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Economic Fluctuation, Local Government Bond Risk and Risk-Taking of City Commercial Banks

Changjun Zheng (), Shiying Chen () and Zhenhuan Dong ()
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Changjun Zheng: School of Management, Huazhong University of Science and Technology, Wuhan 430074, China
Shiying Chen: School of Management, Huazhong University of Science and Technology, Wuhan 430074, China
Zhenhuan Dong: Department of Business Administration, Jiangxi College of Foreign Studies, Nanchang 330099, China

Sustainability, 2021, vol. 13, issue 17, 1-26

Abstract: Countercyclical fiscal regulation can mitigate economic risk, but this is bound to increase the scale of local government debt during an economic downturn, and then spread risk to the banking sector, forming potential financial instability factors. We extracted the three most important variables in this process: economic fluctuation, local debt risk and bank risk-taking to build an econometric model and found that: (1) both economic fluctuations and local government bond risks have a significant impact on bank risk-taking, which is negatively correlated with local economic growth, while the increase of local government bond risks tends to increase bank risk-taking in the long run; (2) the impact of local government debt risk significantly increases the loans of city commercial banks flowing into the construction industry. Therefore, the impact of local government bond risk on city commercial banks is concentrated in the impact on their construction loans. This study has an important reference value for timely and moderate countercyclical regulation, preventing local debt risk from spreading to banks, constructing a sustainable local government−bank ecology, and promoting sustainable economic development.

Keywords: economic fluctuation; city investment bond; city commercial bank; bank risk-taking; panel VAR (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
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