scholarly journals Overhauling China’s Financial Stability Regulation: Policy Riddles and Regulatory Dilemmas

2017 ◽  
Vol 4 (1) ◽  
pp. 1-57 ◽  
Author(s):  
Emilios AVGOULEAS ◽  
Duoqi XU
Keyword(s):  
Financial Stability ◽  
Banking Sector ◽  
Financial Regulation ◽  
Banking System ◽  
Big Bang ◽  
Shadow Banking ◽  
Financial Repression ◽  
Leverage Ratio ◽  
Regulation Policy ◽  
Shadow Banking System

AbstractChina faces a number of important financial-stability risks. A persistent feature of the Chinese banking sector is the rapid formation of non-performing loans (NPLs) during each business cycle. Moreover, lending restrictions and interest-rate caps (“financial repression”) have, in part, given rise to an ever-expanding shadow-banking sector. The article highlights five cardinal sins within the Chinese financial system: (1) bad lending practices by the regulated sector, (2) lax governance, (3) a shadow-banking system that is dominated by short-term claims with no liquidity backstop, (4) stark lack of transparency in the shadow sector, and (5) very high levels of interconnectedness between the shadow and the regulated sector. The article suggests that some of these problems will be alleviated through a regulatory big bang that would abolish the current silo approach to financial regulation streamlining financial stability and conduct/consumer-protection supervision. Furthermore, we recommend the introduction of a binding and all-encompassing leverage ratio that will require banks to hold much higher capital buffers as a means to boost bank resilience, reduce NPLs, and battle interconnectedness with the shadow sector.

Shadow banking in China: expanding scale, evolving structure

2014 ◽  
Vol 6 (3) ◽  
pp. 198-211 ◽  
Author(s):  
Tong Li
Keyword(s):  
Financial Stability ◽  
Banking System ◽  
Bank Loans ◽  
Data Sources ◽  
Shadow Banking ◽  
Real Economy ◽  
Content Type ◽  
Comprehensive Picture ◽  
Shadow Banking System ◽  
Banking Credit

Purpose – This paper aims to survey available data sources and put China’s shadow banking system in perspective. Although bank loans still account for the majority of credit provided to China’s real economy, other channels of credit extension are growing rapidly. The fast expansion of shadow banking has spurred wide concerns regarding credit quality and financial stability. Design/methodology/approach – This paper explores various data sources, provides an overview of shadow banking activities in China, discusses their close ties with banks and summarizes regulatory issues. Extensive descriptive data are included to provide a comprehensive picture of the nature of shadow banking activities in China. In particular, institutions and products are discussed in great details. Findings – While China’s shadow banking system is by no means simple, it does not (yet) involve the extensive use of financial derivatives. Rather, shadow banking credit is often directly extended to the real economy. In addition, shadow banks are typically interconnected with commercial banks in various ways. The expanding scale and constantly evolving structure of the shadow banking system has posed challenges for financial regulators. Originality/value – This paper attempts to quantify the scale and scope of China’s shadow banking activities and provides a consistent framework as the basis for cross-country comparison of shadow banking systems. This is one of the first scholarly research products that discusses the origin, nature and risks of China’s shadow banking system in a regulatory context.

scholarly journals Macroeconomic Determinants of Shadow Banking – Evidence from EU Countries

2016 ◽  
Vol 9 (2) ◽  
pp. 111-129 ◽  
Author(s):  
Teodora Cristina Barbu ◽  
Iustina Alina Boitan ◽  
Sorin Iulian Cioaca
Keyword(s):  
Interest Rates ◽  
Banking Sector ◽  
Banking System ◽  
Point Of View ◽  
Stock Index ◽  
Shadow Banking ◽  
Investment Funds ◽  
Banking Regulations ◽  
Shadow Banking System ◽  
Macroeconomic Determinants

AbstractShadow banking is a topical, debated issue on the agenda of national and European macro-prudential regulatory and supervisory authorities. It is generally accepted that shadow banks and the traditional banking system have some core functions in common, such as credit and maturity transformation, and the exposure to similar risks. However, the tight banking regulations and the decreasing trend recorded by interest rates in the post-crisis period create prospects for shadow banking sector growth. Against this background, the present paper aims at investigating the particular impact that shadow banking activity exerts on macroeconomic fundamentals. The analysis covers 15 European Union countries, including Romania, during the period 2008 – 2015, using quarterly data. Shadow banking system is used as a proxy by monetary funds, due to breaks in the series or unbalanced number of observations across selected countries. By employing panel regression, it was found that the shadow banking total assets’ variation is negatively influenced by the GDP growth, short term interest rates, M2/GDP ratio and the ratio of investment funds’ assets in GDP, and positively determined by stock index dynamics and long term interest rates. The findings sustain the literature’s point of view

scholarly journals When Brussels meets shadow banking – Technical complexity, regulatory agency and the reconstruction of the shadow banking chain

2020 ◽  
Vol 24 (3-4) ◽  
pp. 225-247
Author(s):  
Vanessa Endrejat ◽  
Matthias Thiemann
Keyword(s):  
Mutual Funds ◽  
Banking Sector ◽  
Time Pressure ◽  
Banking System ◽  
Money Market ◽  
Shadow Banking ◽  
Money Market Mutual Funds ◽  
High Maturity ◽  
Shadow Banking System ◽  
Bank Balance Sheets

At the heart of the last financial crisis stood the shadow banking system, a mesh of financial activities and entities that grew outside of bank balance sheets but with the support of the banking sector. These activities were not regulated or supervised like banks, and they were characterized by high maturity mismatches and leverage. Two prime elements were Money Market Mutual Funds and Asset-Backed Commercial Papers, which jointly performed bank-like functions. This paper sheds light on the fate of these entities post-crisis and the regulatory dynamics at play as policymakers shifted their focus from constraining their activities to drafting a European regulatory infrastructure that delivers both stability and growth. Based on expert interviews and document analysis, we show how European policymakers opened up to private experts during this shift to learn about the technical complexity of Money Market Mutual Funds and Asset-Backed Commercial Papers, but in the end were restricted in their efforts to craft such regulation due to competing national factions and the legislative time pressure at the European level. We argue that the process was heavily influenced by, first, nationally held visions about the future role of financial markets that came to the fore at pivotal moments during the negotiations, and, second, the specific European institutional set-up and its electoral cycle.

Funny Money or Legitimate Finance? Shadow Banking and Policy Impacts in China

2021 ◽  
pp. 000276422110200
Author(s):  
Sara Hsu ◽  
Xun Han
Keyword(s):  
Banking Sector ◽  
Banking System ◽  
Financial System ◽  
Financial Sector ◽  
Banking Regulation ◽  
Shadow Banking ◽  
Data Set ◽  
Money Flows ◽  
Shadow Banking System ◽  
The Impact

Government officials in China have taken different views regarding shadow banking. Some have seen the industry as overly risky, potentially undermining the formal financial system, while others have asserted that it is an increasingly important part of the financial system, filling a gap in finance provision to particular sectors and smaller firms. Do their views matter? Regulators have striven to crack down on the riskiest practices in shadow banking, but are the policies effective? In this article, we analyze the impact of government attitudes and actions on the shadow banking sector. Using a unique data set based on information collected from various sources in a difference-in-difference model, we find that shadow banking regulation plays a strong role in China’s financial sector, while contradictory government views (in the form of commentary in the People’s Daily) on shadow banking do not. This reveals that shadow banking is strongly affected by political authority when it is codified into regulation. Only some aspects of shadow banking can be legitimized through regulation, while the remainder of China’s financial system remains constrained due to state dominance over the financial sector. This underscores the “funny” nature of shadow banking’s money flows. This article is one of the first to study the effects of government views and regulations on the shadow banking system.

scholarly journals Shadow Banking, Bank Liquidity and Monetary Policy Shocks in Emerging Countries: A Panel VAR Approach

2020 ◽  
Vol 11 (6(J)) ◽  
pp. 52-65
Author(s):  
Sheunesu Zhou
Keyword(s):  
Monetary Policy ◽  
Banking Sector ◽  
Emerging Market ◽  
Banking System ◽  
Shadow Banking ◽  
Panel Var ◽  
Shadow Banking System ◽  
Monetary Policy Shock ◽  
Positive Shock ◽  
The Impact

The study provides an analysis of the relationships between monetary policy, shadow banking and bank liquidity in emerging market economies. It is aimed at broadening knowledge on the effect of shadow banking on monetary policy transmission. Furthermore, the study seeks to analyze the impact of changes in bank liquidity on the growth of the shadow banking sector. We employ panel VAR technique to analyse the dynamics of monetary policy, shadow banking and bank liquidity using data for 15 emerging economy countries. A contractionary monetary policy shock results in a decrease in shadow banking and a decrease in bank liquidity. We also find that a positive shock in bank liquidity increases shadow bank growth and a positive shock in shadow banking also increases bank liquidity. The results point to complementarity between shadow banking and bank liquidity; and the interconnectedness between the two markets in emerging economies. We suggest continuous monitoring of shadow banking activities to minimize transmission of risk from the shadow banking system into the banking sector.

scholarly journals On Shadow Banking and Financial Frictions in DSGE Modeling

2020 ◽  
Vol 71 (2) ◽  
pp. 101-133
Author(s):  
Philipp Kirchner
Keyword(s):  
Financial Stability ◽  
Financial Frictions ◽  
Explanatory Power ◽  
Banking System ◽  
Dsge Models ◽  
Shadow Banking ◽  
Real Economy ◽  
Dynamic Stochastic ◽  
Shadow Banking System ◽  
The Business Cycle

AbstractAt the forefront of macroeconomic research on the causes of the Great Financial Crisis (GFC) was and still is the usage of dynamic stochastic general equilibrium (DSGE) models. To capture the nonlinearities of the GFC, these models were enriched with a variety of financial frictions. This paper focuses on a special subset of these frictions, the shadow banking system. We provide a structured review of the strand of literature that considers shadow banking in DSGE setups and draw particular attention to the modeling approach as well as impact of shadow banking. Our analysis allows the following conclusions: firstly, models featuring shadow banking are better able to simulate realistic movements in the business cycle that are of comparable magnitude to the GFC. Secondly, the models consider amplification channels between the financial sector and the real economy that proved to be of importance during the crisis. Thirdly, the models display a good explanatory power of financial stability measures in the light of shadow banking.

scholarly journals Financial Markets: From the “Tragedy of Commons” to Balanced Regulation

2020 ◽  
Vol 15 (2) ◽  
pp. 173-190
Author(s):  
Anastasia Podrugina ◽  
◽  
Anton Tabakh ◽  
Keyword(s):  
Financial Markets ◽  
Financial Stability ◽  
Banking Sector ◽  
Financial Regulation ◽  
Financial System ◽  
Political Influence ◽  
Regulation System ◽  
Shadow Banking ◽  
Financial Industry ◽  
Tax Legislation

Nowadays the global financial system faces a triple challenge: the threat of a new systemic financial crisis at both global and regional levels; difficulties of constant adaptation of existing financial business and regulatory practices to intensive technological innovations; direct and hidden consequences of excessive political influence on the financial system through sanctions and selectively applied practices for sanction purposes. Improving the quality of financial regulation will require deeper cooperation between regulators of leading economies and a proactive position of the financial industry, as well as the decentralization of financial regulation. However, it is unlikely that this will happen at the global level. Financial stability became a key goal of global financial regulation in the post-crisis period. We consider financial stability as the «tragedy of commons». The article describes the main trends of financial markets regulation after the crisis: transformation of global financial architecture, anti-money laundering and counter-terrorism financing practices (AML/ CT), financial sanctions. The article analyzes the existing failures of modern post-crisis financial regulation: credit crunch, reduction in the effectiveness of monetary policy, regulatory arbitrage, and increased compliance costs (AML/CT legislation, tax legislation, and the sanctions regime). In the future we expect simultaneous trends of harmonization and standardization of requirements in traditional sectors of financial markets (including traditional institutions of the shadow banking sector), but at the same time regulatory arbitrage1 will induce new financial technologies in order to reduce regulatory costs. The crisis triggered by the coronavirus pandemic in 2020 despite its non-financial nature will almost inevitably have a major impact on financial markets and their regulation. Possible steps to eliminate failures in the financial regulation system are proposed, including recommendations for international organizations.

scholarly journals The effects of shadow banking on the traditional banking system in Zimbabwe

2015 ◽  
Vol 4 (4) ◽  
pp. 605-611
Author(s):  
Virimai Mugobo ◽  
Misheck Mutize
Keyword(s):  
Banking Sector ◽  
Banking System ◽  
Good Alternative ◽  
Bank Loan ◽  
Critical Element ◽  
Shadow Banking ◽  
Shadow Banks ◽  
The Face ◽  
Shadow Banking System ◽  
Market Needs

The growth of shadow banks changed the face of banking in Zimbabwe. Their inconsistent product nature and complexity of form has been a cause for concern to regulatory authorities. The interrelationship between their financial intermediary role and that of formal banks has made them good substitutes to formal banking. This study conducts a statistical analysis of the country’s monetary aggregates and the total formal bank loan-to-deposits balances. The findings of this analysis show that the shadow banking system has always been a critical element of the formal banking sector which resulted from market needs and it completes the banking system. The shadow banking system does not pose direct threat to the formal banking system but it was a result of failure to attract savers who found shadow banks as a good alternative.

scholarly journals Shadow Banking in India: Nature, Trends, Concerns and Policy Interventions

2019 ◽  
Vol 12 (2) ◽  
pp. 29-46
Author(s):  
Sashi Sivramkrishna ◽  
Soyra Gune ◽  
Kasturi Kandalam ◽  
Advait Moharir
Keyword(s):  
Banking Sector ◽  
Banking System ◽  
Shadow Banking ◽  
Secondary Sources ◽  
Shadow Banks ◽  
Massive Growth ◽  
Policy Interventions ◽  
Systemic Risks ◽  
Credit Cycle ◽  
Shadow Banking System

AbstractWhile the origin of shadow banks may be traced to the 1970s, developing countries have witnessed a massive growth of shadow banks in more recent decades. India too has seen a similar growth in shadow banks; however, the recent 2018 collapse of IL&FS Group, a major shadow bank, disrupted the credit cycle, stalled investment and even affected overall GDP growth. With experts warning that shadow banks are susceptible to systemic risks and crisis, it becomes imperative to understand the shadow banking system better. In this paper, we use exploratory data analysis – both quantitative and qualitative – to draw attention to the need for definitional clarity in the concept of shadow banks and how they operate. Trends in Indian shadow banking are discussed using data drawn from secondary sources. Systemic risks in India’s shadow banking sector are identified and policy interventions are discussed. The study is imperative for highlighting the importance of shadow banking in India, its growth and the evolving policy interventions regulating this important component of the financial system.

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