Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/305281 
Year of Publication: 
2024
Series/Report no.: 
BOFIT Discussion Papers No. 11/2024
Publisher: 
Bank of Finland, Bank of Finland Institute for Emerging Economies (BOFIT), Helsinki
Abstract: 
This paper examines the consequences of Chinese regulators deviating from a long-standing full bailout policy in addressing the distress of a city-level commercial bank. This policy shift led to a persistent widening of credit spreads and a significant decline in funding ratios for negotiable certificates of deposit issued by small banks relative to large ones. Our empirical analysis reveals a novel contagion mechanism driven by reduced confidence in future bailouts (implicit non-guarantee), contributing to the subsequent collapse of other small banks. However, in the longer term, this policy shift improved price efficiency, credit allocation, and discouraged risk-taking among small banks.
Subjects: 
Implicit guarantee
Bailout
Contagion
Price efficiency
Credit allocation
TBTF
JEL: 
G14
G21
G28
H81
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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