Implicit Guarantees and the Rise of Shadow Banking: The Case of Trust Products

81 Pages Posted: 20 Sep 2021 Last revised: 19 Jan 2023

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Xian Gu

Durham University Business School

C. Wei Li

University of Iowa

Jun "QJ" Qian

Fanhai International School of Finance, Fudan University

Yiming Qian

University of Connecticut - Department of Finance

Date Written: September 15, 2021

Abstract

Implicit guarantees provided by financial intermediaries are important in China. We argue theoretically that project screening by financial intermediaries, accompanied by their implicit guarantees to investors, can be the second-best arrangement. It can also mitigate capital misallocation that favors state-owned enterprises (SOEs). Using a comprehensive set of trusts’ investment products, we find, consistent with our model, that ex ante expected yields reflect borrower risks and implicit guarantee strength, and risk sensitivity is reduced by strong guarantees. Regulations in 2018 restricting implicit guarantees lead to a weaker relationship between yield spread and guarantee strength, and more credit rationing of non-SOEs.

Keywords: Shadow banking, trust products, implicit guarantee, yield, real estate, SOE

JEL Classification: G2, G3, L2

Suggested Citation

Allen, Franklin and Gu, Xian and Li, C. Wei and Qian, Jun and Qian, Yiming, Implicit Guarantees and the Rise of Shadow Banking: The Case of Trust Products (September 15, 2021). Available at SSRN: https://ssrn.com/abstract=3924888 or http://dx.doi.org/10.2139/ssrn.3924888

Franklin Allen (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Xian Gu

Durham University Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

C. Wei Li

University of Iowa ( email )

Finance Department
Henry B. Tippie College of Business
Iowa City, IA 52242-1097
United States
319-335-0911 (Phone)
3193353690 (Fax)

Jun Qian

Fanhai International School of Finance, Fudan University ( email )

Shanghai
China
86-21-63895501 (Phone)
86-21-62934572 (Fax)

HOME PAGE: http://www.fisf.fudan.edu.cn/show-65-69.html

Yiming Qian

University of Connecticut - Department of Finance ( email )

2100 Hillside Road U-1041F, Room 452
Storrs, CT 06269
United States
860-486-2774 (Phone)

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