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Spatial correlation of local government implicit debt tail risks in China and its spillover effects on the banking system

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  • Wen, Bohui
  • Xu, Jiaxiang
  • Zhang, Li
  • Hao, Jing
  • Zhang, Zhongyi

Abstract

This study empirically examines the spatial correlation of implicit debt tail risks among local governments across provinces in China and its impact on systemic risks within the banking sector. By applying the TENET (Härdle et al., 2016) and the impulse response separation method, our analysis reveals a complex interconnection among these implicit debt tail risks. Moreover, we observe that a higher degree of spatial correlation amplifies the effect on bank systemic risk, resulting in a pronounced spillover effect in the banking system. Finally, our findings indicate that increased spatial correlation is correlated with a decrease in the capital adequacy ratio, a heightened trading volume of urban construction investment bonds, and an increased nonperforming loan ratio.

Suggested Citation

  • Wen, Bohui & Xu, Jiaxiang & Zhang, Li & Hao, Jing & Zhang, Zhongyi, 2024. "Spatial correlation of local government implicit debt tail risks in China and its spillover effects on the banking system," International Review of Financial Analysis, Elsevier, vol. 96(PA).
    • Handle: RePEc:eee:finana:v:96:y:2024:i:pa:s1057521924005416
    DOI: 10.1016/j.irfa.2024.103609
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