The Regulatory Arbitrage and Window Dressing in Shadow Banking: The Example of Chinese Wealth Management

Abstract

We document that in China the maturity dates of bank-issued wealth management products (WMPs) cluster toward the end of a month and then decrease significantly at the beginning of the following month. Our empirical work detects a negative relationship between a bank’s loan-to-deposit ratio (LDR) at month-ends and the number of its issued WMPs expiring within several days of the month-end. Moreover, this WMP clustering and the negative relationship disappear after the reform in which regulators bring up measures for banks with a high deposit deviation degree in 2014. We also document that the banks tend to arrange the high-return WMPs to expire around month-ends to attract customers, and this clustering of high-return WMPs also disappears after the reform. Our findings suggest that banks actively, rather than passively, use WMPs as vehicles for their regulatory arbitrage or window dressing behaviours.