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Constraining effects of local government debt on bank loan growth

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  • Cao, Mingyao
  • Duan, Keyi
  • Ibrahim, Haslindar

Abstract

In China's ever-evolving financial landscape, commercial banks are showing an increasing preference for local government bonds, viewing them as steadfast financial instruments. This study explores the complex relationship between banks’ growing preference for local government bonds and the resulting impact on their loan growth trajectories. Using a linear mixed model, empirical findings reveal that as local government debt increases, there is a corresponding slowdown in loan growth. Notably, city commercial banks, which are closely tied to local governmental structures, exhibit a more pronounced response to these fiscal changes compared to their joint-stock counterparts. Furthermore, strong political connections between banks and local governments tend to mitigate this negative relationship.

Suggested Citation

  • Cao, Mingyao & Duan, Keyi & Ibrahim, Haslindar, 2025. "Constraining effects of local government debt on bank loan growth," Economic Analysis and Policy, Elsevier, vol. 85(C), pages 371-382.
    • Handle: RePEc:eee:ecanpo:v:85:y:2025:i:c:p:371-382
    DOI: 10.1016/j.eap.2024.12.007
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    More about this item

    Keywords

    Loan growth; Government debt; Bank finance; Public policy; Fiscal expenditure;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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