The Impact of Local Government Hidden Debt on the Risk of Small and Medium-sized Banks

Against the backdrop of slowing economic growth and increasing fiscal imbalances, the risk linkage between local government hidden debt and the banking system has intensified. City and rural commercial banks, which are highly intertwined with local public finance and regional economies, play a pivotal role in the transmission and absorption of such risks. Understanding the transmission mechanism between hidden government debt and bank risk contributes to the design of more targeted countercyclical and structural regulatory policies, while offering practical insights for improving debt transparency and promoting the stability of small and medium-sized (SME) banks.