While the rapid growth of nonbank financial institutions (NBFIs) has transformed financial landscapes globally, their impact on financial stability remains unclear. NBFIs can promote market liquidity and innovation; however, their complex structures may introduce systemic risks. This study employed a vector autoregression model to examine the short- and long-term effects of NBFI expansion on financial stability in China from 2010 to 2020. Findings indicate that financial NBFIs negatively affect financial stability in the short term but exhibit positive effects over the long run; however, nonfinancial NBFIs exhibit consistent negative effects. Variance decomposition suggests a lagged effect of NBFI expansion on financial stability, which becomes more pronounced in the medium to long term. These findings underscore the need for nuanced, forward-looking regulatory approaches to balance NBFI growth with financial system resilience for a comprehensive understanding of evolving financial ecosystems.
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