In recent years, some small and medium-sized banks (SMBs) have been subject to irregular equity management, which has led to major shareholders evading supervision and illegally controlling financial institutions, seriously affecting the stability of China’s financial market. To prevent and resolve the risks of SMBs, regulatory authorities have implemented several policies to rectify the chaos of their shareholders’ equity. In particular, since July 2020, public penalties have been imposed on major illegal and irregular shareholders in SMBs, to regulate market discipline and deter unpunished banks. However, existing research largely focuses on the direct impact of regulatory penalties on punished banks, ignoring the spillover effect, namely whether such deterrent effect can constrain the illegal behavior of unpunished banks and reduce banks’ risk-taking behavior.

This paper treats the disclosure of the “List of Major Illegal and Irregular Shareholders of Banking and Insurance Institutions” by the former China Banking and Insurance Regulatory Commission (CBIRC) from 2020 to 2022 as an exogenous shock, selects small and medium-sized banks nationwide from 2014 to 2022 as the sample, and uses a staggered DID design to study the deterrent effect of penalties on major illegal and irregular shareholders on banks that have not been punished in the same province. The empirical results show that penalties on major illegal and irregular shareholders significantly reduce unpunished banks’ risk-taking behavior within the same region, indicating that they have a strong deterrent effect. Mechanism testing reveals that the deterrent effect can reduce related-party transactions, improve their equity governance in unpunished banks, and thereby curb unpunished banks’ risk-taking behavior. Further research indicates that penalties on major illegal and irregular shareholders have a stronger deterrent effect on banks with weaker risk resistance and poorer corporate governance.

The marginal contributions of this paper are as follows: First, it focuses on major shareholders who play a central role in bank governance, expanding the research field of bank regulatory penalties. Second, in the context of micro-prudential supervision, it explores the deterrent effect of penalties on major illegal and irregular shareholders, revealing its potential role in saving regulatory costs. Third, it explores how penalties on major illegal and irregular shareholders affect bank risk-taking through governance mechanisms, expanding the research on factors affecting commercial banks’ risk-taking behavior. The findings provide empirical support for regulatory authorities to formulate differentiated regulatory strategies and enhance the efficiency of financial supervision.