Default Contagion and Systemic Risk in Loan Guarantee Networks

24 Pages Posted: 19 Mar 2020

See all articles by Wenwei Li

Wenwei Li

Zhejiang University

Shenglin Ben

affiliation not provided to SSRN

Ulrich Hommel

EBS Business School

Sandra Paterlini

University of Trento - Department of Economics and Management

Jiefang Yu

affiliation not provided to SSRN

Date Written: November 2019

Abstract

This paper studies systemic risk in the Chinese debt market stemming from inter‐corporate loan guarantees using field data from Zhejiang Province. We apply a weighted and directed network model to analyse the implications for default contagion and systemic risk under different stress testing scenarios. The empirical results indicate that the topology of the loan guarantee network is close to a ‘scale‐free’ structure, which is known to be robust against accidental failures but vulnerable to coordinated attacks. Hence, the network is able to cope with idiosyncratic shocks resulting from single company failures, but can easily suffer from more widespread contagion if a group of systemically important companies are hit by a targeted shock. We further demonstrate that within our sample of small and medium‐sized enterprise (SME) companies, increasing leverage reduces network stability and exacerbates the effects of contagion. More lenient bank lending policies increase the survival rate of sample companies and thereby reduce the losses from default contagion.

Keywords: Loan guarantee network, SMEs financing, Default contagion, Systemic risk, Stress testing

Suggested Citation

Li, Wenwei and Ben, Shenglin and Hommel, Ulrich and Paterlini, Sandra and Yu, Jiefang, Default Contagion and Systemic Risk in Loan Guarantee Networks (November 2019). Accounting & Finance, Vol. 59, pp. 1923-1946, 2019, Available at SSRN: https://ssrn.com/abstract=3556746 or http://dx.doi.org/10.1111/acfi.12549

Wenwei Li (Contact Author)

Zhejiang University ( email )

38 Zheda Road
Hangzhou, Zhejiang 310058
China

Shenglin Ben

affiliation not provided to SSRN

No Address Available

Ulrich Hommel

EBS Business School ( email )

Gustav-Stresemann-Ring 3
Wiesbaden, 65189
Germany
+49 611 7102 1241 (Phone)
+49 611 7102 10 1241 (Fax)

Sandra Paterlini

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, I-38100
Italy

Jiefang Yu

affiliation not provided to SSRN

No Address Available

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