Wealth management products, banking competition, and stability: Evidence from China

Xu Feng, Eva Lütkebohmert and Yajun Xiao

Journal of Economic Dynamics and Control, 2022, vol. 137, issue C

Abstract: Shadow financing through off-balance sheet wealth management products (WMPs) has become increasingly important besides deposits in China. We quantify the economic magnitude of the effect of WMPs on banking stability in an equilibrium model calibrated to Chinese banking sector data. Alternative equilibria emerge which deviate substantially from the observed banking system and lead to severe financial distress and large welfare losses. Rollover costs from the WMP market and negative shocks to the asset market underlying WMPs can exacerbate banking instability. Moreover, we show that smaller and medium sized banks are comparably relevant for financial stability as the systemically important big 4 banks in China.

Keywords: Wealth management products; Shadow funding; Banking competition; Bank runs; Financial stability (search for similar items in EconPapers)
JEL-codes: E44 G01 G21 G28 G32 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:137:y:2022:i:c:s0165188922000513

DOI: 10.1016/j.jedc.2022.104346

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