Abstract
Our study aims to quantitatively assess some of the determinants of shadow banking dynamics in 11 European Union (E.U.) countries from Central and Eastern Europe (C.E.E.) over the period 2004–2017. Using panel data estimation techniques and a quarterly data set compiled from several publicly available data sources, we alternatively evaluate the impact of six macroeconomic and financial variables on two dependent variables corresponding to two different measures of the shadow banking sector, namely the broad one (including all non-monetary financial institutions, except insurance corporations and pension funds) and the narrow one (excluding from the above one the investment funds, other than money market funds [M.M.F.]). Our findings confirm that shadow banking is sensitive to overall macroeconomic conditions and that economic growth positively influences the expansion of this segment of the financial sector. In addition, a higher demand for funds from institutional investors, which also reveals a more developed financial system, supports the expansion of the shadow banking sector. Moreover, in a low interest rate environment, the search for yield makes investors turn to shadow banks, while the development of the shadow banking sector is also found to be complementary to the development of the rest of the financial system, in particular, traditional banks.
Highlights
Shadow banking has become more significant in recent years, especially during and after the financial crisis of 2007/2008
Using panel data estimation techniques on a quarterly data set compiled for a group of 11 New European Union (E.U.) member states from C.E.E. and almost 13 years (2004Q2–2017Q1) we address the following research question: which are the macro determinants that significantly influence the expansion of shadow banking in C.E.E?
We noticed an important increase in the shadow banking sector in 2004 in C.E.E. countries, clearly outpacing the growth rate in the euro area
Summary
Shadow banking has become more significant in recent years, especially during and after the financial crisis of 2007/2008. Previous studies that refer to these particular countries usually dedicate to them only a minor section in their whole research To fill this gap, the current study aims to empirically assess how different variables from the macroeconomic and financial environment influence the dynamics of the shadow banking sector in the C.E.E. economies. Our article contributes to enhancing knowledge on shadow banks in two major ways It provides both a theoretical and quantitative analysis of the phenomenon, whilst most pre-existing studies address only conceptual issues related to the different facets of shadow banking (e.g. definition, measurement, dynamics, potential triggers, and risks to the overall financial stability).
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