The regulatory arbitrage and window dressing in shadow banking: the example of Chinese wealth management product

Cai, Jun; Garcı́a-Herrero, Alicia; Li, Fengyun; Xia, Le

doi:10.1080/20954816.2019.1633825

Cited by 15 publications

(16 citation statements)

References 9 publications

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“…It is worth mentioning that the stimulus plan launched in 2008, and it was implanted mostly by Big 4 banks, which enabled them to increase their lending activities; although Big 4 banks' WMPs issuance also experienced increasing trend, we can argue that Big 4 banks' WMPs rose as a response to WMPs issuance by the SMBs. Our results are consistent with (Acharya et al, 2019;Cai et al, 2019).…”

Section: Resultssupporting

confidence: 94%

“…SHIBOR-3M and NPLR were positive and significant pre-2015 period, but the majority of their coefficients were found to be not significant in the post-2015 periods for all banks and SMBs as well. These discoveries are in line with (Acharya et al, 2019;Cai et al, 2019;Liao, 2020;Luo et al, 2019). This study implemented an alternate measure for ROE (return on equity) by replacing it with ROA (return on assets).…”

Section: Resultssupporting

confidence: 74%

“…To pursue our discussed objectives, with quarterly data pre-& post-2015, for 30 Chinese banks, this study use static panel models, as (Acharya et al, 2019;Cai et al, 2019;Liao, 2020;Luo et al, 2019;and Wu & Shen, 2018) also implied static panel models (fixed effects, random effects, LSDV). Fixed effects and random effects models are the two most essential components of panel data.…”

Section: Empirical Proceduresmentioning

confidence: 99%

“…We use the number of WMPs as the proxy for the bank's exposure to these financial products, as there is no information available for individual bank-issued WMP's amount. As (Cai et al, 2019;Luo et al, 2019) use the number of WMPs as a measure for banks' exposure to this business. Our sample contains 315,894 NG-WMPs and 403,036 total WMPs.…”

Section: Data and Descriptive Statisticsmentioning

confidence: 99%

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What Prompted Shadow Banking in China? Wealth Management Products and Regulatory Arbitrage

Shah¹,

Li²,

Fu³

2020

JAFEB

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Shadow banking in China has been growing rapidly; banks use wealth management products aggressively to evade regulatory constraints. The loan-to-deposit ratio or LDR targets both sides of the balance sheet; loans in terms of asset-side, and deposits in terms of liabilitiesside; banks needed to control and maintain both sides. Regulators restricted Chinese banks to maintain a 75% limit for their loan-depositratio. Banks' needed to either lower their loans or increase the deposits; WMPs helped banks to evade this limit. Banks issue more WMPs to control and manage a 75% statutory ceiling LDR. This WMPs-LDR positive association disappeared post-2015 period. This study empirically examined how Chinese banks use WMPs issuance to avoid regulatory constraints. Quarterly panel data for 30 top Chinese banks were used by analyzing pre-2015 (during the 75% LDR limit) and post-2015 (after removal of the LDR limit). This study also performed fixed-effects model as recommended by the Hausman specification test, with feasible generalized least squares FGLS estimation technique. The results of this study show that for the pre-2015 period, Chinese banks use issuance of WMPs aggressively to manage their LDR limit; this WMPs-LDR relationship disappeared post-2015 period. Moreover, SMBs use WMPs more eagerly as compare to Big4 banks.

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Section: Resultssupporting

confidence: 94%

Section: Resultssupporting

confidence: 74%

Section: Empirical Proceduresmentioning

confidence: 99%

Section: Data and Descriptive Statisticsmentioning

confidence: 99%

See 2 more Smart Citations

What Prompted Shadow Banking in China? Wealth Management Products and Regulatory Arbitrage

Shah¹,

Li²,

Fu³

2020

JAFEB

View full text Add to dashboard Cite

show abstract

“…The number of WMPs is considered a suitable proxy for China's banking sector's exposure to the wealth management sector. As empirically analyzed by Cai et al (2019) and Luo et al (2019), the individual bank-issued WMPs' amount data is not available in any database. The sample in this study contains 315,894 nonguaranteed and 403,036 total.…”

Section: Data and Descriptive Statisticsmentioning

confidence: 99%

Interaction between wealth management products and bank deposits: evidence from China's shadow banking

Shah

Yan

et al. 2021

IJBM

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PurposeShadow banking has been evolving rapidly in China, with banks actively using wealth management products (WMPs) to evade regulatory restrictions. These products are the largest constituent of China's shadow banking sector. A large number of these products are off-balance-sheet and considered a substitute for bank deposits. China's banking sector, especially the small and medium-sized banks (SMBs), uses these products to avoid regulatory restrictions and sustainability risk in the deposit market.Design/methodology/approachThis study empirically examined how banks in China, specifically SMBs, utilize these products on a short and long-run basis to manage and control their deposit levels. This study utilized a quarterly panel dataset from 2010 to 2019 for the top 30 Chinese banks, by first implementing a Panel ARDL-PMG model. For cross-sectional dependence, this study further executed a cross-sectional augmented autoregressive distributive lag model (CS-ARDL).FindingsUnder regulations avoidance theory, the findings revealed that WMPs and deposits have a stable long-run substitute relationship. Furthermore, the WMP–Deposit substitute relationship was only significant and consistent for SMBs, but not for large four banks. The findings further revealed that the WMP–Deposit substitute relationship existed, even after the removal of the deposit rate limit imposed by the People's Bank of China (PBOC) to control the deposit rates.Research limitations/implicationsThe individual bank-issued WMPs' amount data is not available in any database. Therefore, this study utilized the number of WMPs as a proxy for China's banking sector's exposure to the wealth management business.Practical implicationsThis research helps policymakers to understand the Deposit–WMP relationship from the off-balance-sheet perspective. During the various stages of interest rate liberalization, banks were given more control to establish their deposit and loan interest rates. However, the deposit rates are still way below the WMP returns, making WMPs more competitive. This research suggests that policymakers should formulate a more balanced strategy regarding deposit rates and WMPs returns.Originality/valueThis study contributes to the existing literature on China's shadow banking by concentrating on the WMPs. This research represents one of the few studies that analyze regulatory arbitrage in terms of the WMP–Deposit relationship. Moreover, the implementation of CS-ARDL panel data models and multiple data sources makes this study's findings more reliable and significant.

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Liquidity, capital requirements, and shadow banking

Liu

Xie

2021

International Review of Economics & Finance

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The regulatory arbitrage and window dressing in shadow banking: the example of Chinese wealth management product

Cited by 15 publications

References 9 publications

What Prompted Shadow Banking in China? Wealth Management Products and Regulatory Arbitrage

What Prompted Shadow Banking in China? Wealth Management Products and Regulatory Arbitrage

Interaction between wealth management products and bank deposits: evidence from China's shadow banking

Liquidity, capital requirements, and shadow banking

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