Corporate bond defaults and spillover effects on bank risk: Evidence from city commercial banks in China

This paper examines the spillover effects of corporate bond defaults on the non-performing loans of local city commercial banks. Using a staggered difference-in-differences model, we find that the emergence of corporate bond defaults significantly increases the non-performing loans of local banks. The spillover effects are pronounced in less diversified banks. Mechanism analyses show that the illiquidity contagion rather than the deteriorating fundamentals of local borrowers accounts for the rise in non-performing loans. We exclude the risk-taking explanation. Our findings suggest that bond defaults have spillover effects on the risk of local banks.