Shadow Banking Activities Research Articles

Shadow Banking and the Property Market in China

This paper studies the evolution of property values and the connections between shadow banking and property markets in China. We use Pooled Mean Group estimation to analyze Chinese house prices in 65 cities from 2007-2014, defining the “fundamentals” of housing prices with the Gordon dividend discount model, and using lagged rents, prices, real, nominal interest rates, and shadow banking activity as short term explanatory factors. We find that the cities tend to share long run fundamentals and adjust relatively quickly to deviations from the fundamentals; we do not find anything close to bubbles. We also find that house prices grow more rapidly with availability of shadow banking funds, which have grown rapidly. A policy implication for the Chinese government is to focus on regulatory monitoring in this funding sector.

Shadow Banking in China: Implications for Financial Stability and Macroeconomic Rebalancing

Shadow banks have grown exponentially in China since 2008 and their impacts on financial stability and real economic growth are highly controversial. This article analyzes the trend, operations, and causes of the surge in shadow banking institutions and activities. In addition, the article investigates the financial and “real” impacts of the shadow banks. Regarding financial impacts, the article discusses the potential risks at the institutional and systemic levels. Given the interconnectedness between shadow banks and the formal banking sector, risks in the shadow banks can easily be transmitted to the major commercial banks. On the one hand, albeit the potential risks, the article finds that the Chinese banking sector is unlikely to encounter a crisis, given the current structure of the Chinese banking system and regulatory framework. On the other hand, despite much lauded “contributions” of shadow banks to the real economy, especially small- and medium-sized enterprises, the article argues that the benefits of shadow banks in financing real productive activities are highly limited.

Financial Regulation in a Quantitative Model of the Modern Banking System

This paper builds a quantitative general equilibrium model with commercial banks and shadow banks to study the unintended consequences of capital requirements. In particular, we investigate how the shadow banking system responds to capital regulation changes for traditional banks. A key feature of our model are defaultable bank liabilities that provide liquidity services to households. In case of default, commercial bank debt is fully insured and thus provides full liquidity services. In contrast, shadow banks are only randomly bailed out. Thus, shadow banks' liquidity services also depend on their default rate. Commercial banks are subject to a capital requirement. Tightening the requirement from the status quo, leads households to substitute shadow bank liquidity for commercial bank liquidity and therefore to more shadow banking activity in the economy. But this relationship is non-monotonic due to an endogenous leverage constraint on shadow banks that limits their ability to deliver liquidity services. The basic trade-off of a higher requirement is between bank liquidity provision and stability. Calibrating the model to data from the Financial Accounts of the U.S., the optimal capital requirement is around 20\%.

Regulatory Arbitrage and Window-Dressing in the Shadow Banking Activities: Evidence from China's Wealth Management Products

We examine wealth management products (WMP) issued by Chinese commercial banks, which are an important part of China’s fast growing shadow banking sector. We document that the WMPs’ maturity dates 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 the end of a quarter and the number of its issued WMPs expiring within several days of the quarter-end. Our findings suggest that banks are using WMPs as vehicles for their regulatory arbitrage or window- dressing behaviors.

Schattenbankwesen – Anstrengungen einer Regulierung

With the beginning of the financial crisis the discussion of the lack of detection of non-banking financial market participants that may create systemic risks, again flared up. Paul McCulley, former managing director of investment company PIMCO, coined for these phenomena the slogan „shadow banking system“ and understood it „the whole alphabet soup of levered up non-bank investment conduits, vehicles, and structures.“ The activities of the shadow banking system are varied and can be performed by various financial market players. Shadow banks are not like regular banks regulated, but nevertheless exercise bank-like activities. Because of the diffuse nature of the shadow banking system also the respective supervision is very complex. Therefore a single shadow banking law cannot be issued. Also, the EU Commission considered in its Green Paper on Shadow Banking that any kind of company and / or activity requires a special procedure. In recent years, increasingly regulations have been developed that directly or indirectly affect activities that are associated with the shadow banking system and that can be seen as important building blocks for greater stability in the financial sector. However, a systematic recording of all shadow banking activities in Europe as well as clear and consistent rules applicable to all stakeholders are still pending. This contribution brings an overview of the latest developments and efforts to regulate the shadow banking system.

Shadow Banking In The United States And China :What Are The Risks?

This paper addresses the concern the authors have regarding the speculative nature of shadow banking in the United States and China in particular. There appears to be ample evidence that shadow banking in the United States was a major contributor to the speculation that led up to the 2008 - 2010 financial crisis. The same type of speculation was also responsible for the U.S. stock market collapse of 1929. During the 1930s the Glass-Steagall Act was enacted to address the potential conflict of interest between commercial and investment banking activities. This Act was altered in the 1990s by a majority vote in Congress. Some believe that this partial gutting of the Glass-Steagall Act contributed to Americas unregulated shadow banking activities and real estate speculation that followed. At present Chinas shadow banking sector is following a similar speculative path that the United States did about seven years ago. A difference is that Chinas commercial and shadow banking systems are absent of many of the mechanisms that allowed the U.S. to regulate its way out of Americas financial crisis. This paper compares past and current U.S. and Chinese shadow banking activities and draws conclusions relative to certain sectors in the Chinese economy that are overheated and primed for economic difficulties that could have global implications.

An Empirical Study of Potential Risks of Shadow Banking in South Africa

A large number and valuable, academic literature on shadow banking has developed since the 2007/8 financial crisis but with different conclusions on the essential factors at work. In the rapidly evolving literature, especially from the United States of America, reviews have been done on the fundamental reasons for the existence of shadow banking, the functioning of shadow banking institutions and activities, the reasoning behind the drive to regulate shadow banking and the impact of financial sector reform efforts on shadow banking credit intermediation.Limited research has, however, been done on the prevalence, the importance and the risks of shadow banking to the financial systems of emerging economies. This thesis contributes to the discussion and on whether shadow banking activities and/or institutions contribute to systemic risk so as to necessitate the need to be regulated in order to maintain stability in the financial markets. Testing the hypothesis that shadow banking leads to increased risks for the formal banking sector will play a significant role to understand potential risks that may arise within financial systems and enable the development of policy and regulatory responses. These are currently unresolved empirical issues. The research focuses on empirical evidence about the presence of shadow banking in South Africa and its impact on the stability in financial markets, emphasizing both microeconomic and macroeconomic perspectives for which there is little empirical evidence in extant literature.

The Shifting Realm of Hedge Funds

This Article focuses on the development of the hedge fund landscape in the United States by focusing on the industry’s continued path towards a mainstream asset class, the enormous growth of the industry in terms of assets under management, and the increase in shadow banking activities. As hedge funds increase assets under management through investment by institutional investors and initial public offering activity, the industry is continually changing from its reclusive origins to more mainstream prominence in finance. Further, hedge funds have grown at an impressive rate — particularly since the recent global financial crisis — and now command the same respect and care that other typical institutional investors, such as pension funds and university endowments, have wielded for decades. Finally, hedge funds are now central players in the shadow banking arena, bringing the capital and tactics that can shape the future of high-finance.

Playing the Shadowy World of Emerging Market Shadow Banking

For emerging market regulators, shadow banking represents an activity which they must control. For businessmen in economies like Russia, Argentina, Saudi Arabia and Mexico, shadow banking represents an important business opportunity. By extending credit to risky (but promising) activities through shadow banking, financiers in these economies can earn far higher returns for excess-cash than placing it in cash management accounts. In this brief, we describe ways that cash-rich individuals and companies can use shadow banking activities to help themselves (by earning more money) and help the economy (by extending credit in these traditionally credit-starved economies). Some of these activities include issuing debt which shadow bankers use as collateral, chopping project-lending into privately-placed share offerings, investing in trade, real estate and insurance securities as well as centring shadow banking activities in regulation-friendly jurisdictions.

What Drives Cost Efficiency of Banks in China?

AbstractThis study uses stochastic frontier analysis to examine the factors that influenced cost efficiency of banks in China from 2005 to 2013. The results indicate that policy variables, such as the reserve requirement ratio, the interest rate spread and open market operations by the People's Bank of China, are effective in improving the cost efficiency of banks, but shadow banking variables may reduce cost efficiency. Among the various bank types, city commercial banks appear to be the most efficient and foreign banks are the least efficient. The present study suggests that policy‐makers can have a positive influence on bank cost efficiency by adjusting macro policy variables on different types of banks and by requiring more information on the shadow banking activities to improve monitoring.

“Новая нормальность” китайской экономики

China’s economic growth has decelerated substantially in recent years. This state of affairs is described by Chinese economic researchers as a "new normal". Furthermore, such a definition has also been put forward by the officials as an ideological concept, and in that sense the "new normal" means not just the current situation, but also a prospective path of development. New structural trends do appear in China’s economy. But, by and large, macro-trends kept worsening in 2014- 2015. Industrial production grew by a diminishing margin, and its expansion pace was roughly the same as in the period of the global crisis in late 2008-2009. Sales at the real estate market plummeted, and the prospects of recovery are still unclear. The CPI has been touching a deflationary threshold, reflecting a relative sluggishness of the aggregate demand. Monetary policy turned toward a relaxation with a sequential cause of interest rates and reserve ratios going down. But the possibilities of a further monetary softening are limited because of a high leverage both at the corporate and parastatal sectors, and of a huge overcapacity in the various branches of manufacturing. Nevertheless, hard landing is unlikely to happen in the nearest future. Growth may sustain due not only to the monetary stimuli, but also to new institutional reforms. China’s economy is really rebalancing in favor of services, and that process leads to a fast creation of jobs, which, in its turn, assists a consumer demand’s expansion. Such a shift is promoted with the new tax reform carried out newly in the service sector. The investment demand has been weakening, not least because of the government’s efforts to curb the shadow banking activities and to deleverage at the regional and municipal levels. But, at the same time, a huge amount of new businesses has been established as a result of the minimum capital requirements liberalization. The concept of a "mixed ownership" pioneered by the top state leaders actually implies a new phase of privatization. Public-private partnership is being installed in the number of infrastructural industries. A wave of new reforms is also prevailing at the banking and equity markets. The government assists the Chinese companies' entry into foreign markets with additional export promotion policies and the "Go Out" investment drive.

The regulation of the shadow banking system in the European Union

Introduction: The European Union is the second-largest market of shadow banking activities, which represent an important part in the post-crisis regulatory reform. Not subject to traditional banking regulation, characterized with specific advantages in terms of credit mediation and also specific risks such as systemic and risk of bank runs the shadow banking entities are an important part of the newly forged financial order. PURPOSE: To show the risks and advantages of shadow banking and to analyse some of the regulatory actions taken in the European Union concerning it. METHODS: Analysis of publications, policy and framework recommendations by regulatory bodies and organizations. Evaluation of said recommendations’ ability to cope with shadow bank specific risks. CONCLUSIONS: Many of the risky activities once normal to traditional banks have since the postcrisis regulatory reform migrated to the less regulated shadow banking sector. As more funds seek higher profit in financial markets, the more important the issues in the shadow banking sector become. European authorities must seek a balance between regulation and deregulation so as not to push the same funds away, especially when Europe is facing a slow recovery. Issues in transparency, investor disclosure, reporting and data collection are central to a successful reform.

Shadow Banking and Bank Capital Regulation

Banks are subject to capital requirements because their privately optimal leverage is higher than the socially optimal one. This is in turn because banks fail to internalize all costs that their insolvency creates for agents who use their money-like liabilities to settle transactions. If banks can bypass capital regulation in an opaque shadow banking sector, it may be optimal to relax capital requirements so that liquidity dries up in the shadow banking sector. Tightening capital requirements may spur a surge in shadow banking activity that leads to an overall larger risk on the money-like liabilities of the formal and shadow banking institutions.

Shadow banking in China: expanding scale, evolving structure

Purpose – This paper aims to survey available data sources and put China’s shadow banking system in perspective. Although bank loans still account for the majority of credit provided to China’s real economy, other channels of credit extension are growing rapidly. The fast expansion of shadow banking has spurred wide concerns regarding credit quality and financial stability. Design/methodology/approach – This paper explores various data sources, provides an overview of shadow banking activities in China, discusses their close ties with banks and summarizes regulatory issues. Extensive descriptive data are included to provide a comprehensive picture of the nature of shadow banking activities in China. In particular, institutions and products are discussed in great details. Findings – While China’s shadow banking system is by no means simple, it does not (yet) involve the extensive use of financial derivatives. Rather, shadow banking credit is often directly extended to the real economy. In addition, shadow banks are typically interconnected with commercial banks in various ways. The expanding scale and constantly evolving structure of the shadow banking system has posed challenges for financial regulators. Originality/value – This paper attempts to quantify the scale and scope of China’s shadow banking activities and provides a consistent framework as the basis for cross-country comparison of shadow banking systems. This is one of the first scholarly research products that discusses the origin, nature and risks of China’s shadow banking system in a regulatory context.

The interrupted power law and the size of shadow banking.

Using public data (Forbes Global 2000) we show that the asset sizes for the largest global firms follow a Pareto distribution in an intermediate range, that is “interrupted” by a sharp cut-off in its upper tail, where it is totally dominated by financial firms. This flattening of the distribution contrasts with a large body of empirical literature which finds a Pareto distribution for firm sizes both across countries and over time. Pareto distributions are generally traced back to a mechanism of proportional random growth, based on a regime of constant returns to scale. This makes our findings of an “interrupted” Pareto distribution all the more puzzling, because we provide evidence that financial firms in our sample should operate in such a regime. We claim that the missing mass from the upper tail of the asset size distribution is a consequence of shadow banking activity and that it provides an (upper) estimate of the size of the shadow banking system. This estimate–which we propose as a shadow banking index–compares well with estimates of the Financial Stability Board until 2009, but it shows a sharper rise in shadow banking activity after 2010. Finally, we propose a proportional random growth model that reproduces the observed distribution, thereby providing a quantitative estimate of the intensity of shadow banking activity.

Shadow Banking and Bank Capital Regulation

Banks are subject to capital requirements because their privately optimal leverage is higher than the socially optimal one. This is in turn because banks fail to internalize all the costs that their insolvency creates for the non-financial agents using their money-like liabilities to settle transactions. If banks can bypass capital regulation in an opaque shadow-banking system, it may be optimal to relax capital requirements so that liquidity dries up in the shadow-banking system. Tightening capital requirements may spur a surge in shadow-banking activity that leads to an overall larger risk on the money-like liabilities of the formal and shadow banking institutions.

Shadow Bank Monitoring

We provide a framework for monitoring the shadow banking system. The shadow banking system consists of a web of specialized financial institutions that conduct credit, maturity, and liquidity transformation without direct, explicit access to public backstops. The lack of such access to sources of government liquidity and credit backstops makes shadow banks inherently fragile. Shadow banking activities are often intertwined with core regulated institutions such as bank holding companies, security brokers and dealers, and insurance companies. These interconnections of shadow banks with other financial institutions create sources of systemic risk for the broader financial system. We describe elements of monitoring risks in the shadow banking system, including recent efforts by the Financial Stability Board.

Porządkowanie funkcjonowania bankowości równoległej (shadow banking) w Polsce i w Unii Europejskiej

Threats related to improper regulation of shadow banking institutions apply as well to their customers as to whole financial system. It is perceived by financial authorities in Poland (Polish Financial Supervision Authority, the National Bank of Poland), and in the European Union (European Commission, European Central Bank), and also globally (Financial Stability Board). However, the task of proper regulation of shadow banking activities is already in early stage of completion and still requires from institutions mentioned above a lot of work to do.

Shadow Banking: A Review of the Literature

We provide an overview of the rapidly evolving literature on shadow credit intermediation. The shadow banking system consists of a web of specialized financial institutions that conduct credit, maturity, and liquidity transformation without direct, explicit access to public backstops. The lack of such access to sources of government liquidity and credit backstops makes shadow banks inherently fragile. Much of shadow banking activities is intertwined with the operations of core regulated institutions such as bank holding companies and insurance companies, thus creating a source of systemic risk for the financial system at large. We review fundamental reasons for the existence of shadow banking, explain the functioning of shadow banking institutions and activities, discuss why shadow banks need to be regulated, and review the impact of recent reform efforts on shadow banking credit intermediation.

Shadow Banking in the Euro Area: An Overview

Shadow banking, as one of the main sources of financial stability concerns, is the subject of much international debate. In broad terms, shadow banking refers to activities related to credit intermediation and liquidity and maturity transformation that take place outside the regulated banking system. This paper presents a fi rst investigation of the size and the structure of shadow banking within the euro area, using the statistical data sources available to the ECB/Eurosystem. Although overall shadow banking activity in the euro area is smaller than in the United States, it is significant, at least in some euro area countries. This is also broadly true for some of the components of shadow banking, particularly securitisation activity, money market funds and the repo markets. This paper also addresses the interconnection between the regulated and the non-bank-regulated segments of the financial sector. Over the recent past, this interconnection has increased, likely resulting in a higher risk of contagion across sectors and countries. Euro area banks now rely more on funding from the financial sector than in the past, in particular from other financial intermediaries (OFIs), which cover shadow banking entities, including securitisation vehicles. This source of funding is mainly shortterm and therefore more susceptible to runs and to the drying-up of liquidity. This finding confirms that macro-prudential authorities and supervisors should carefully monitor the growing interlinkages between the regulated banking sector and the shadow banking system. However, an in-depth assessment of the activities of shadow banking and of the interconnection with the regulated banking system would require further improvements in the availability of data and other sources of information.