Local Government Debt Swaps, the Reshaping of Bank Credit Allocation, and the Mitigation of Systemic Risk

Speaker：Wang Shuai, Ph.D. candidate, Shanghai University of Finance and Economics

Host：Nie Haifeng, Professor, Lingnan College

Time and Date：9:30, October 30, 2026 (Friday)

Venue：Wang Dao Han Conference Room (101), Lingnan Hall

Language：Chinese

Abstract：

Because implicit local government debt amplifies the systemic risk of commercial banks by distorting the credit allocation of regional banks, the orderly resolution of such debt has become a central priority for government efforts to prevent and defuse systemic financial risk. Using hand-collected data on local government debt swaps at the prefecture-city level from 2015 to 2020, matched to firm-level data from the National Tax Survey and prefecture-city-level data on commercial banks, this paper examines whether local government debt swaps have reshaped the credit allocation of commercial banks and mitigated their systemic risk. 

The analysis exploits a structural feature of China's banking system: national commercial banks primarily hold local government bonds, whereas regional commercial banks primarily hold claims on local government financing vehicles (LGFVs). We find that subscriptions to local government swap bonds crowd out the lending capacity of national commercial banks, and the use of swap proceeds to repay LGFV debt releases the lending capacity of regional commercial banks. Local government debt swaps reduce lending by national commercial banks and increase lending by regional commercial banks, which in turn reduces credit financing for large firms and increases it for small firms. Further analysis shows that the decline in credit financing for large firms is concentrated among firms with excessive financing, zombie firms, and firms outside strategic emerging industries; the increase in credit financing for small firms is concentrated among underfinanced firms, non-zombie firms, and firms in strategic emerging industries. These patterns indicate that local government debt swaps improve the efficiency of credit allocation at both national and regional commercial banks. Accordingly, the credit quality of both types of banks improves significantly. The paper emphasizes that local government debt swaps help optimize the structure and improve the efficiency of bank credit allocation, thereby mitigating banks' systemic risk—an insight with important policy implications for advancing debt swaps as a means of preventing and defusing systemic financial risk.
 

Profile:

Wang Shuai is a Ph.D. candidate in Public Finance at the School of Public Finance and Investment, Shanghai University of Finance and Economics. His research interests include coordinated fiscal–financial governance, fiscal and tax system reform, corporate investment and financing decisions, and banking and corporate finance. His research has been published (or accepted) in leading Chinese and English-language journals, including Economic Research Journal, Management World, Journal of Management Sciences in China, The Journal of World Economy, The Journal of Quantitative & Technological Economics, Journal of Financial Research, Finance & Trade Economics, China Journal of Accounting Research, and Economic Modelling. He has served as principal investigator of a research innovation fund project for graduate students at Shanghai University of Finance and Economics and has participated in numerous projects, including a Youth Program project of the National Natural Science Foundation of China and preliminary research topics for Shanghai's 15th Five-Year Plan.