The Impact of Implicit Reciprocity between Bank Credit and Local Government Debt on Financial Stability
The implicit reciprocity between bank credit and local government debt is demon-strated by banks voluntarily providing funding support and favorable loan terms to facilitate the expansion of local government debt,grounded in their trust in local government commitments and their anticipation of future indirect benefits.The escalation of China's local debt is not only fueled by local governments'financing demands but also amplified by the banking sector.This resonance between the borrowing needs of local governments and the lending inclinations of banks establi-shes a debt-credit cycle that significantly influences financial stability.This study analyzed panel data on bank credit,local government debt,and financial volatility from prefecture-level cities o-ver 2008-2020 to investigate the effects of this implicit reciprocity on financial stability.The find-ings reveal that this reciprocity is a pivotal factor in driving financial volatility,especially in cities with lower levels of economic development,increased fiscal strain,or heightened financial decen-tralization.The mechanism analysis suggests that implicit reciprocity leads to the displacement of corporate financing channels,a higher concentration of bank loans,and an increase in the inter-bank liabilities of local commercial banks,thereby inducing financial volatility.To ensure finan-cial stability,it is crucial to establish effective regulatory frameworks to manage this reciprocal re-lationship to mitigate the growth of local debt while fostering the stable progression of the financial sector.
bank creditlocal government debtimplicit reciprocityfinancial stability
万方数据
维普
