What We Learn from China's Rising Shadow Banking: Exploring the Nexus of Monetary Tightening and Banks' Role in Entrusted Lending

Tao Zha, Jue Ren and Kaiji Chen
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Jue Ren: Emory University

No 82, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We argue that China's rising shadow banking was inextricably linked to potential \emph{balance-sheet} risks in the banking system. We substantiate this argument with three didactic findings: (1) commercial banks in general were prone to engage in channeling \emph{risky} entrusted loans; (2) shadow banking through entrusted lending masked small banks' exposure to balance-sheet risks; and (3) two well-intended regulations and institutional asymmetry between large and small banks combined to give small banks an incentive to exploit regulatory arbitrage by bringing off-balance-sheet risks into the balance sheet. We reveal these findings by constructing a comprehensive transaction-based loan dataset, providing robust empirical evidence, and developing a theoretical framework to explain the linkages between monetary policy, shadow banking, and traditional banking (the banking system) in China

Date: 2016
New Economics Papers: this item is included in nep-ban, nep-cna, nep-mon and nep-tra
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Citations: View citations in EconPapers (20)

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Related works:
Working Paper: What we learn from China's rising shadow banking: exploring the nexus of monetary tightening and banks' role in entrusted lending (2016)
Working Paper: What We Learn from China's Rising Shadow Banking: Exploring the Nexus of Monetary Tightening and Banks' Role in Entrusted Lending (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:82

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