No-bailout event and local bank-government nexus in China |
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| Affiliation: | 1. Chongyang Institute for Financial Studies, Renmin University of China, 6th Floor, Culture Building, No.59 Zhongguancun Avenue, Haidian District, Beijing 100872, China;2. School of Finance, Renmin University of China, Room 812, Mingde Building, No. 59 Zhongguancun Avenue, Haidian District, Beijing 100872, China;1. James Cook University, Queensland, Australia;2. Western Sydney University, NSW, Australia;3. Lebanese American University, Beirut, Lebanon;1. Joint Research Centre of the European Commission (JRC), Via E. Fermi 2749, 21027 Ispra (VA), Italy;2. University of Edinburgh Business School, 29 Buccleuch Pl, Edinburgh EH8 9JS, United Kingdom;3. Queen''s University Belfast, Queen''s Management School, 185 Stranmillis Road, Belfast, Northern Ireland BT9 5EE, United Kingdom;4. University College Dublin Michael Smurfit Graduate School of Business, Carysfort Ave, Carrysfort, Blackrock, Co. Dublin, Ireland;2. School of Economics, Hainan University, Haikou, China;3. School of Tourism, Hainan University, Haikou, China;1. School of Management, The University of Bradford, Richmond Road, Bradford BD7 1DP, United Kingdom;2. Huddersfield Business School, University of Huddersfield, Queensgate, Huddersfield HD1 3DH, United Kingdom |
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| Abstract: | We examine the impact of a no-bailout event on the local bank-government nexus in China in the context of a multi-level fiscal federalism. Using a difference-in-difference (DID) model, we find that the no-bailout event leads to a tighter relationship between the issuance premia of negotiable certificates of deposit (NCDs) by local banks and the fiscal strength of local governments. It also induces a higher divergence of issuance premia among cities with different fiscal strengths and local banks of different sizes. The divergence is weaker among province-level banks. We also find that the spread of urban construction investment bonds (UCIBs) decreases more in fiscally stronger cities, while that of provincial government bonds declines more in fiscally weaker provinces. The market discipline on governments is strengthened at the city level but weakened at the province level. It suggests that the decline of implicit guarantee, especially that of higher-level governments, is an essential channel for the changes of local bank-government nexus after the event. |
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