Implicit guarantees and the rise of shadow banking: The case of trust products

Franklin Allen, Xian Gu, C. Wei Li, Qian, Jun “qj” and Yiming Qian

Journal of Financial Economics, 2023, vol. 149, issue 2, 115-141

Abstract: Implicit guarantees provided by financial intermediaries are a key component of China's shadow banking sector. We show theoretically that project screening by intermediaries, accompanied by their implicit guarantees to investors, can be the second-best arrangement and mitigate capital misallocation that favors state-owned enterprises (SOEs). Using a dataset 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.

Keywords: Shadow banking; Trust products; Implicit guarantee; Yield; Real estate; SOE (search for similar items in EconPapers)
JEL-codes: G2 G3 L2 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X2300082X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:149:y:2023:i:2:p:115-141

DOI: 10.1016/j.jfineco.2023.04.012

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().