Shadow banking and firm financing in China

Lu, Yunlin; Guo, Haifeng; Kao, Erin H.; Fung, Hung‐Gay

doi:10.1016/j.iref.2014.11.006

Cited by 81 publications

(40 citation statements)

References 5 publications

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“…However, these regulatory reforms remain thus far largely silent on many aspects of shadow banking (Gorton and Metrick 2010;Adrian and Ashcraft 2012;Lu et al 2015). Plantin (2015) shows that tightening capital requirements may increase shadow banking activities that lead to an overall larger risk on the money-like liabilities of the regular and shadow banking institution.…”

Section: Related Literaturementioning

confidence: 99%

“…7 We assume that the bank carries the amount of WMPs, M ≥ 0, during the period, and can earn the market interest rate of WMPs, R M > 0. The bank cannot invest funds in non-standard assets that exceed 0 < α < 1 of the value of its outstanding of WMPs by regulation (Lu et al 2015). The bank can hold the rest of the funds (1 − α)M to earn the security-market interest rate of R in order to capture the opportunity cost of the funds during the period.…”

Section: Bank Equitymentioning

confidence: 99%

“…Investors want a higher return rate of R P of WMPs than R D (Lu et al 2015). Corporate deposit substitutes, usually invested via the inter-bank market, would need to be considered as well.…”

Section: Bank Equitymentioning

confidence: 99%

“…Our model assumes D > M. Alternatively, the bank acts the trustee and helps collect the principal with interest (1 + R Q )Q from the borrower on the behalf of the trustor. The bank charges a commission premium of m > 0 per dollar of ELs (Lu et al 2015).…”

Section: Bank Equitymentioning

confidence: 99%

“…Further, Lu et al (2015) point out that about 97% of WMPs have a maturity of less than one year. Accordingly, the condition of R L > R M is assumed in the numerical analysis.…”

Section: Parameter Basicsmentioning

confidence: 99%

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Bank Interest Margin, Multiple Shadow Banking Activities, and Capital Regulation

Lin

Chen

Huang

2018

IJFS

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Abstract:In this paper, we develop a contingent claim model to evaluate a bank's equity and liabilities that integrates the premature default risk conditions with loan rate-setting behavioral mode and multiple shadow banking activities under capital regulation. The barrier options theory of corporate security valuation is applied to the contingent claims of a bank. The barrier reports that default can occur at any time before the maturity date. We focus on a type of earning-asset portfolio, consisting of balance-sheet banking activities of loans and liquid assets and shadow banking activities of wealth management products (WMPs) and entrusted loans (ELs). The optimal bank interest margin, i.e., the spread between the loan rate and the deposit rate, is derived and analyzed. The results provide an alternative explanation for the decline in bank interest margins, which better fits the narrative evidence on bank spread behavior under capital regulation in particular during a financial crisis. Raising either WMPs or ELs leads to a transfer of wealth from equity holders to the debt holders, and hence increases the deposit insurance liabilities. We also show that the multiple shadow banking activities of WMPs and ELs captured by scope equities may produce superior return performance for the bank. Tightened capital requirements may reinforce the superior return performance by a surge in shadow banking activities that makes the bank less prudent and more prone to risk-taking at a reduced margin, thereby adversely affecting banking stability. We demonstrate that financial disturbance may be created because of the potential for shadow banking activities to spill over to regular banking activities and damage the real economy.

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Section: Related Literaturementioning

confidence: 99%

Section: Bank Equitymentioning

confidence: 99%

Section: Bank Equitymentioning

confidence: 99%

Section: Bank Equitymentioning

confidence: 99%

“…Further, Lu et al (2015) point out that about 97% of WMPs have a maturity of less than one year. Accordingly, the condition of R L > R M is assumed in the numerical analysis.…”

Section: Parameter Basicsmentioning

confidence: 99%

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