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The Risk of Implicit Guarantees: Evidence from Shadow Banks in China

Author

Listed:
  • Ji Huang
  • Zongbo Huang
  • Xiang Shao

Abstract

We study how risks spill over from shadow banking activities to traditional banks through implicit guarantees. Using data on wealth management products (WMPs), China’s largest shadow banking component, we find that banks with higher interbank borrowing rates strategically provide stronger implicit guarantees to their issued WMPs. Extending implicit guarantees builds bank reputations and reduces rollover costs while exposing banks to losses from shadow banking activities. Our findings thus suggest a bank-specific approach to assessing the risk of implicit guarantees based on transparent and real-time interbank rates.

Suggested Citation

  • Ji Huang & Zongbo Huang & Xiang Shao, 2023. "The Risk of Implicit Guarantees: Evidence from Shadow Banks in China," Review of Finance, European Finance Association, vol. 27(4), pages 1521-1544.
    • Handle: RePEc:oup:revfin:v:27:y:2023:i:4:p:1521-1544.
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    References listed on IDEAS

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    More about this item

    Keywords

    Implicit guarantee; Shadow banking; Off-balance-sheet financing; Rollover risk; Wealth management product;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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