Shadow loans and regulatory arbitrage: evidence from China

Amanda Liu, Jing Liu and Ilhyock Shim
Authors registered in the RePEc Author Service: Xiaoxi Liu

No 999, BIS Working Papers from Bank for International Settlements

Abstract: This paper examines how Chinese banks used on-balance sheet shadow loans for regulatory arbitrage and whether the financial market priced in the banks' use of shadow loans and the resulting vulnerabilities in 2016–2020. It finds that banks chose to window-dress their regulatory capital ratio by using shadow loans. It also shows that banks with a higher shadow loan ratio or a lower break-even non-performing loan ratio obtained from reverse stress testing faced higher wholesale funding costs. Finally, after the announcement of a rare bank failure event, more vulnerable banks witnessed lower cumulative stock and bond returns.

Keywords: bank capital regulation; Chinese economy; regulatory arbitrage; shadow banking; reverse stress test. (search for similar items in EconPapers)
JEL-codes: G12 G14 G21 G28 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2022-02
New Economics Papers: this item is included in nep-ban, nep-cba and nep-cna
References: View references in EconPapers View complete reference list from CitEc
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Related works:
Journal Article: Shadow loans and regulatory arbitrage: Evidence from China (2024)
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