Local Government Debt Expansion,Leverage Ratio Regulatory Pressure and Shadow Banking
The landscape of China's financial system has been quietly changing over the past few years,and one of the most significant changes has been the surge in the size of shadow banking.Shadow banking has long been outside the regulatory system,and its expansion has ultimately disrupted the stable operation of the macro economy.In the context of accelerating the creation of a new development pattern,exploring the internal formation mechanism of shadow banking is not only the theoretical basis for preventing the rebound of shadow banking but also a prerequisite for promoting the high-quality development of finance and the economy,which is of great theoretical significance and practical value.Based on the characteristics of China's fiscal and financial systems and the operation mode of shadow banking,this paper incorporates local government debt and shadow banking into the multi-sector DSGE model,and systematically in-terprets the impact and mechanism of local government debt expansion on shadow banking.Numerical simulation results show that local government debt expansion induces banks to engage more in shadow banking activities,and the leverage ratio regulatory pressure faced by banks is an important endogenous factor for the increase in shadow banking scale in-duced by local government debt expansion.Then,this paper uses unbalanced panel data from 178 Chinese commercial banks from 2008 to 2018 to empirically test the theoretical findings.The empirical results show that local government debt expansion increases the shadow banking scale.The mechanism test results of the mediation effect and the interaction effect find that the leverage ratio regulatory pressure is an important channel through which local government debt expan-sion affects shadow banking.The marginal contributions of this paper lie in the following three aspects.First,this paper argues that although the demand-side policy adjustment is important,it is difficult to fully understand the internal logic of the expansion of the shadow banking scale without considering the feedback mechanism of the market-oriented operation of commercial banks on the supply side,and the research in this paper is a good complement to the existing literature.Second,theoretically,this paper integrates enterprise ownership heterogeneity and credit business heterogeneity into the theoretical model to reveal the intrinsic mechanism of the expansion of the scale of China's shadow banking,which expands and deepens the existing theoretical research.Empirically,this paper quantitatively identifies the impact of the expansion of local government debt on shadow banking,explores its underlying mechanism,and reveals the"black box"problems of this impact.Third,the re-search in this paper not only deepens the understanding of the existing research on the risk of local government debt expan-sion but also provides theoretical references for the sound regulatory mechanism of the shadow banking system.This paper offers the following policy implications.First,policymakers need to standardize local governments'fiscal expenditure and debt financing mechanisms,change the GDP-centered one-dimensional performance evaluation model,and fundamentally curb local governments'over-indebtedness.Second,the central bank and regulators need to further en-rich and improve financial regulatory tools,and bring shadow banking into the regulatory system to reduce the potential for regulatory arbitrage of shadow banking.Third,in the short term,a firewall should be established to isolate the trans-mission of debt and financial risks to avoid the spillover of fiscal and financial risks;in the long term,the market-oriented reform of the fiscal and financial systems should be strengthened to optimize the incentive and constraint mechanisms of the financial sector,so as to realize the benign interaction between the fiscal sector and the financial sector.
Local Government Debt ExpansionShadow BankingLeverage Ratio Regulatory PressureDSGE Model
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