Liquidity, capital requirements, and shadow banking

Liu, Zehao; Xie, Chengbo

doi:10.1016/j.iref.2019.11.019

Cited by 12 publications

(6 citation statements)

References 17 publications

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“…In online Appendices B and C, we consider both state and nonstate banks when simulating the effect of monetary policy on the entire banking system. 22 We thank a referee for bringing out this important point to us. As Anna J. Schwartz succinctly stated, absent movements of currency in circulation, "deposits and M2 move together almost by definition" (http://www.econlib.…”

Section: A a Theoretical Modelmentioning

confidence: 97%

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The Nexus of Monetary Policy and Shadow Banking in China

Chen

Ren

Zha

2018

American Economic Review

346

160

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We study how monetary policy in China influences banks’ shadow banking activities. We develop and estimate the endogenously switching monetary policy rule that is based on institutional facts and at the same time tractable in the spirit of Taylor (1993). This development, along with two newly constructed micro banking datasets, enables us to establish the following empirical evidence. Contractionary monetary policy during 2009–2015 caused shadow banking loans to rise rapidly, offsetting the expected decline of traditional bank loans and hampering the effectiveness of monetary policy on total bank credit. We advance a theoretical explanation of our empirical findings. (JEL E32, E52, G21, O16, O23, P24, P34)

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Section: A a Theoretical Modelmentioning

confidence: 97%

“…We derive the functional form of μ( ⋅ ) to formalize Anna J. Schwartz's informative description of how monetary policy changes influence total (aggregate) deposits in the banking system. 22 We denote the deposits of bank j in period t by D t ( j) .…”

Section: A a Theoretical Modelmentioning

confidence: 99%

The Nexus of Monetary Policy and Shadow Banking in China

Chen

Ren

Zha

2018

American Economic Review

346

160

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“…Second, the use of short-term debts to support long-term assets exposes banks to liquidity risk [25]. Previous studies demonstrate that shadow banking activities expose banks to greater liquidity risk due to the serious maturity mismatch problem [26] and the lack of deposit insurance and capital protection [27]. This paper sheds lights on the measures banks can take to manage liquidity risk in their shadow banking activities based on the information sensitivity theory.…”

Section: Introductionmentioning

confidence: 91%

Managing Information Sensitivity: The Relationship between the Interbank Offered Rate and the Characteristics of Bank-Issued Wealth Management Products in China

Bai

Chen

2023

Sustainability

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Unlike previous studies that focused on measures and changes in debts’ information sensitivity, this paper examines how banks in China manage the information sensitivity of wealth management products (WMPs), one of the most important assets in Chinese shadow banking. Employing the interbank offered rate to proxy investors’ incentives for private information production, we find when the interbank offered rate rises for newly issued WMPs, banks shorten their maturity, provide them with more guarantees, and reduce the risk of their underlying assets. Moreover, these effects are more pronounced in small and medium-sized banks (SMBs) relative to the largest five state-owned (Big5) banks. Furthermore, we also find that banks reduce the number of WMPs issued to institutional investors when the interbank offered rate rises, and this effect exists in both Big5 banks and SMBs. Our findings suggest that banks adjust the characteristics of WMPs to maintain WMPs’ information insensitivity when investors’ incentives to produce private information increase. These results also indicate that there is less need for Big5 banks to adjust WMPs’ characteristics since individual investors consider WMPs issued by Big5 to be safer and thus to have less incentive to produce private information. However, institutional investors understand WMPs’ risks better and, therefore, all banks reduce the number of issues to them when the interbank rate rises.

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“…The rapid proliferation of shadow banking has engendered a plethora of excessive risk-taking behaviors and fostered the emergence of a precarious financial system [10,40]. Theoretically, shadow banking serves as a regulatory arbitrage strategy to circumvent capital regulations in the presence of relatively stringent policy formulations and binding regulatory restrictions [41,42]. Consequently, the absence of policy protection renders depositors' funds in shadow banking susceptible to potential risks [43,44].…”

Section: Shadow Bankingmentioning

confidence: 99%

“…Chinese commercial banks play a central role in the realm of shadow banking, enabling them to attain enhanced cost-effectiveness and income generation through off-balance-sheet shadow banking activities. However, this phenomenon also presents a formidable challenge to both financial sustainability and the orderly development of the sector [42,50].…”

Section: Shadow Bankingmentioning

confidence: 99%

Systemic Risk Arising from Shadow Banking and Sustainable Development: A Study of Wealth Management Products in China

Pan,

Fan

2024

Sustainability

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Shadow banking is a main way for the financial market to serve the real economy today, and this process is closely related to systemic risk. This study examines the impact of shadow banking associated with sustainable development in China’s banking on systemic risk. We analyze the data obtained from a rich sample of 31 listed commercial banks in China and shadow banking represented by wealth management products (WMPs) by constructing a dynamic complex interbank network model. The results show that the risks and vulnerabilities generated by shadow banking spread out through the interbank network and cause systemic risk to increase. The effect operates through increasing the number of default banks, reducing banks’ survival rate and profit, and forcing central bank bailout funds expansion. However, it has a positive impact in terms of augmenting liquidity and enhancing investment opportunities. Furthermore, the variability in the influence of different categories of shadow banking is assessed, emphasizing that short-term shadow banking exerts a more pronounced impact on systemic risk. In addition, the heterogeneity of the shadow banking effect on different types of commercial banks is explored, revealing that local and rural commercial banks experience a more conspicuous effect compared to state-owned and joint-stock banks. Our findings highlight that improving external supervision, promoting financial internal governance, and constraining credit linkages are vital for alleviating the increase in risks in shadow banking and maintaining the sustainable development of banking.

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Liquidity, capital requirements, and shadow banking

Cited by 12 publications

References 17 publications

The Nexus of Monetary Policy and Shadow Banking in China

The Nexus of Monetary Policy and Shadow Banking in China

Managing Information Sensitivity: The Relationship between the Interbank Offered Rate and the Characteristics of Bank-Issued Wealth Management Products in China

Systemic Risk Arising from Shadow Banking and Sustainable Development: A Study of Wealth Management Products in China

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