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

42 Pages Posted: 13 Jun 2019 Last revised: 13 Jun 2022

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 - School of Management and Economics and Shenzhen Finance Institute

Xiang Shao

Fudan University - School of Management

Date Written: May 29, 2019

Abstract

We study how risks spillover from shadow banking activities to traditional banks through implicit guarantees. Using data on wealth management products, China's largest shadow banking component, we find that banks with higher interbank borrowing rates strategically provide stronger implicit guarantees to their issued wealth management products. Extending implicit guarantees builds bank reputations and reduces rollover costs while exposing banks to losses from shadow banking activities. Our findings thus suggest a bank-specific approach to assessing the risk of implicit guarantees based on transparent and real-time interbank rates.

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 - School of Management and Economics and Shenzhen Finance Institute ( email )

Xiang Shao

Fudan University - School of Management ( email )

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

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