CBR Briefing #84

Sep 05, 2019

Sections Finance

Heavy borrowing contributes to stock market crashes

  • Excessive borrowing that leads to fire sales in stock markets has been widely studied as a cause of financial crises, but empirical evidence has been lacking. A research team including Chicago Booth’s Zhiguo He analyzed whether the Shanghai Stock Exchange crash of 2015 was due to a sudden sell-off by margin investors who borrowed heavily from fintech shadow banks.
  • In June 2015, China’s government imposed limits on margin lending by shadow banks. This reduced the amount of margin available to new investors and increased pressure on shareholders to unload stocks. Though the SSE Index may have been due for a correction, the new rules coincided with the index’s plunge over the following month.
  • Margin accounts at shadow banks, which were more leveraged and closer to their limits, contributed more to the crash than accounts at traditional brokerages, the researchers find.