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

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Syed Mehmood Raza Shah ◽  
Yan Lu ◽  
Qiang Fu ◽  
Muhammad Ishfaq ◽  
Ghulam Abbas
Keyword(s):  
Interest Rates ◽  
Banking Sector ◽  
Balance Sheet ◽  
Shadow Banking ◽  
Cross Sectional ◽  
Content Type ◽  
Wealth Management ◽  
Panel Ardl ◽  
Bank Deposits ◽  
Long Run

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.

Shadow banking from China's perspective: an empirical analysis of bank-issued wealth management products

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Syed Mehmood Raza Shah ◽  
Qiang Fu ◽  
Ghulam Abbas ◽  
Muhammad Usman Arshad
Keyword(s):  
Commercial Banks ◽  
Fixed Effects ◽  
Banking Sector ◽  
Balance Sheet ◽  
Estimation Method ◽  
Least Square ◽  
Shadow Banking ◽  
Content Type ◽  
Wealth Management ◽  
Chinese Banks

PurposeWealth Management Products (WMPs) are the largest and most crucial component of China's Shadow banking, which are off the balance sheet and considered as a substitute for deposits. Commercial banks in China are involved in the issuance of WMPs mainly to; evade the regulatory restrictions, move non-performing loans away from the balance sheet, chase the profits and take advantage of yield spread (the difference between WMPs yield and deposit rate).Design/methodology/approachIn this study, the authors investigate what bank related characteristics and needs; influenced and prompted the issuance of WMPs. By using a quarterly panel data from 2010 to 2019, this study performed the fixed effects approach favored by the Hausman specification test, and a feasible generalized least square (FGLS) estimation method is employed to deal with any issues of heteroscedasticity and auto-correlation.FindingsThis study found that there is a positive and significant association between the non-performing loan ratio and the issuance of WMPs. Moreover, profitability and spread were found to play an essential role in the issuance of WMPs. The findings of this study suggest that WMPs are issued for multi-purpose, and off the balance sheet status of these products makes them very lucrative for regulated Chinese commercial banks.Research limitations/implicationsNon-guaranteed WMPs are considered as an item of shadow banking in China, as banks do not consolidate this type of WMPs into their balance sheet; due to that reason, there is no individual bank data available for the amount of WMPs. The authors use the number of WMPs issued by banks as a proxy for the bank's exposure to the WMPs business.Practical implicationsFrom a regulatory perspective, this study helps regulators to understand the risk associated with the issuance of WMPs; by providing empirical evidence that Chinese banks issue WMPs to hide the actual risk of non-performing loans, and this practice could mislead the regulators to evaluate the bank credit risk and loan quality. This study also identifies that Chinese banks issue WMPs for multi-purpose; this can help potential investors to understand the dynamics of WMPs issuance.Originality/valueThis research is innovative in its orientation because it is designed to investigate the less explored wealth management products (WMPs) issued by Chinese banks. This study's content includes not only innovation but also contributes to the existing literature on the shadow banking sector in terms of regulatory arbitrage. Moreover, the inclusion of FGLS estimation models, ten years of quarterly data, and the top 30 Chinese banks (covers 70% of the total Chinese commercial banking system's assets) make this research more comprehensive and significant.

scholarly journals Who Bears Interest Rate Risk?

2018 ◽  
Vol 32 (8) ◽  
pp. 2921-2954 ◽  
Author(s):  
Peter Hoffmann ◽  
Sam Langfield ◽  
Federico Pierobon ◽  
Guillaume Vuillemey
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Banking Sector ◽  
Balance Sheet ◽  
Interest Rate Risk ◽  
Cross Sectional ◽  
Net Worth ◽  
Loan Rate ◽  
Rate Risk ◽  
European Banking

Abstract We study the allocation of interest rate risk within the European banking sector using novel data. Banks’ exposure to interest rate risk is small on aggregate, but heterogeneous in the cross-section. Contrary to conventional wisdom, net worth is increasing in interest rates for approximately half of the institutions in our sample. Cross-sectional variation in banks’ exposures is driven by cross-country differences in loan-rate fixation conventions for mortgages. Banks use derivatives to partially hedge on-balance-sheet exposures. Residual exposures imply that changes in interest rates have redistributive effects within the banking sector. Received October 31, 2017; editorial decision August 30, 2018 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals DOES BANKING SECTOR DEVELOPMENT HAVE ANY ASSOCIATION WITH ECONOMIC GROWTH AND INTEREST RATES IN PAKISTAN?

2019 ◽  
Vol IV (I) ◽  
pp. 100-107
Author(s):  
Muhammad Yusuf Amin ◽  
Syed Imran Khan ◽  
Noor Hassan
Keyword(s):  
Economic Growth ◽  
Interest Rates ◽  
Granger Causality ◽  
Banking Sector ◽  
Real Exchange Rates ◽  
Discount Rates ◽  
Causality Test ◽  
Bank Deposits ◽  
Long Run ◽  
Banking Sector Development

The study aims to examine the association between banking sector development, real exchange rates, inflation rates, federal discount rates, economic growth and bank deposits in Pakistan. The study employs Johansen co-integration method and Granger causality test. The empirical results confirm for the existence of a long run relationship between banking sector development and inflation, economic growth and federal discount rates. The results of Granger causality indicate that US interest rates affect the development of the Pakistani banking sector. This confirms the existence of spillover impact.

scholarly journals Why Are Banks Exposed to Monetary Policy?

2021 ◽  
Vol 13 (4) ◽  
pp. 295-340
Author(s):  
Sebastian Di Tella ◽  
Pablo Kurlat
Keyword(s):  
Interest Rates ◽  
Balance Sheet ◽  
Monetary Shocks ◽  
Hedging Strategy ◽  
Cross Sectional ◽  
Time Pattern ◽  
Bank Deposits ◽  
Maturity Mismatch ◽  
Optimal Dynamic ◽  
The Cost

We propose a model of banks’ exposure to movements in interest rates and their role in the transmission of monetary shocks. Since bank deposits provide liquidity, higher interest rates allow banks to earn larger spreads on deposits. Therefore, if risk aversion is higher than one, banks’ optimal dynamic hedging strategy is to take losses when interest rates rise. This risk exposure can be achieved by a traditional maturity-mismatched balance sheet and amplifies the effects of monetary shocks on the cost of liquidity. The model can match the level, time pattern, and cross-sectional pattern of banks’ maturity mismatch. (JEL E43, E44, E51, E52, G21, G32)

Identification of systemically important banks in India using SRISK

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Juhi Gupta ◽  
Smita Kashiramka
Keyword(s):  
Systemic Risk ◽  
Banking Sector ◽  
Global Financial Crisis ◽  
Balance Sheet ◽  
Data Set ◽  
Content Type ◽  
Long Run ◽  
Marginal Expected Shortfall ◽  
The Global Financial Crisis ◽  
Systemically Important Banks

Purpose Systemic risk has been a cause of concern for the bank regulatory authorities worldwide since the global financial crisis. This study aims to identify systemically important banks (SIBs) in India by using SRISK to measure the expected capital shortfall of banks in a systemic event. The sample size comprises a balanced data set of 31 listed Indian commercial banks from 2006 to 2019. Design/methodology/approach In this study, the authors have used SRISK to identify banks that have a maximum contribution to the systemic risk of the Indian banking sector. Leverage, size and long-run marginal expected shortfall (LRMES) are used to compute SRISK. Forward-looking LRMES is computed using the GJR-GARCH-dynamic conditional correlation methodology for early prediction of a bank’s contribution to systemic risk. Findings This study finds that public sector banks are more vulnerable to macroeconomic shocks owing to their capital inadequacy vis-à-vis the private sector banks. This study also emphasizes that size should not be used as a standalone factor to assess the systemic importance of a bank. Originality/value Systemic risk has attracted a lot of research interest; however, it is largely limited to the developed nations. This paper fills an important research gap in banking literature about the identification of SIBs in an emerging economy, India. As SRISK uses both balance sheet and market-based information, it can be used to complement the existing methodology used by the Reserve Bank of India to identify SIBs.

China's Shadow Banking in Spotlight

2013 ◽  
Vol 05 (04) ◽  
pp. 65-75 ◽  
Author(s):  
Mu YANG ◽  
Jielu YAO
Keyword(s):  
Interest Rates ◽  
Commercial Banks ◽  
Banking Sector ◽  
Balance Sheet ◽  
Chinese Government ◽  
Shadow Banking ◽  
Entry Barriers ◽  
Credit Access ◽  
Contingent Liabilities

Shadow banking in China encompasses informal financing activities including both underground lending and the banks' off-balance-sheet credit. The lack of formal credit access prompted the development of China's underground lending. Banks' off-balance-sheet credit refers to various contingent liabilities of commercial banks. Though the Chinese government has taken measures to lower risks posed by shadow banking, it needs to move towards more market-determined interest rates and lower entry barriers to the banking sector.

China’s shadow banking sector: beneficial or harmful to economic growth?

2015 ◽  
Vol 7 (4) ◽  
pp. 421-445 ◽  
Author(s):  
James R. Barth ◽  
Tong Li ◽  
Wen Shi ◽  
Pei Xu
Keyword(s):  
Economic Growth ◽  
Banking Sector ◽  
Commercial Banking ◽  
Global Perspective ◽  
Shadow Banking ◽  
Content Type ◽  
Wide Range ◽  
Recent Developments ◽  
Major Factors ◽  
Made In

Purpose – The purpose of this paper is to examine recent developments pertaining to China’s shadow banking sector. Shadow banking has the potential not only to be a beneficial contributor to continued economic growth, but also to contribute to systematic instability if not properly monitored and regulated. An assessment is made in this paper as to whether shadow banking is beneficial or harmful to China’s economic growth. Design/methodology/approach – The authors start with providing an overview of shadow banking from a global perspective, with information on its recent growth and importance in selected countries. The authors then focus directly on China’s shadow banking sector, with information on the various entities and activities that comprise the sector. Specifically, the authors examine the interconnections between shadow banking and regular banking in China and the growth in shadow banking to overall economic growth, the growth in the money supply and the growth in commercial bank assets. Findings – Despite the wide range in the estimates, the trend in the size of shadow banking in China has been upward over the examined period. There are significant interconnections between the shadow banking sector and the commercial banking sector. Low deposit rate and high reserve requirement ratios have been the major factors driving its growth. Shadow banking has been a contributor, along with money growth, to economic growth. Practical implications – The authors argue that shadow banking may prove useful by diversifying China’s financial sector and providing greater investments and savings opportunities to consumers and businesses throughout the country, if the risks of shadow banking are adequately monitored and controlled. Originality/value – To the authors’ knowledge, this paper is among the few to systematically evaluate the influence of shadow banking on China’s economic growth.

Long run apartment price dynamics in Swedish and German cities

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sviatlana Engerstam
Keyword(s):  
Banking Sector ◽  
Cointegration Analysis ◽  
Price Dynamics ◽  
Long Term Effects ◽  
Content Type ◽  
Macroeconomic Variables ◽  
Price Elasticities ◽  
Long Run ◽  
German Cities

PurposeThis study examines the long term effects of macroeconomic fundamentals on apartment price dynamics in major metropolitan areas in Sweden and Germany.Design/methodology/approachThe main approach is panel cointegration analysis that allows to overcome certain data restrictions such as spatial heterogeneity, cross-sectional dependence, and non-stationary, but cointegrated data. The Swedish dataset includes three cities over a period of 23 years, while the German dataset includes seven cities for 29 years. Analysis of apartment price dynamics include population, disposable income, mortgage interest rate, and apartment stock as underlying macroeconomic variables in the model.FindingsThe empirical results indicate that apartment prices react more strongly on changes in fundamental factors in major Swedish cities than in German ones despite quite similar development of these macroeconomic variables in the long run in both countries. On one hand, overreactions in apartment price dynamics might be considered as the evidence of the price bubble building in Sweden. On the other hand, these two countries differ in institutional arrangements of the housing markets, and these differences might contribute to the size of apartment price elasticities from changes in fundamentals. These arrangements include various banking sector policies, such as mortgage financing and valuation approaches, as well as different government regulations of the housing market as, for example, rent control.Originality/valueIn distinction to the previous studies carried out on Swedish and German data for single-family houses, this study focuses on the apartment segment of the market and examines apartment price elasticities from a long term perspective. In addition, the results from this study highlight the differences between the two countries at the city level in an integrated long run equilibrium framework.

Macroeconomic shocks, fragility and home financing in Malaysia: can rental index be the answer?

2018 ◽  
Vol 9 (1) ◽  
pp. 17-44 ◽  
Author(s):  
Rosylin Mohd Yusof ◽  
Farrell Hazsan Usman ◽  
Akhmad Affandi Mahfudz ◽  
Ahmad Suki Arif
Keyword(s):  
Interest Rates ◽  
Islamic Banks ◽  
Macroeconomic Shocks ◽  
Content Type ◽  
Long Run ◽  
Short Run ◽  
Rental Rate ◽  
Conventional Banks ◽  
The Impact ◽  
Conventional And Islamic Banks

Purpose This study aims to investigate the interactions among macroeconomic variable shocks, banking fragility and home financing provided by conventional and Islamic banks in Malaysia. Identifying the causes of financial instability and the effects of macroeconomic shocks can help to foil the onset of future financial turbulence. Design/methodology/approach The autoregressive distributed lag bound-testing cointegration approach, impulse response functions (IRFs) and forecast error variance decomposition are used in this study to unravel the long-run and short-run dynamics among the selected macroeconomic variables and amount of home financing offered by both conventional and Islamic banks. In addition, the study uses Granger causality tests to investigate the short-run causalities among the selected variables to further understand the impact of one macroeconomic shock to Islamic and conventional home financing. Findings This study provides evidence that macroeconomic shocks have different long-run and short-run effects on amount of home financing offered by conventional and Islamic banks. Both in the long run and short run, home financing provided by Islamic banks is more linked to real sector economy and thus is more stable as compared to home financing provided by conventional banks. The Granger causality test reveals that only gross domestic product (GDP), Kuala Lumpur Syariah Index (KLSI)/Kuala Lumpur Composite Index (KLCI) and house price index (HPI) are found to have a statistically significant causal relationship with home financing offered by both conventional and Islamic banks. Unlike the case of Islamic banks, conventional home financing is found to have a unidirectional causality with interest rates. Research limitations/implications This study has focused on analyzing the macroeconomic shocks on home financing. However, this study does not assess the impact of financial deregulation and enhanced information technology on amount of financing offered by both conventional and Islamic banks. In addition, it is not within the ambit of this present study to examine the effects of agency costs and information asymmetry. Practical implications The analysis of cointegration and IRFs exhibits that in the long run and short run, home financing provided by Islamic banks are more linked to real sector economy like GDP and House Prices (HPI) and therefore more resilient to economic vulnerabilities as compared to home financing provided by conventional banks. However, in the long run, both conventional and Islamic banks are more susceptible to fluctuations in interest rates. The results of the study suggest that monetary policy ramifications to improve banking fragility should focus on stabilizing interest rates or finding an alternative that is free from interest. Social implications Because interest plays a significant role in pricing of home loans, the potential of an alternative such as rental rate is therefore timely and worth the effort to investigate further. Therefore, Islamic banks can explore the possibility of pricing home financing based on rental rate as proposed in this study. Originality/value This paper examines the unresolved issues in Islamic home financing where Islamic banks still benchmark their products especially home financing, to interest rates in dual banking system such as in the case of Malaysia. To the best of the authors’ knowledge, studies conducted in this area are meager and therefore is imperative to be examined.

Symmetric and asymmetric adjustment of bank deposit interest rates: empirical evidence from Kenya

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Moses Nzuki Nyangu ◽  
Freshia Wangari Waweru ◽  
Nyankomo Marwa
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Asymmetric Adjustment ◽  
Deposit Rate ◽  
Content Type ◽  
Long Run ◽  
Adjustment Speed ◽  
Short Run ◽  
Pass Through

PurposeThis paper examines the sluggish adjustment of deposit interest rate categories with response to policy rate changes in a developing economy.Design/methodology/approachSymmetric and asymmetric error correction models (ECMs) are employed to test the pass-through effect and adjustment speed of deposit rates when above or below their equilibrium levels.FindingsThe findings reveal an incomplete pass-through effect in both the short run and long run while mixed results of symmetric and asymmetric adjustment speed across the different deposit rate categories are observed. Collusive pricing arrangement behavior is supported by deposit rate categories that adjust more rigidly upwards than downwards, while negative customer reaction behavior is supported by deposit rate categories that adjust more rigidly downwards than upwards.Practical implicationsEven though the findings indicate an aspect of increased responsiveness over the period, the sluggish adjustment of deposit rates imply that monetary policy is still ineffective and not uniform across the different deposit rate categories.Originality/valueTo the best of the authors' knowledge, this is the first study to empirically examine both symmetric and asymmetric adjustment behavior of deposit interest rate categories in Kenya. The findings are key to policy makers as they provide insights on how long it takes to adjust different deposit rate categories to monetary policy decisions. In addition, the behavior of deposit rates partly explains why interest rates capping was imposed in Kenya in 2016.

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