Local Fiscal Pressure, Lending Concentration and Macro Policy Coordination

Abstract: Under global economic recession, fiscal stimulus keeps pushing up local fiscal pressure. Using panel data of China’s banking sector, this paper examines impact of local fiscal pressure on bank lending’s concentration and the coordination effect of monetary policy and macro-prudential policy in conjunction with local fiscal pressure on bank lending concentration and loan allocation. The study finds that local fiscal pressure contributes to the decline in lending concentration. Lending concentration in customer increases non-performing loan ratio and risk-weighted assets, deteriorates bank's capital structure, and reduces asset returns. Local fiscal pressure reduces lending concentration through channels of weakening local government's support to banks, constraining banks' moral hazard and triggering monetary easing. Credit expansion weakens mitigation effect of local fiscal pressure on lending concentration. Moderately tight interest rate and macro-prudential policies strengthen mitigation effect of local fiscal pressure on customer concentration through indirect channels, and affect industry concentration by changing the direct effect of local fiscal pressure. Estimation is robust when controlling for other bank characteristics, substituting explanatory variable, and using instrumental variable regression. Further analysis shows that local fiscal pressure, in coordination with moderately tight monetary policy and macro-prudential policy, helps increase bank lending to the real sector, but has no stimulus on credit to the real estate and finance industries. The empirical evidence has important policy implications for the coordination of fiscal and monetary policies as well as macro-prudential policies to maintain financial stability and facilitate economic growth