Politicians' Promotion Incentives and Bank Risk Exposure in China

This paper shows that politicians' pressure to climb the career ladder increases bank risk exposure in their region. Chinese local politicians are set growth targets in their region that are relative to each other. Growth is stimulated by debt-financed programs which are mainly financed via bank loans. The stronger the performance incentive the riskier the respective local bank exposure becomes. This effect holds primarily for local banks which are under a certain degree of control of local politicians and it has increased with the release of recent stimulus packages requiring local co-financing.

Wang, Li, Lukas Menkhoff, Michael Schröder and Xian Xu (2015), Politicians' Promotion Incentives and Bank Risk Exposure in China, ZEW Discussion Paper No. 15-026, Mannheim.