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.
Highlights
Countercyclical fiscal regulation can reduce economic risk, but it is bound to increase the scale of local government debt in a recession period, and spread risk to the banking industry, forming potential financial instability factors
Facts and data analysis all show that there is a close correlation between local debt risks, economic fluctuations and commercial banks (CCBs) risk-taking
OLS results show that local debt risks and local economic fluctuations significantly affect the CCB risk-taking
Summary
Countercyclical fiscal regulation can reduce economic risk, but it is bound to increase the scale of local government debt in a recession period, and spread risk to the banking industry, forming potential financial instability factors. This risk transmission chain cannot be ignored. This research attempts to build an econometric model to study the interaction between the risk of local government debt and bank risk-taking in economic fluctuations, so as to reveal the deep connection between the three This will help prevent excessive accumulation of government debt, prevent the spread of government debt risks to the banking sector and prevent systemic financial risks.
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