Onshore guarantees for offshore loans and bank risk-taking: Evidences from Taiwanese banks

Abstract

This research explores the issue of onshore guarantees for offshore loans, which are significant off-balance-sheet activities that have seldom been examined. Our research systematically reviews the literature on off-balance-sheet activities and cross-border interbank transactions and also discusses popular shadow-banking activities in recent times. Because of the high-risk characteristics of off-balance-sheet activities, our empirical work focuses on the relationship of onshore guarantees with offshore loans and bank risk-taking. We employ data of all Taiwanese banks doing the business of onshore guarantees for offshore loans in China during 2013–2017 and provide evidence that banks with more risk-taking have higher amounts of such guarantees. Furthermore, by sub-sample regression we find this phenomenon strongly exists in private banks and independent banks, indicating they are more sensitive to higher risk characteristics of the off-balance-sheet loans.