Government Debt Expansion And Bank Risk-taking:Weak Or Collusive?

After the reform of tax distribution system and the financial crisis in 2008,the scale of government debt has expanded rapidly,which has brought about potential debt risks,causing concern from all sectors of society.In recent years,the scale of local governments has become larger and larger,and more and more debts are coming due.Some city investment companies have defaulted on their debts.Commercial banks play an important role in China’s financial system and are also the largest creditors of government departments.Government debt will directly affect the risk of commercial banks.Against this background,in July 2018,the central bank and the Ministry of Finance launched a debate on fiscal policy,local government debt and financial institutions risk,which aroused wide concern throughout the country.Based on the quarterly data of 16 listed banks in China over the past 10 years,this paper integrates macro-factors such as bank level data and government sector leverage ratio into FAVAR model,studies the bank risk-taking behavior under the influence of government debt,and analyses the channel of government debt expansion.The main conclusions of this paper are as follows:(1)There are indeed risk-taking channels for commercial banks in China.The tightening price-based monetary policy reduces banks’active risk-taking and increases their passive risk-taking;the expansion of quantitative monetary policy increases both banks’active and passive risk-taking,and the risk-taking channels for price-based monetary policy are more stable and direct.Because of the high degree of nationalization of the banking sector in our country,there are credit rationing in our commercial banks,the non-marketization of the banking credit market is more serious,and the commercial banks are the carrier of the government’s counter-cyclical regulation,together with the liquidation restrictions,which make our banking sector play an obvious "buffer" role to the economic fluctuations caused by macro-shocks,especially the interest rate shocks.(2)The tightening of interest rates,the increase of money supply and the government’s active leverage will lead to the expansion of government debt scale.Commercial banks are conservative about government debt,but they have to provide funds to the government because of the pressure of the government.In t:his situation,banks can only passively accept the risk of government debt and are in a "weak" position.In the case of monetary easing or the government’s "active" expansion of leverage,banks will take the initiative to bear the risk of government debt for their own interests,and even persuade the government to borrow.At this time,government debt is the result of "collusion" between the government and banks.(3)The increase of government leverage is often accompanied by the expansion of interbank business,which indicates that the interbank business channel of commercial banks is one of the important sources for banks to provide funds for government departments.Excessive liquidity will aggravate economic instability.Banks have strong motivation to pursue profits and strong speculative mentality,which will "induce" the expansion of government debt.At the same time,banks will choose to expand their business in the same industry to provide funds.Under the austerity price-oriented monetary policy,government debt expands and banks passively take risks.At this time,because of the limited loan scale,banks can provide financial support to government debt platform through shadow banking system in order to avoid supervision.On the one hand,they can meet the requirements of supervision and provide financial resources for government debt;on the other hand,they can start through interbank debt channels.To reduce risk,beautify the role of the bank balance sheet.