel data from 37 A-share-listed Chinese commercial banks over the 2010–2024 period, this study measures systemic risk using the GAS-based Dynamic Gaussian Copula-ΔCoVaR approach. The results show that both bank concentration and bank competition exhibit significant U-shaped relationships with systemic risk, with systemic risk declining at relatively low levels of concentration and competition but rising once the corresponding turning points are exceeded. Furthermore, IRL significantly attenuates both U-shaped relationships, indicating that greater IRL reduces the sensitivity of systemic risk to changes in bank concentration and competition. These findings reconcile competing views on the competition–stability nexus and highlight the importance of the institutional environment in shaping systemic risk in the banking sector.