Shadow Banking Activities Research Articles

From Financialization to Sustainability: The Impact of Climate Risks on Shadow Banking Activities in Non-Financial Firms in China

Climate risks are increasingly shaping corporate strategies, raising important considerations for sustainability. This study explores the impact of climate risks on the shadow banking activities of non-financial firms, examining how these risks influence sustainable financial practices. Analyzing a sample of Chinese listed firms from 2010 to 2022, this study finds that climate risks are negatively associated with shadow banking activities, reflecting a shift towards more sustainable financial management. This finding remains robust through various robustness checks and tests for endogeneity. Heterogeneity results indicate that the reduction in shadow activities due to climate risks is more pronounced in firms with higher dependence on external financing and weaker profitability. Mechanism results suggest that climate risks amplify cross-sectional risks for firms, increasing risk sources. Simultaneously, companies enhance their preference for holding cash to address potential risks. The combined effect of these factors leads to a decrease in shadow banking activities among non-financial firms, aligning with a shift towards sustainability. This study provides new insights into understanding how climate risks drive sustainable financial decision-making and enriches the research on the determinants of firm financialization.

Digital tax enforcement and shadow banking of non-financial firms: Evidence from China's Golden Tax Project III

Digital tax enforcement (DTE) is an important external monitoring and governance mechanism for firms. We leverage the pilot of China's Golden Tax Project III as a natural experiment of DTE to investigate its impact on non-financial firms’ shadow banking. Using a sample of Chinese firms from 2007 to 2022, we document that DTE restrains shadow banking activities of non-financial firms by improving corporate transparency and mitigating agency problems. Additional analyses suggest that the effect is more salient for firms in regions with weak financial supervision, low-quality media monitoring, low-quality auditor, or weak internal control.

Effect of financial contagion between real and financial sectors on asset bubbles: A two‐layer network game approach

AbstractUnderstanding the mechanism of asset bubble formation is important for maintaining financial stability and healthy functioning of the economic system. With gradual emphasis on the complex characteristics of financial markets, a new perspective for analyzing the emergence of asset bubbles is emerging: how to integrate the real economy with financial markets composed of heterogeneous individuals. In this study, we propose a two‐layer network game to investigate the impact of financial contagion between the real and financial sectors on asset bubbles. Among their interactions, shadow banking activities in both sectors increase the contagion risk across financial markets and construct a broader financial system. Both credit interactions and peer learning effects are captured in the network framework. Simulating relevant regulation policies, our experiments indicate that regulators should closely monitor returns on assets by setting an upper threshold. Financialization in the real sector significantly exacerbates the formation of asset bubbles, with medium‐level borrowing constraints minimizing bubble dynamics most effectively. The financialization practices of mature industries should be strictly regulated, while innovative industries should be allowed moderately flexible financing practices. The degree of friction within the financial market should be flexibly calibrated for financial institutions and genuine enterprises, aiming to mitigate systemic risks in the financial market while fostering robust growth in the real economy.

Collateral Monetary Policy, Regional Financial Development, and Nonfi nancial Firms' Shadow Banking Activities

AbstractThe disparity in credit access between large firms and small and medium‐sized enterprises contributes to the prevalence of shadow banking activities, where large, nonfinancial firms with high credit ratings have become new financial intermediaries. These activities vary geographically and are affected significantly by collateral monetary policy. This paper examines the effect of collateral monetary policy, its reform, and regional financial development characteristics on large firms' shadow banking activities, with a focus on the medium‐term lending facility (MLF), the primary collateral monetary policy instrument in China. The results indicate that the MLF encouraged large firms' shadow banking activity. However, the MLF reform in 2018 mitigated this effect by broadening the range of acceptable collateral. Regional financial development, such as a higher number of bank branches around firms, facilitated large firms' shadow banking activities and amplified the MLF's stimulating effect. In contrast, regional advancements in digital finance and market development limited both shadow banking activities and MLF's impact.

The financial resource curse: Interest rate deregulation and firms' shadow banking activities

AbstractBy exploiting China's 2013 interest rate deregulation, we analyse whether the financial resource curse exists. The results show that after the deregulation, low‐risk firms with more credit resources engage in more shadow banking activities, which preliminarily confirms the existence of the financial resource curse. Moreover, this effect is pronounced in firms located in regions with high credit marketisation and firms with bank connections. However, this effect is weakened in firms with strong internal governance and external supervision, and SOEs. Finally, additional analyses reveal that active participation in shadow banking activities hinders low‐risk firms' long‐term growth, and receives unfavourable market feedback.

Tác động của hoạt động ngân hàng ngầm đến mức độ chấp nhận rủi ro tại các ngân hàng thương mại Việt Nam

Engaging in shadow banking activities may result in significant risks for banks and increase systematic risk as well. If the risk level is too high, it can lead to contagion to other banks. Therefore, the impact of shadow banking activities on risk-taking in Vietnam commercial banks needs to be clarified in the context of volatile financial markets. This article employs secondary data collected from the annual audited financial reports of 31 Vietnamese commercial banks and the World Bank database from 2010 to 2022. Regression results using the two-step system generalized moment estimation method show that participating in shadow banking activities will increase the risk-taking level of banks. Therefore, Vietnam commercial banks should be cautious when participating in shadow banking activities; the State Bank of Vietnam should issue specific regulations on disclosing information related to shadow banking activities as well as have a risk management and control mechanism for these activities to ensure the safety of the banking system’s operations.

INTERCONNECTIONS AND INTERDEPENDENCIES OF ECONOMIC DEVELOPMENT AND SHADOW BANKING SECTOR IN DEVELOPING AND TRANSITIONAL ECONOMIES

The research objective is defined as the identification and confirmation of empirical relationships between shadow banking activities and economic development in developing and transitional economies to establish a theoretical basis for minimizing potential risks associated with shadow banking. The methodological design is based on a quantitative approach, implemented through correlation-regression analysis and ARIMA forecasting methods. The research findings confirm Hypothesis 1: China’s shadow banking is closely interconnected with the country’s economic development. However, Hypothesis 2 (the reduction of shadow banking in China contributes to per capita GDP growth) is only supported for specific structural elements of shadow banking that contribute to economic overheating. In contrast, for other structural elements, such as entrusted loans, a strong direct correlation exists, promoting a positive impact of shadow banking on the country’s economic development. This highlights the need for a highly balanced state policy to minimize shadow banking risks. The research results can be valuable for professionals in public administration and academic researchers, particularly in terms of shaping future research directions.

Executive financial background, external audit quality and shadow banking in non-financial firms

The absence of formal financial services in the face of the actual economy's transition from old to new sources of energy and development modes has led to the emergence of a widespread shadow banking sector. Based on the high-order ladder theory, this paper examines the influence of executives' financial background on non-financial firms' shadow banking. The finding reveals a positive impact of executive financial backgrounds on non-financial firms' shadow banking, mainly driven by the executives' non-banking financial experiences, primarily contributing to the shadow credit chain model. Additionally, high-quality external audits discourage management from engaging in blind shadow banking activities.

Shadow banking and SME investment: Evidence from China's new asset management regulations

China's initiatives to maintain financial stability by curbing shadow banking activities through tighter financial regulation may have unexpected consequences. Using a difference-in-difference-in-differences (DDD) strategy around China's New Asset Management Regulations (NAMR), we examine the effect of shadow banking contraction on SME investment. The result reveals a significant decline in SME investment following the introduction of the regulatory policy, with a more pronounced negative effect observed among politically unaffiliated and high-tech enterprises. The channel analysis demonstrates that the regulatory policy induces financial frictions, leading to an increase in financing costs for SMEs and subsequently causing a decline in investment. Furthermore, we find that the regulatory policy also reduces both investment efficiency and total factor productivity in enterprises. Collectively, our results imply that under financial repression, shadow banking potentially acts as a crucial financial resource for SME growth. However, tighter regulatory policies, without corresponding supportive measures, might result in detrimental impacts on the real economy.

Local fiscal pressure and shadow banking activities of nonfinancial enterprises–A story of government intervention

The literature documents instances in which governments intervene in the allocation of local financial resources to serve their specific objectives. However, few studies have delved into the subsequent consequences of these interventions on local enterprises. Using a dataset that matches variables at both the city and company levels in China, we reveal the promotive effect of fiscal pressure faced by local governments on the engagement of large nonfinancial enterprises in shadow banking activities. Upon mitigating the disturbances caused by short-term economic fluctuations and excluding a potential alternative explanatory mechanism, we delineate the core operative mechanism: under fiscal pressure, local governments direct local credit resources preferentially towards local large enterprises. Such biased guidance leads to disparities in credit availability between large enterprises and small and medium-sized enterprises. As a result of receiving augmented credit support, large enterprises, driven by profit-seeking motives, partially assume the role of substantive financial intermediaries. Our findings highlight the critical need for regulatory measures regarding government interventions in the allocation of resources within the financial market, as well as the engagement of nonfinancial enterprises in "quasi-banking" activities.

The impact of shadow banking on nonfinancial firms listed on the Ho Chi Minh Stock Exchange (HOSE) – Evidence from Vietnam

This paper examines the effect of shadow banking activities on the performance and risk-taking of 339 Vietnamese nonfinancial firms listed on the Ho Chi Minh Stock Exchange (HOSE). Using manually gathered data on firms' shadow banking activities from 2009 to 2021, the expansion of shadow banking is found to have a negative effect on the overall financial soundness of the securities companies, in particular negatively affecting performance and increasing the risk tolerance of companies. We present empirical findings about several aspects of shadow banking activities, including entrusted loans, entrusted investments, private lending, leasing, and commercial credit in this study. While the majority of shadow banking operations could have a negative impact on a firm's performance, we have discovered that commercial credit grants were crucial in reducing the COVID-19 pandemic's adverse effects on businesses, highlighting the need for financial stability in times of crisis. According to our results, the risk of shadow banking activities, which have consequences for policymakers and caution for nonfinancial enterprises, must be taken into consideration.

Shadow banking and non-performing loans: international evidence

PurposeThis paper aims to document the impact of shadow banking on non-performing loans (NPLs) of publicly listed banks in an international setting.Design/methodology/approachThis paper uses the data from 27 countries and various estimation strategies to test the arguments presented in this paper. The sample covers the period between 2002 and 2020.FindingsThe empirical results suggest that banks headquartered in countries with high shadow banking activity have fewer NPLs than otherwise similar banks headquartered in countries with low shadow banking activity. The findings remain qualitatively the same in different sub-samples and after replacing the main variables with their alternate proxies. The paper also shows that this relationship is sensitive to bank-specific characteristics. Moreover, the paper also indicates that the stringency of banking regulations weakens the relationship between shadow banking and NPLs.Research limitations/implicationsThe study’s data limitations prevent a detailed year-by-year analysis of NPLs and shadow banking, restricting insights into their evolving dynamics. In addition, the focus on country-level shadow banking data limits the exploration of how multinational banks’ activities in various jurisdictions impact individual banks’ NPLs.Originality/valueThe paper not only documents the effect of shadow banking on NPLs but also shows that the relationship between shadow banking and NPLs weakens as banking regulations become more stringent.

FinTech Development, Shadow Banking, and Stock Market Activity in China: Insights from a TVP-SV-VAR Modeling

FinTech Development, Shadow Banking, and Stock Market Activity in China: Insights from a TVP-SV-VAR Modeling

Exacerbation or suppression? Digital transformation and shadow banking activities of non-financial firms

Using an unbalanced panel dataset from Chinese non-financial firms spanning 2008–2021, this research explores the relationship between digital transformation and shadow banking. Contrary to expectations, the evidence indicates that digital transformation accelerates shadow banking rather than suppressing it. A result resilient to potential endogeneity, proxy variables, and outlier exclusion. Furthermore, shadow banking exacerbates operational risk, a pattern particularly prominent among firms with underdeveloped digital capabilities, intimating that digital maturity may alleviate the detrimental impacts. This study elucidates the economic repercussions of shadow banking in the digital transformation epoch, yielding valuable insights.

The impact of banking regulatory policies on the expansion of shadow banking business in China

To better examine how shadow banking activities are affected by banking regulation, this paper uses the implementation of new regulatory standards in China's banking sector in 2011 as a quasi-natural experiment to test whether China's banking regulatory policies were effective in curbing shadow banking activities from 2007 to 2019 using data on banks' entrusted loans to measure the size of shadow banking business. The findings of this study are as follows: Firstly, the new regulatory standards had effectively inhibited the development of shadow banking business such as entrusted loans. Mechanism analysis showes that CAR had a significant positive impact on entrusted loans, once the CAR fell, the entrusted loans decreased. Meanwhile, the higher the LIR was, the more shadow banking activities Chinese banks were likely to engage in. Further insight reveales that among banks with larger assets and higher profitability, the impact of the new regulatory policies on shadow banking business was more significant. The results remain robust when the paper also consideres the policies issued in 2017 for shadow banking. The findings of this paper demonstrate the actual effect of China's regulation on shadow banking from a micro perspective and provide a scientific and theoretical basis for the implementation of regulatory policies.

The moderating role of shadow banking on the finance-growth nexus

ABSTRACT This study uses data from 28 countries to document the moderating role of shadow banking on the finance-growth nexus during the period between 2010 and 2020. Employing both static (fixed effects and random effects with Driscoll-Kraay standard errors) and dynamic (two-step System GMM) panel estimators, the findings reveal that the marginal effects of financial development on economic growth increases with the levels of shadow banking activity prevailing in the country.

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.

Do regulatory penalties reduce risk-taking of banks?

This paper analyzes the impact of regulatory penalties on risk-taking of Chinese commercial banks during the period of 2009–2019. Our results reveal that regulatory penalties significantly reduce bank risk-taking, and the results still hold after taking endogeneity and robust tests into consideration. As mechanism test uncovers, regulatory penalties exert much pronounced effect on banks with better corporate governance and stronger market discipline. Furthermore, regulatory penalties enforce banks to improve asset structure in which the proportion of quasi-credit shadow-banking activities has decreased. On the other hand, the structure of bank lending also has changed by penalties with more funds flowing to the real estate sector, and less to the manufacturing sector. Based on those, this paper proposes to optimize regulatory penalty designation further, with the goal of stabilizing bank operating, reducing risk exposure, and providing better financial service for high-quality development in real sector.

Managerial ability, shadow banking activity engagement, and bank shareholder values in China

<p>This study aims to investigate two issues: The impacts of shadow banking activities on bank shareholder value, and the relationship between managerial ability and shadow banking engagement in China. Using the differences in the Basel II capital adequacy ratio to represent the extent commercial banks get involved in shadow banking activities, the authors regress the econometric models using the generalized method of moments. The robustness tests are conducted regarding different risk weights, alternative measures, and model specifications. Thence, the authors found growths in trust beneficiary rights increase banks’ shareholder values, thus suggesting that banks enrich their shareholder wealth while engaging in the shadow banking business. Further, we found that more able managers intend to join the shadow banking business. Given that the purpose of bank management is to enrich shareholder value, we contributed to the literature that joining the shadow banking business can benefit bank shareholders.</p> <p> </p>

Does Confucian culture affect shadow banking activities? Evidence from Chinese listed companies

The study investigates whether and how cultural norms affect corporate shadow banking activities. Using a sample of Chinese listed companies from 2008 to 2020, we find that as a typical informal institution, Confucian culture has a positive effect on stimulating shadow banking business. Mechanism tests show that Confucianism contributes to mitigating business risks and facilitating integration into social networks to tap more profit opportunities, thus stimulating firms to engage in shadow banking activities. Moreover, the positive association between Confucianism and the amount of corporate shadow banking is more prominent for firms located in regions with higher levels of social trust, stronger regional collectivism, and weaker foreign cultural shocks. Our findings are robust to alternative measures of key variables and are still valid after controlling for the endogeneity issues. This study contributes to the literature on the determinants of corporate shadow banking activities and highlights the role of cultural norms in firm’s decision-making.