Since the global financial crisis of 2007–2009, preventing financial crises has become one of the most important objectives of regulators and banks. Although previous studies have identified the phenomenon of risk contagion in the banking system, the underlying mechanisms of risk contagion are still unclear. This study delves into the multi-stage contagion mechanism of liquidity risk based on interbank lending linkages and clearing rules and introduces a new index to quantify bank liquidity risk. We find that the contagion of liquidity risk is primarily determined by the network structure of risk exposures between banks in default and is not significantly influenced by the lending relationships of banks that remain solvent. The empirical results suggest that banks with high risk should be prioritized for cash injections to improve system liquidity. These findings offer new insights into financial risk contagion and practical recommendations for regulatory authorities formulating intervention strategies and for banks conducting risk management.

To avoid illiquidity spillovers and basis risk in swaps, interbank lenders are especially cautious about whether interbank borrowers can meet their claims. We examine whether the incentive of interbank lenders to penalize risky borrowers can reduce borrowers' liquidity risk taking. We find that interbank borrowers, especially small and medium banks, manage their liquidity risks more prudently than their counterparts. This phenomenon is especially significant for borrowers with high information asymmetry, low liquidity buffers, and high funding gaps. Our results suggest that interbank exposure reduces the asset, funding, and off‐balance‐sheet liquidity risks of small and medium borrowing banks, and can therefore supplement regulatory liquidity requirements, which target only the largest banks.

Macro-prudential policy plays a crucial role in stabilizing the financial system and influencing banks' risk preferences and willingness to take risks. This study examines the influence of macro-prudential policies on bank risk-taking using unbalanced panel data from 126 commercial banks in China between 2010 and 2021. The difference-in-differences model is employed to analyze the data. The empirical findings demonstrate that implementing macro-prudential policies in China effectively enhances bank risk prevention measures. In other words, macro-prudential policy implementation facilitates the digital transformation of banks and subsequently reduces risk-taking behaviors. Moreover, the heterogeneity test reveals that macro-prudential policies have a more significant impact on the risk-taking behavior of commercial banks with higher capital adequacy ratios compared to those with lower ratios. Additionally, commercial banks with strong interbank dependence exhibit more pronounced effects on their risk profiles when subjected to macroprudential policies with stricter capital supervision requirements. Therefore, this study proposes policy recommendations for strengthening bank capital supervision through differentiated approaches, serving as a valuable reference for the regulatory authorities.

This paper researches into development of China’s shadow banking during 2020-2022, a special period marked by COVID-19 and strengthened global regulation on Non-Bank Financial Intermediation (NBFI). Research focus includes balance sheet evolvement, growth dynamics, and relation with macro-finance. Its business model surprisingly resembles western peers. They both fund underserved sectors and have similar exposure to balance sheet mismatch. Massive holding of bond investment (36.6% of total asset) is funded by uninsured interbank fund and wealth management product, which makes it more closely related with banks’ balance sheet and risk contagion from NBFI to traditional commercial banks more easily. This paper then re-summarizes growth dynamics of China’s shadow banking in a “Pull-Push” framework, and proposes concept of reintermediation in respective to disintermediation. Consecutive regulation on NBFI and real estate sector kept dragging on growth of shadow banking, and rendered it in liquidity surplus, which is invested into interbank market. This paper also provides empirical evidence on relation of China’s shadow banking with macro-finance, and notes several empirical breakdowns of pre- COVID relations among economic and financial indicators. Most important breakdown is the non-functionality of monetary policy transmission channel. Besides, it continued to twist de facto financial regulatory indicators, however with fading impact.

This paper examines the relationship between controlling shareholder equity pledges and their pricing using data on new debt financing instruments issued by Chinese A-share listed companies from 2010-2021. The findings suggest that controlling shareholder equity pledges lead to higher credit spreads on new debt financing instruments issued. Further findings suggest that this significant relationship only exists in groups where listed companies are on the eastern seaboard, where there is a higher risk of the share price collapse, and where management is more competent. It was also found that this relationship was not heterogeneous in the quality of the firm's information environment group and was only significant in the low hollowing out-group, thus ruling the hollowing out hypothesis and the information hypothesis and validating the uniqueness of the control transfer risk hypothesis in this paper.

Although implicit guarantees are widely used in the shadow banking system, we know very little about its qualitative and quantitative properties. In this paper, we use a micro-level data set on China's shadow bank products to quantify the risk of implicit guarantees. We find a robust empirical fact that banks extend more implicit guarantees to their shadow bank debt (i.e., wealth management products) when their own default risks increase. Our result shows that this effect is particularly stronger when riskier banks plan to issue certificates of deposits in the interbank market. A simple model that is based on a signaling game is proposed to rationalize this fact. The key mechanism of the model is that as a bank's reputation becomes worse, it has stronger incentives to send positive signals to the market, i.e., to boost the realized returns of its shadow bank obligations, although it has no obligation to do so. Our findings show that implicit guarantees have nonlinear negative effects on bank fundamentals and the risk-weight of off-balance-sheet exposure should be increasing in banks' default risks.

Over the past twenty years, especially the past decade, China has taken enormous strides to develop its bond market as an integral step of financial reform. This paper aims to provide the most up-to-date overview of Chinese bond markets, by highlighting two distinct and largely segmented markets: Over-the-Counter based interbank market, and centralized exchange market. We explain various bond instruments traded in these two markets, highlighting their inherent connection with the banking system, and many multi-layer regulatory bodies who are interacting with each other in an intricate way. We also covers the credit ratings and rating agencies in Chinese market, and offer an account of ever-rising default incidents in China starting 2014. Finally, we discuss the recent regulatory tightening of shadow banking since late 2017 and its impact on bond investors, and the forces behind the internalization of Chinese bond markets in the near future.

China repos trade in the over-the-counter interbank market as well as the stock exchange. This paper examines the behaviours, sources, and drivers of the spread between China’s exchange and interbank reporates from December 2006 to June 2018. After adjusting for different day-count quoting methods, I dissect the exchange to interbank repo spread into two components: cross-market segmentation between exchange and interbank markets for non-depository institutions (NDIs), and within-market counterparty segmentation between NDIs and depository institutions (DIs) in the interbank market. The 1-day repo markets are found to be more segmented, with the spread mainly driven by the cross-market segmentation for NDIs, reflecting the two different market mechanisms and trading frictions that prevent NDIs from effectively arbitraging across the two markets in the shorter tenor. On the other hand, the 7-day repo markets are found to be less segmented, with the spread mainly driven by the counterparty segmentation between NDIs and DIs within the interbank market, reflecting greater counterparty credit and liquidity risks for NDIs relative to DIs. Further analysis uncovers the impacts of quarter-end effect, monetary policies, and shadow banking activities on the cross-market and within-market segmentations in China’s repo markets.

We document that monetary policy has asymmetric effects on investments by large and small firms in China. Large firms’ investment are highly responsive to monetary expansions, but less affected by monetary contractions. In contrast, small firms’ investments are less responsive to monetary expansions, but significantly affected by monetary contractions. We argue that this asymmetric responses of large and small firms stem from their differential access to credits in a two-tiered banking system. Large firms borrow from the big state-owned banks, which have a strong depositor base, whereas small firms borrow mainly from small banks which does not have a large depositor base and therefore rely heavily on the inter-bank market for financing their loans to small firms. We build a DSGE model with heterogeneous banks, heterogeneous firms, and an inter-bank market that is calibrated to the Chinese data. We show that the model’s quantitative predictions about the effects of monetary policy on large and small firms are consistent with the facts we documented.

Our study is the first to examine the effect of policy instability on interest rates. China offers a natural setting for the experiment because financial market liberalization policy flip-flops recur. When a policy is reversed, interest rate level and spread can increase or decrease in the interbank repo market. Accounting for the bureaucratic quality of policymaking, we find that the nonpredictable, non-credible and non-timely reversal of an existing policy is related to higher interest rate spread and volatility, which represent higher risk premia in interest rates. Conversely, predictable, credible and timely reversal is related to lower interest rate spread and volatility. Our results suggest that bureaucratic quality is a moderating factor and high bureaucratic quality can reduce the risk premia of policy instability being priced in interest rates.