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Chinese Shadow Banking:

Effects and Policy Options

Lecturer:Tao Shen

Institute of China-ASEAN Research

Guangxi University

Diversified Research Perspective

Typical Form Effects

Perspective

International comparison

Perspective

Positive Effects & Negative

Effects Perspective

Macro-level & Micro-level

Effects Perspective

Positive Effects

1

Achieving Interest rate marketization 2

Accumulating experience of Financial regulation 3

Complementary to traditional banking 4

Promoting Development of real economy

5 Developing diversified financing channels

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Negative Effects

1

risk and limitation 2

efficacy of macro-control policies 3

systemic risk of commercial banks 4

social stability

5 financing costs and the development of SMEs

Macro-level

Effects

Micro-level

Effects

The national economy

The financial system

Monetary policy

Commercial banking system

Small and medium-sized enterprises（SMEs）

Macro & Micro-level Effects Perspective

Macro-level Effects Perspective

Meeting the market’s capital requirements and

promoting economic development

One reason of real economic “hollowing”

Market-oriented economy

The National Economy

Positive Effects

Negative Effects

The Financial System

Positive Effects Negative Effects

financial resources allocation

optimized

multi-level capital market

decentralize system risks

Innovative financial instruments

promote the financial market

Complex business and regulatory

difficulties make the responsibility

unclear

Risk transfer to formal financial

institutions easily

Excessive leverage will expand risk

Lead to credit proliferation

Maturity mismatch increase the liquidity

risk easily

1 2 3

Monetary Policy

Draft

Effective Stability

30

70

SMEs

complement to credit operations

Promoting financial innovation

strengthen ability to manage risk

Traditional commercial banks transform

into securitized commercial banks

Accelerating internal and external

financial disintermediation

Distorting intermediate business

reputational risk and credit risk

Meeting capital

requirements

solving asymmetric

information

Increasing private

borrowing costs

crowding out

funding for SMEs

Commercial banking system

Positive

Negative

Micro-level Effects Perspective

International comparison Perspective

Risk

Abroad

Domestic liquidity

High

leverage Financial crisis

Theoretical Analysis

Based on Ponzi financing, which is the least secure

financing type

Optimizes the allocation of financial resources and improves the

operating efficiency of financial markets

Explaining obvious characteristics by introducing provisions of

legal private finance

Financial unstable Theory

Efficient Market Theory

Property rights Theory

Abundance in normative analysis

Less in empirical analysis

Method

Conclusion

Impulse Response

Function

negative impact on CPI and

M1, impact tends to zero

weaker over time

negative impact on

economic growth, positive

impact is deeper than

negative impact

Introduction

Author：Cheng Jian

Zhang xiao long

Variables:

CPI , GDP

M1,RATE, Entrusted loans

Trust loans

Goal: the impact of

Shadow banking on CPI,

GDP and M1

Method

Conclusion

Variance

Decomposition

greatest impact on

inflation rate

minimal impact on

economic growth

Introduction

Author：Yu Jing

Variable:

RGDP,RCPI,RM1

RSB

Goal: further evaluation

impact of shadow baking

on three economic

indicators(GDP,CPI,M1)

•Limit executive

remuneration

•“Golden parachute”

Strengthen supervision

of federal government

Increasing liquidity

requirements of fund

assets in Money market

United States——Multi-level regulation

first second third

EU——systemic risk control

European Systemic Risk Board

Expand financial regulationscope ,focus on risk control

• Hedge funds and private equity

• Credit rating agencies

• Financial Institutions

Japan—— Financial legislation

June

2009

December

2009

December

2009

Cabinet Office

Ordinance

Amendment Act on

Financial Instruments

Business

Amendment Act on

principle of

consolidated

supervision of

major banks

Financial

Instruments

Exchange

Amendment Act 2

Financial

Instruments

Exchange

Amendment Act 1

May

2010

International financial organizations

FSB

Basel Ⅲ

Before After

Defined shadow banking

standards

Strengthen monitoring

methods

Established regulatory

framework

capital requirements for

banks

Regulatory standards of

leverage ratio

Improvement on capital

instruments

Encourage financial

globalization

Not regulated Cross-

border risks

Not regulated on same

leverage ratio

existed procyclicality in

Financial regulatory

system

Lacked consideration

on systemic risk

Basis for policy options

Bank

Change in

Macroeconomic

SMEs &

Real Estate

shadow

banking

Impact Model

Relation to the entire

national economy

Operational difficulties

Unable to pay

off debts

seriously

situation turn out

Deterioration the

real economy

Macro perspective for shadow

banking development

Improving the supervision of

shadow banking

Concerned the associated risks

between the commercial banks

and shadow banking

policy

option

Macro

environment

Regulatory

Banking

system

Macro-environment

Environment Chinese

characteristics Reform

Monetary

policy

Healthy environment

Right direction

Prudential

regulatory

framework

Interest rate

marketization

Business

diversification

Quantity

Price-based

Regulation

Principles 1

Effective regulation measures 2

Principles

More

International cooperation

Precautionary regulatory

Full disclosure of information

Comprehensive regulatory

Effective regulation measures

Establish and improve relevant financial

legislation

Take shadow banking system into

Regulatory system

Implement dynamic supervision policies

Effective

Supervision

∆ Specialized investment banking regulators

∆ Reducing internal risk

∆ Dynamic supervision

Banking system

Actively absorb

innovations

Policy options

Establish

a firewall

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