Abstract
By using monthly data regarding the scale of shadow banking, interest rates, loan balances, and the market confidence index in China from 2013 to 2017, this study constructed a structural vector autoregressive model to investigate the impacts of monetary policies and confidence in the economy with a special parallel financial intermediary. The regression results indicated that the tightening of monetary policy had compressive effects on commercial banks and shadow banking in China; however, the characteristics of Chinese shadow banking increased overall economic volatility, making the financial system more vulnerable. In addition, this study determined that the influence of confidence in the market in China, as demonstrated through responses of monetary policy authorities, had a considerable effect on shadow banking. We further determined the channel through which confidence affected the credit scale.
Highlights
Shadow banking has become considerably more prevalent over the preceding decade in China and has raised the potential systemic risks of the Chinese financial market
By using monthly data regarding the scale of shadow banking, interest rates, loan balances, and the market confidence index in China from 2013 to 2017, this study constructed a structural vector autoregressive model to investigate the impacts of monetary policies and confidence in the economy with a special parallel financial intermediary
As indicated by the model results, the scale of shadow banking was immediately narrowed by a higher interest rate; this indicated that monetary policy tightening had a considerable effect on shadow banking and compressed it
Summary
Shadow banking has become considerably more prevalent over the preceding decade in China and has raised the potential systemic risks of the Chinese financial market. Shadow banking in China constitutes investments made by commercial banks that are kept off banks’ balance sheets to evade loan restrictions. This differs from the nature of shadow banking in the United States. Boesky [3], the typical shadow banking products available in developed economies are asset-backed commercial securities, money market funds, and other innovative financial tools. More than half of the business flow of shadow banking in China is essentially that of “bank loans in disguise” [5]
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