The Risk of Implicit Guarantees: Evidence from Shadow Banks in China

30 Pages Posted: 13 Jun 2019 Last revised: 20 Apr 2020

See all articles by Ji Huang

Ji Huang

The Chinese University of Hong Kong (CUHK) - Department of Economics

Zongbo Huang

The Chinese University of Hong Kong, Shenzhen

Xiang Shao

Fudan University - School of Management

Date Written: May 29, 2019

Abstract

The shadow banking literature is anchored on the premise that shadow banking intensifies financial risks through its connection with regular banks. We document the importance of implicit guarantees as the risk transmission channel using a detailed micro-level data set on wealth management products, which are the most prominent shadow banking products in China. We find that when the risk perception of a bank increases, the bank extends stronger implicit guarantees to the investors of wealth management products to safeguard its reputation. Stronger guarantees incur more expenses and erode bank equity, thus amplifying impacts of negative shocks to the related regular banks. The expenses account for a significant reduction in bank profits, especially for banks that are less healthy. Our results suggest that risk-weights for off-balance-sheet exposures should be higher for riskier banks.

Keywords: shadow banking, implicit guarantees, off-balance-sheet financing

JEL Classification: G21, G23, G28

Suggested Citation

Huang, Ji and Huang, Zongbo and Shao, Xiang, The Risk of Implicit Guarantees: Evidence from Shadow Banks in China (May 29, 2019). Available at SSRN: https://ssrn.com/abstract=3395598 or http://dx.doi.org/10.2139/ssrn.3395598

Ji Huang (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Economics ( email )

Shatin, N.T.
Hong Kong

Zongbo Huang

The Chinese University of Hong Kong, Shenzhen ( email )

Xiang Shao

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

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