The spillover effect of bank distress: Evidence from the takeover of Baoshang Bank in China

Yuyun Xu, Zhengyuan Liu and Longyao Zhang

Finance Research Letters, 2024, vol. 59, issue C

Abstract: The recent US regional banking crisis has gained considerable attention due to its potential for contagion and amplification of shocks. This paper employs the difference-in-differences method to examine the spillover effects of a regional bank failure on its peer institutions. By focusing on the bankruptcy case of Baoshang Bank in China, which serves as a natural experiment, we show that the bank's bankruptcy leads to a substantial increase in the riskiness of its peers’ loan portfolios. Specifically, our findings reveal a more pronounced impact on group-based loans, while digital credit remains unaffected. This study introduces a novel mechanism through which bank distress spillovers, providing valuable insights for financial institutions to optimize their lending strategies and for policymakers to make informed policy and regulatory decisions.

Keywords: Risk spillover; Bank distress; Regional banking; Microfinance institution; China (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:59:y:2024:i:c:s1544612323010681

DOI: 10.1016/j.frl.2023.104696

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