Work

Implicit Guarantees and the Rise of Shadow Banking: The Case of Trust Products

Year: 2021

Type: article

Abstract: Implicit guarantees provided by financial intermediaries are important in China. We argue theoretically that project screening by financial intermediaries, accompanied by their implicit guarantees to investors, can be the second-best arrangement. It can also mitigate capital misallocation that favors state-owned enterprises (SOEs). Using a comprehensive set of trusts’ investment products, we find, consistent with our model, that ex ante expected yields reflect borrower risks and implicit guarantee strength, and risk sensitivity is reduced by strong guarantees. Regulations in 2018 restricting implicit guarantees lead to a weaker relationship between yield spread and guarantee strength, and more credit rationing of non-SOEs.

Source: Journal of Financial Economics

DOI: 10.1016/j.jfineco.2023.04.012

Authors: Franklin Allen, Xian Gu, C. Wei Li, Jun “QJ” Qian, Yiming Qian

Institutions: Imperial College London, Durham University, University of Iowa, Fudan University, University of Connecticut

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Peace, justice, and strong institutions

Open Access status: hybrid

Estimated APC paid: $4,010