Summary:
This paper examines how bank capital regulation affects local government financing costs through commercial banks’ incentives in the primary bond market. The setting is China’s local government bond market, where commercial banks are the dominant investors and underwriters, and where the design of regulatory capital rules can directly influence the demand for government bonds. In November 2023, China announced Rules on Capital Management of Commercial Banks, which lowered the risk weight on banks’ holdings of local government general bonds from 20 percent to 10 percent while keeping the risk weight on special bonds unchanged. This reform corrected a regulatory mismatch: general bonds are mainly supported by local general public budget revenues and generally carry lower repayment risk, whereas special bonds rely more on government-fund revenues or project-related cash flows, yet the two had previously received the same capital treatment. The reform therefore provides a useful quasi-natural experiment for studying whether a more risk-sensitive capital rule can reduce explicit local government financing costs through market incentives rather than direct fiscal subsidies or administrative intervention. The paper develops a bank bidding model under China’s Dutch auction issuance system to show that lowering the risk weight of general bonds reduces the capital cost of these bonds, raises banks’ willingness to bid for them, and improves the market’s ability to absorb new issuance. The model predicts that the financing-cost reduction should be stronger when bank underwriters face tighter capital constraints and when the recent supply of local government bonds is larger. Using transaction-level issuance data on local government bonds from January 2021 to June 2025, drawn from Wind, iFinD, East Money Choice, and DM database, the paper employs a difference-in-differences framework to compare refinancing general bonds with refinancing special bonds. These two types of bonds have similarrefinancing purposes and comparable issuance mechanisms, but only general bonds are affected by the risk-weight reduction. The results show that the capital reform significantly lowers the issuance spreads of general bonds over comparable treasury bond yields. The finding is robust to a series of tests, including checks for pre-trends, placebo reforms, alternative sample windows, controls for other fiscal policies, alternative fixed effects, and additional measures of primary-market bidding conditions. Mechanism tests support the model: the effect is stronger for bonds underwritten by banks with lower capital adequacy ratios, and is stronger when the market faces greater recent issuance pressure, indicating that the reform works by relaxing bank capital constraints and improving market absorption capacity. Further analysis suggests that the reform also improves the transmission of market benchmark rates to local government bond pricing and supports credit expansion among more capital-constrained banks, especially in regions with larger stocks of general bonds. These findings imply that well-designed capital regulation can lower local government borrowing costs without weakening market discipline or increasing direct fiscal incentives. The paper contributes to the literature in three ways.First, it introduces a financial-regulatory perspective to the study of local government bond pricing, while existing literature has mostly focused on fiscal fundamentals, government behavior, information disclosure, default risk, and tax policy. Second, it extends the literature on bank capital regulation by showing that risk-weight adjustments affect not only bank stability and credit supply, but also government bond pricing at the micro level. Third, it also provides evidence on fiscal-financial coordination by showing that regulatory design can help establish a long-term government debt management mechanism. The policy implication is that regulators should continue to refine risk-weight design according to the actual risk characteristics and policy functions of different bond types, while complementing capital regulation with market-based tools that reduce banks’ overall cost of holding local government bonds. Future research can examine the longer-run effects of the reform, its impact on secondary-market liquidity and investor structure, and the interaction between risk-weight policy, monetary policy, and macroprudential regulation.
安剑锋, 余明桂, 张萌萌. 银行资本监管改革与地方政府债券融资成本——兼论完善政府债务管理长效机制[J]. 金融研究, 2026, 555(9): 39-56.
AN Jianfeng, YU Minggui, ZHANG Mengmeng. Bank Capital Regulation Reform and Local Government Bond Financing Costs:Implications for Improving the Long-Term Government Debt Management Mechanism. Journal of Financial Research, 2026, 555(9): 39-56.
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