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The empirical relation between loan risk and collateral in the shadow banking system: Evidence from China’s entrusted loan market

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  • Fang, Sheng
  • Qian, Xuesong
  • Zou, Wei

Abstract

Based on evidence from China’s entrusted loan market (2004–2014), we examine the effect of collateral in the shadow banking system. We find that collateral generally accompanies higher loan risk premiums and a higher probability of ex-post loan nonperformance (i.e., loan extension). Furthermore, the evidence shows that the types of collateral pledges, borrower heterogeneity and equity ties make a difference in the channel by which collateral works. Our findings suggest that in entrusted loan shadow banking, the lenders likely require collateral from observably riskier borrowers (unlisted or non-affiliated borrowers) to control ex-post contract conflict, and the lender selection effect is particularly strong for outside collateral. The paper sheds light on risk management in the shadow banking system and offers a possible explanation for the conflicting empirics concerning the relation of loan risk and collateral.

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  • Fang, Sheng & Qian, Xuesong & Zou, Wei, 2020. "The empirical relation between loan risk and collateral in the shadow banking system: Evidence from China’s entrusted loan market," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 42-54.
    • Handle: RePEc:eee:reveco:v:67:y:2020:i:c:p:42-54
    DOI: 10.1016/j.iref.2019.12.012
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    2. Zhang, Xuan & Zhang, Yongmin & Scheffel, Eric & Zhao, Yang, 2022. "A key driver for the mixed relationship between loan risk premiums and collateral: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 83(C).
    3. Ridoy Deb Nath & Mohammad Ashraful Ferdous Chowdhury, 2021. "Shadow banking: a bibliometric and content analysis," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-29, December.
    4. Hongjie Pan & Hong Fan, 2024. "Systemic Risk Arising from Shadow Banking and Sustainable Development: A Study of Wealth Management Products in China," Sustainability, MDPI, vol. 16(10), pages 1-26, May.
    5. Yu, Jian & Peng, Fanjia & Shi, Xunpeng & Yang, Longjian, 2022. "Impact of credit guarantee on firm performance: Evidence from China’s SMEs," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 624-636.
    6. Wu, Meng-Wen & Xu, Li & Shen, Chung-hua & Zhang, Ke-Kun, 2021. "Overconfident CEOs and shadow banking in China," Pacific-Basin Finance Journal, Elsevier, vol. 65(C).
    7. Si, Deng-Kui & Wan, Shen & Li, Xiao-Lin & Kong, Dongmin, 2022. "Economic policy uncertainty and shadow banking: Firm-level evidence from China," Research in International Business and Finance, Elsevier, vol. 63(C).

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    More about this item

    Keywords

    Collateral; Loan risk; Entrusted loan; Shadow banking; Risk premium; Loan extension;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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