Shadow Banking Regulation Research Articles

The impacts of China's shadow banking regulation on bank lending—An empirical analysis based on textual analysis and machine learning

China's financial regulatory authority has strengthened shadow banking regulation in recent years, the impact of which has attracted the attention of academics and policymakers. We develop China's shadow banking regulation intensity change index using textual analysis and machine learning methods and explore the impacts of the regulation on bank lending. Using a fixed effect model and a dataset of 177 commercial banks in China from 2007 to 2020, we find that strengthened shadow banking regulation results in shrinkage in bank loan scale and lower loan growth. Mechanism analysis reveals that the asset-reallocation motives and profit-seeking motives generated by banks faced with strengthening regulation lead to a decline in bank lending. The credit tightening effect mainly exists in joint-stock, city, and rural commercial banks while insignificant in state-owned banks. This effect can be moderated by ample capital, abundant deposits, and high loan issuance efficiency. Strengthened regulation also affects loan composition, with an increase in the proportion of corporate lending and a decrease in mortgage lending. Our results have novel implications for both regulators and banks and are robust to several tests.

The real effect of shadow banking regulation: Evidence from China

I find a crackdown on shadow banking has real effects. For identification, I exploit a policy — the “New Regulations on Asset Management” (NRAM) — that restricts the issuance of wealth management products (WMP) in China. I show firms with high WMP exposure experience a decline in investments. The effects are pronounced for firms that are more profitable, have higher revenue growth, and are more financially constrained. Exploration of the possible channels of these effects shows a decline in the credit supply of banks that relied more on WMPs, driven by the fall in their shadow banking activities.

Why are international standards not set? Explaining “weak” cases in shadow banking regulation

AbstractWhy are international regulatory standards not set? While most of the literature focuses on explaining positive cases of standard-setting where international rules are agreed upon, weak or negative cases remain prevalent and yet surprisingly under-explored. To explain these cases in the area of financial services, we integrate an inter-state explanation, which focuses on competition between major jurisdictions, with a transgovernmental explanation, which relates to conflict between different regulatory bodies at the international level. We also consider how these dimensions interact with financial industry lobbying. This allows us to construct a typology differentiating between distinct types of cases concerning international standard-setting: (1) absent standards, (2) non-agreed standards, (3) symbolic standards, and (4) agreed standards. The explanatory leverage of our approach is illustrated through a systematic structured focused comparison of four post-crisis cases related to “shadow banking.” The article generates novel insights into regulatory conflicts and the scope conditions for international agreement.

Shadow banking Regulation and the stock price synchronicity --A quasi-natural experiment based on China's new asset management regulation

Shadow banking has somewhat compensated for China's lack of formal financial development. However, it may also amplify the financial system's risks, which runs counter to the initial expectation of macroprudential management. With the regulation of shadow banking in China under the New Asset Management Regulation (NAMR), this paper investigates the impact of shadow banking regulation on the stock price synchronicity of China's A-share listed companies and its mechanism from 2013 to 2021. The mechanism test finds that shadow banking regulation can reduce stock price synchronicity by reducing firms' agency costs and improving information transparency. Our study enriches the related research on shadow banking regulation. It provides evidence on the microeconomic consequences of shadow banking from the perspective of stock price synchronicity for other developing countries and emerging economies.

The Impacts of China’s Shadow Banking Regulation Intensity on Bank Lending -An empirical analysis based on textual analysis and machine learning

The Impacts of China’s Shadow Banking Regulation Intensity on Bank Lending -An empirical analysis based on textual analysis and machine learning

Financial sector and outbreak of the economic crisis in 2008: IFRS versus US GAAP

PurposeTesting a total of five hypotheses, the paper contributes to overall comparison of the two regimes, as it scrutinises whether these improvements have helped regulate this sector. Although it appears that, for the first time, International Financial Reporting Standards (IFRS) had a more timely effect than US Generally Accepted Accounting Principles (GAAP), multiple parameters must be taken into consideration. The banking system has additional rules that may affect financial statements, such as the Basel Accord which sets many policies closely related to the IFRS, such as deferred tax credits. In this way, this paper aim to enrich the results of these decisions, and illuminate aspects of amendments to IFRS and US GAAP in light of the crisis. Focussing on the financial sector, the author sought to critically evaluate their reactions, and to question some of their fundamental rules in practice. This is vital for accounting researchers and analysts, allowing for the first time to compare IFRS performance between Europe and the US, and make better investment evaluations.Design/methodology/approachThe study sought to detect whether IFRS and US GAAP protected firms from abnormal sales arising from the outbreak of the crisis, whether the reclassification option under IFRS was an answer to the crisis, and whether IFRS and US GAAP succeeded in regulating shadow banking through their amendments. Therefore, it processes five hypotheses. In order to detect the effects of the crisis on accounting regimes, the analysis focused only on companies from the financial sector composed of the banking industry, insurance companies and shadow banking. The author included firms from Australia, Germany, Greece, the UK and the US, and collected information on 679 financial institutions for the period 2009–2013. The author settled on these time frames because the author aimed to capture IFRS performance surrounding the crisis effects in 2008 and the amendments that followed. In this way, the author applied quantitative methods using only numerical data over a given period.FindingsThe results suggest that the reclassification option was successful, helping firms to perform better amid the crisis, indicating that the manipulation of the crisis was appropriate. It seems therefore that US GAAP should have activated this option for US firms. However, the US may not have hurried to act because its banking sector seemed to recover more quickly than in Australia and Europe. Either way, both regimes need to consider speculative market cases that might have appeared during the crisis, as the author have detected cases of abnormal returns. Finally, concerning regulation of the shadow banking sector, the results seem to be encouraging only with regard to the latest improvements and only for all countries examined.Originality/valueThe project contributes to debate on the reactions of both IFRS and US GAAP during and after the economic crisis. For this, it addresses several questions to investigate the performance of the financial sector under both regimes, identifying possible additional effects and considerations. More specifically, it answers if the fair value orientation actually contributes to the financial crisis through contagion effects, while it addresses additional questions. Have these two global accounting regimes succeeded in overcoming the consequences of the crisis? Have amendments and the introduction of new standards to IFRS and US GAAP achieved regulation of shadow banking? Which of the two has performed better? As aforementioned, the analysis focused only on companies from the financial sector composed of the banking industry, insurance companies and shadow banking firms from Australia, Germany, Greece, the UK and the US, for the period 2009–2013.

The impact of shadow banking activities on carbon dioxide emissions: empirical evidence from China.

Financial activity plays an important role in the analysis of environmental and ecological implications. Previous research shows that shadow banking activities, informal and less regulated financial activities, have become an important part of financial systems after the 2008 financial crisis. However, the impact of shadow banking activities on carbon dioxide emissions has been ignored in previous research. In this paper, we use the panel annual data of 30 Chinese provinces over the period 2013-2020 to study the effect of shadow banking activities on carbon dioxide emissions. The result shows that shadow banking activities have a positive impact on carbon dioxide emissions, and the result is still robust by using dynamic panel regression with general method of moments (GMM) method. Heterogeneity analysis shows that the impact of shadow banking activities on carbon emissions is more pronounced for the secondary industry, which proves that shadow banking activities support more for environmentally unfriendly businesses. Furthermore, by using difference-in-difference (DiD) method, we examine the causal effect of shadow banking regulation policy on carbon dioxide emission reduction and demonstrate that the shadow banking regulation can reduce carbon dioxide emissions. Our research contributes to environment protection and achieving the goal of low-carbon economy by exploring the role of shadow banking activities and financial regulation in carbon dioxide reduction.

On the essence and regulation of shadow banking

Subject. This article deals with the shadow banking issues. Objectives. The article aims to define the essence of shadow banking and propose measures to reduce the share of shadow banking in the Russian economy. Methods. For the study, I used analysis and synthesis, economic and mathematical, and formal and logical methods. Results. Based on the transaction cost theory and the Fisher equation, the article confirms the relationship of the shadow economy and the GDP of the Russian Federation. It clarifies the concept of shadow banking and identifies factors affecting the shadow economy expansion, and it also proposes measures to reduce the share of shadow banking in the Russian economy. Conclusions and Relevance. The article concludes that it is necessary to improve the government regulatory activities to minimize the share of shadow banking in the economy. The results of the study can be applied in the control and supervision of the Central Bank of the Russian Federation.

An Empirical Study on the Relationship between Real Estate Price and Real Estate Investment Trusts of Shadow Banking via VAR Model: The Case of China

Purpose – The shadow banking business in China has expanded significantly in the past decade, especially in the real estate industry, which is closely related to the livelihood of many. The purpose of this paper is to investigate the relationship between the realized sale prices of real estates and the real estate investment trusts (REIT) of shadow banking in China. Design/Methodology/Approach – The analysis is performed with a VAR model based on Chinese data collected from Usetrust, CSMAR, the People’s Bank of China, and the National Bureau of Statistics of China during 2013 to 2020. It verifies the impact of the realized sale prices of real estate and relative macroeconomic indicators, on the REIT issuance of shadow banking by variance decomposition and impulse response analysis. Findings – The prices of real estate have the greatest impact on REIT, and there is a one-way Granger causality between them. The findings indicate that it would be beneficial to establish a real estate price prediction and warning mechanism for local governments and relevant institutions to avoid the potential risks to consumers, the finance market, and the real estate industry, which might be caused by price declines or shadow banking failures. Research Implications – In previous literature, it was found that the expansion of shadow banking affected the Chinese real estate market significantly, including an increase in real estate prices, risks of real estate bubbles, and a decrease in monetary policy. Most studies related to this topic collected data from official or commercial databases, respectively. Different from previous research to some extent, this paper is based on up-to-date data collected up the end of 2020. Additionally, it collects data from the two data sources from a broader aspect. The purpose of the research is to empirically explore the mutual influence of shadow banking and real estate prices, and facilitate the regulation of shadow banking for regulators and stakeholders.

Funny Money or Legitimate Finance? Shadow Banking and Policy Impacts in China

Government officials in China have taken different views regarding shadow banking. Some have seen the industry as overly risky, potentially undermining the formal financial system, while others have asserted that it is an increasingly important part of the financial system, filling a gap in finance provision to particular sectors and smaller firms. Do their views matter? Regulators have striven to crack down on the riskiest practices in shadow banking, but are the policies effective? In this article, we analyze the impact of government attitudes and actions on the shadow banking sector. Using a unique data set based on information collected from various sources in a difference-in-difference model, we find that shadow banking regulation plays a strong role in China’s financial sector, while contradictory government views (in the form of commentary in the People’s Daily) on shadow banking do not. This reveals that shadow banking is strongly affected by political authority when it is codified into regulation. Only some aspects of shadow banking can be legitimized through regulation, while the remainder of China’s financial system remains constrained due to state dominance over the financial sector. This underscores the “funny” nature of shadow banking’s money flows. This article is one of the first to study the effects of government views and regulations on the shadow banking system.

Best Laid Plans: Economic Consequences of Shadow Banking Crackdown

This paper studies the impact of shadow banking regulation on the financial system and the real economy. For identification, I exploit a policy – “New Asset Management Rules” (NAMR) – that restrict the issuance and investment directions of wealth management products (WMPs) in China. I find that depositors substitute the WMPs with deposits, leading to an increase in bank loans. I provide evidence the substitution is imperfect and the net credit supply of banks declines. Using a bank-firm linked database, I show that private-owned enterprises (POEs) with high shadow banking or WMP exposure experienced a decline in investments, the growth rate of total assets, liabilities, and revenue. The province-level data shows the aggregate impact of the NAMR is sizable. A counterfactual analysis shows that the investment growth rate would have been 1.6 percentage points higher, translating to a 1 percentage point higher GDP growth rate in 2018.

Much Ado About Nothing? Macro-Prudential Ideas and the Post-Crisis Regulation of Shadow Banking

Post-crisis, macro-prudential ideas have challenged the epistemic authority of private risk management technologies, declaring them to be pro-cyclical contributors to systemic risk. This discursive challenge has been most critical of the shadow banking system, where private risk management instruments are central. This challenge, however, has not been translated into regulatory tools which reflect these convictions. This paper studies this process of discursive challenge to (failed) regulatory intervention for the case of the repo-market, the heart of the current shadow banking system. It traces regulatory efforts on the global and EU level from regulatory statements to (lack of) action, documenting both the persistent articulation of macro-prudential ideas challenging private risk-management systems and timid to no regulatory intervention. It links this hiatus to international coordination problems, the need for macro-prudential action to span regulatory communities, involving banking and financial market authorities and disagreements between micro- and macro-prudentially oriented regulators. The lack of evidence and the difficulty to generate it are identified as major impediments for regulatory consensus, further aggravated by ambiguities about the goals of anti-cyclical regulation. Beyond governance problems and the persistent appeal of private risk-management systems, the paper thus points to difficulties operationalizing macro-prudential ideas as a major explanatory factor.

The measurement and regulation of shadow banking in Ireland

PurposeThe purpose of this paper is to study financial vehicle corporations (FVCs) and other special purpose vehicles (SPVs) in Ireland.Design/methodology/approachThe paper is based on a database of FVCs that are a central part of the shadow banking sector in Ireland. The database is derived from a European Central Bank (ECB) list of securities and from filings in Company Registration Office, Dublin.FindingsTax concessions are very valuable and has resulted in zero or close-to-zero effective tax rates. Although described as “bankruptcy remote”, FVCs/ SPVs in Ireland are associated with several banks that failed. Central Bank data are inconsistent with revenue data and have resulted in regulatory gaps. The main economic benefit to Ireland consists of payments to certain service providers.Research limitations/implicationsA complete population of FVCs/SPVs has not been used. Ownership of FVCs/SPVs has not been identified with consequent implications for identifying risk to the sponsoring firm or guarantor.Practical implicationsThe study indicates data deficiencies in Central Bank data, with consequent implications for regulation and measuring the size of the shadow banking sector, and failure of FVCs/SPVs described as bankruptcy remote.Social implicationsThe shadow banking sector has been a key source of instability and risk transference in the recent past. Research and understanding is vital to prevent a future occurrence.Originality/valueThere are no publicly available databases of individual FVCs/SPVs in Ireland. Hence, research on granular data is limited. The study develops a database derived from lists of securities published by the ECB. The study also relies on a database derived from company house records.

Shadow Banking in Europe: Idiosyncrasies and Their Implications for Financial Regulation

This paper studies the specificities of the regulation of shadow banking in the EU. It argues that the idiosyncratic features of the EU shadow banking sector call for a different (or indigenized) regulatory approach from that of the U.S. It highlights striking differences between the EU and the U.S. shadow banking sector based on both the market structure and the legal micro-infrastructure of the shadow banking sector in these two jurisdictions. These different institutional and legal infrastructures of the shadow banking activities, instruments, and entities, as well as the different trajectories of the evolution of development of the banking and the shadow banking sectors in terms of business models, size and composition of actors and transactions can be the driving force behind the differential regulatory treatment of shadow banking in the EU and the U.S. In highlighting the differences between shadow banking in the EU and the U.S., this paper focuses on the repo markets, securitization and derivatives markets as the main instruments and activities that play significant roles in credit intermediation (maturity and liquidity transformation) outside the regulatory perimeter of the traditional/regular banking system. It then discusses shadow banking entities, especially Money Market Funds (MMFs) as typical shadow banking entities and highlights the fundamental differences in the structure and functioning and existing regulatory treatment of the MMFs in the U.S. and the EU. In the end, the paper underscores the main structural and regulatory differences in the Alternative Investment Fund (AIF) industry across the Atlantic and argues that there is no homogeneous population of such funds and why they need to be treated differentially. The paper concludes that the market structure, business models, as well as legacy regulatory framework of shadow banking (as well as banking), display substantial differences in the U.S. and the EU. The findings in this paper rally against one-size-fits-all proposals to address the problems of the shadow banking system worldwide and require considerably differentiated regulatory approaches to regulating shadow banking across the Atlantic. Therefore, any adoption of the U.S. regulatory framework for the shadow banking sector by the authorities regulating the European shadow banking sector should be cautiously undertaken.

The regulation of shadow banking

Arguments for and against the regulation of shadow banking are presented, evaluated and weighed against each other. Two strong arguments for the regulation of shadow banking are that the system provides the opportunity for regulated banks to circumvent regulation and that it is a major source of systemic risk. Regulatory proposals are also discussed and evaluated. The conclusion that is reached following the discussion is that it does not make sense to regulate depository institutions while giving shadow banking entities a free hand to do what they like.

Grey matter in shadow banking: international organizations and expert strategies in global financial governance

ABSTRACTWho controls global policy debates on shadow banking regulation? We show how experts secured control over how issues in shadow banking regulation are treated by examining the policy recommendations of the Bank of International Settlements, the International Monetary Fund and the Financial Stability Board. The evidence suggests that IO experts embedded a bland reformism opposed to both strong and ‘light touch’ regulation at the core of the emerging regulatory regime. Technocrats reinforced each other's expertise, excluded some potential competitors (legal scholars), co-opted others (select Fed and elite academic economists), and deployed measurement, mandate, and status strategies to assert issue control. In the field of shadow banking regulation, academic economists’ influence came from their credibility as arbitrageurs between several professional fields rather than their intellectual output. The findings have important implications for how we study the relationship between IO technocrats and experts from other professional fields.

IMPACT OF SHADOW BANKING ACTIVITIES AS NON BANK INTERMEDIATION TOWARD REGULATORY DEVELOPMENTS IN FUNCTION CONTROL OF FINANCIAL SERVICES SECTOR IN INDONESIA

Based on the Global Shadow Banking Monitory Report 2015 issued by the Financial Stability Board, global shadow banking activities manage 80% of global GDP and 90% of the global financial system assets. Hence, this study aimed to examine the regulation and supervision of shadow banking activities in Indonesia. The method used is normative juridical with descriptive analytical research specifications. Based on the research results as follows : regulation of shadow banking in Indonesia's financial services sector covers all financial institutions outside the banking sector or Non-Bank Financial Institutions that the regulations are scattered in various rules. Indonesia has developed an integrated surveillance system for the entire financial services sector, include NBFIs. Development of shadow banking regulation will be based on the strengthening of reporting, monitoring, supervision and regulation. Keywords : regulatory developments, shadow banking, and supervision

The Regulation of Shadow Banking

The Regulation of Shadow Banking

Financialization and the Three Utopias of Shadow Banking

The shadow banking system has been identified as a central cause of the current economic crisis. In this article we clarify how the concept of shadow banking is used in public reports to inform current debates about its regulation. We argue that the debate on the regulation of shadow banking is based upon three utopias: the search for a homogenization of different regulatory spaces; the focus on a temporality based on always present availability of data; and the assumption of static configurations of actors within the financial system. Finally, we propose an alternative reading of shadow banking based on the concept of financialization. Financialization allows us to link shadow banking to questions of authority and legitimacy in financial markets. The politics of financialization in general and shadow banking in particular are linked to the stabilization of interpretations and fixation of meaning.

Shadow Banking and Systemic Risk in Europe and China

We compare the European and Chinese shadow banking systems. While the European shadow banking system is better developed than the Chinese shadow banking system, herd behavior and other factors in European markets create systemic risk, which contributed in part to the financial crisis. Dispersion of risk across the under-developed shadow banking system in China has led to some cases of localized, concentrated risk, but not to systemic risk. We discuss proposed European shadow banking regulation and its implications for systemic risk, and discuss what lessons China might glean from such policies. We also discuss what lessons China's diverse and systemically uncoordinated shadow banking sector might provide for Europe.