Research On The Influence Of Local Government Debt Risk On Bank Risk And Its Mechanism

The 2020 Central Economic Work Conference stressed the need to strengthen risk awareness and firmly guard the bottom line of avoiding systemic risks.Local government debt risk and bank risk are factors that easy to cause systemic risk.The government's intervention in banks,and the problem of government shareholding in banks exist all over the world,and the unique land finance in China,which makes the relationship between the government and the financial system more and more close.And bank loans are the the main source of external financing for countries of the world,especially businesses transition economy.Banks become the main holders of local government debt,therefore,the close ties between local government debt risk and bank risk has attracted our attention.Firstly,this paper studies the co-movement between the local government debt risk and bank risk by using the dynamic factor model.Using the data of Chengtou bond spreads of 31 provinces in China from 2009 to 2017 as the proxy variable of local government debt risk,and the reciprocal of Z-score as the proxy variable of commercial banks' risk,the dynamic factor model was used to decompose the data of local government debt risk and bank risk into country factors,regional factors and specific province factors.The result shows the presence of co-movement between local government debt risk and bank risk.(that is,the trend of coordinated movement or common fluctuation).The country,regional and provincial factors explained 62%,16% and 22% of the changes in local government debt risk,respectively,and 28%,8% and 64% of the changes in commercial bank risk,respectively.Country factors explained more than half of the risk variability of local government debt,while provincial factors explained on average more than half of the risk variability of banks.The sub-sample analysis shows that,the volatility of the country factor decreases,after the reform of the local government debt financing pattern(such as the introduction of Document43).The relative importance of national,regional and provincial factors is basically stable in the two subsamples.In the second subsample,however,the importance of national factors generally increased,suggesting that current regulatory policies are having some effect.Local government debt financing reform affects local government debt risk and bank risk.Secondly,we analyze the mechanism of local government debt risk and bank risk from the perspective of land finance.By using the spread data of Chengtou bonds of 31 provinces in China and the reciprocal of Z-score of commercial banks,the factor loading data obtained by using dynamic factor model is further analyzed.It is found that both local government debt risk and bank risk show the national pro-cyclical.Based on the land market data and the country factor loading from the Dynamic Factor Model,the spatial econometric model is used to verify the positive relationship between land leasing revenue and debt risk procyclicality.The land land transaction fees and the proportion of land bidding,auction and listing have a negative impact on the periodicity of bank risk.The results also show that the housing price,the secondary industry and the degree of openness have significant positive contributions to the periodicity of debt risk.On the contrary,these factors have had a negative impact on the bank risk pro-cyclicality.In addition,according to Moran's I statistical data and the estimation results of the spatial econometric model,it is found that there is a negative spatial correlation between the pro-cyclicality of local government debt risk and bank risk in neighboring provinces.The problem of government ownership exists widely in the world.Finally,this paper further analyzes the mechanism of local government debt risk and bank risk from the perspective of ownership structure.Based on bank equity information,personal loan contract information and loan flow information at the level of statements from 2008 to 2019,this paper studies the influence of government ownership on bank lending behavior,and discusses the relationship between ownership concentration and bank lending,including loan interest rate,loan scale and loan flow.Studies have shown that it is easier for firms to borrow from non-state banks,which charge similar or identical firms lower interest rates than private banks.As to the nature of state-owned equity and ownership concentration on bank credit allocation,mainly on the proportion of loan flows in the real estate,construction and manufacturing industries.The empirical results show that the nature and ownership concentration of state-owned ownership have a positive effect on bank loans to the real estate industry and construction industry,but will reduce the proportion of loan flows to manufacturing industry.Finally,the paper discusses that the local government intervenes the credit behavior and credit resource allocation of local banks through government ownership,which makes the banks hold more local government debt,so that the local government debt risk will be transmitted to the banks due to the intervention of government shareholding,thus further affecting bank risk.The main innovation points of this paper are as follows: the innovative application of dynamic factor model in the study of the relationship between local government debt risk and bank risk;The paper verifies the relationship between land finance,local debt and bank risk,and the spatial spillover effect of risk.It verifies the mechanism that the government influences the bank's lending behavior and further influences the bank's risk through the equity intervention.This paper has the innovation of research methods,and also provides a new research perspective.It is of great practical significance to study the co-movement and mechanism between local government debt risk and bank risk.The research of this paper enrich the existing theories about local government debt and bank research subject,from the perspectives of land finance and ownership structure,we further analyze the relationship between local government debt risk and bank risk,which help to improve the management of local government debt and bank,resolve and prevent the local government debt risk and bank risk,strengthen risk awareness,firmly hold the bottom line to make sure systemic risk does not occur.