Local Government Implicit Debt and Bank Liquidity Creation

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Journal of Central University of Finance & Economics ›› 2021, Vol. 0 ›› Issue (10) : 30-42.

LI Zhen, XIANG Hui, ZHAO Qi-feng

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Abstract

A large literature exists on the impact of government debt on economic growth and enterprise operation,but there is a lack of literature on the impact on bank behavior.This paper examines the relationship between local government implicit debt and bank liquidity creation using the data of 147 local banks in China from 2005-2017.The results show that:(1)the expansion of local government implicit debt inhibits bank liquidity creation,and has a negative impact on the real economy growth.A series of robustness tests and endogeneity analyses prove that the findings of this paper are reliable.(2)The intermediation effect suggests that local government implicit debt has a dampening effect on bank liquidity creation by the crowding out effect of bank credit resources.(3)Heterogeneity analysis finds that with the continuous expansion of local government implicit debt,listed banks and rural commercial banks increase liquidity creation,and banks with government department as the top shareholder reduce liquidity creation.(4)The moderating effect suggests that banks in areas with lower government debt or better property rights system environment,as well as banks in the replacement period of local government implicit debt,create more liquidity with the expansion of local government implicit debt.

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Local government implicit debt / Liquidity creation / Local bank / Economic growth

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LI Zhen, XIANG Hui, ZHAO Qi-feng. Local Government Implicit Debt and Bank Liquidity Creation[J]. Journal of Central University of Finance & Economics, 2021, 0(10): 30-42

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