Shadow banking, macroprudential policy, and bank stability: Evidence from China’s wealth management product market

Abstract

This study examines whether shadow banking activities reduce the stability of 269 commercial banks in China, and if they do, whether a tightening macroprudential policy could mitigate this negative effect. A quarterly bank level, unbalanced panel data of wealth management products (WMPs) from 2006 to 2018 measured China’s shadow banking activities. The results show that China’s shadow banking activities weaken the stability of banks, especially for principal-floating WMPs, long-term WMPs, and WMPs issued to individual investors. China’s macroprudential supervision improves the soundness of banks and eases the negative effects of shadow banking on banking stability. Our results suggest the necessity to design specific macroprudential policies based on different kinds of shadow banking activities and different types of banks.