Shadow-banking entrusted loan management, deposit insurance premium, and capital regulation

Xuelian Li and Jyh-Horng Lin

International Review of Economics & Finance, 2016, vol. 41, issue C, 98-109

Abstract: This paper studies bank interest margin, i.e., the spread between the loan rate and the deposit rate of a bank, when the bank conducts regular lending and shadow-banking entrusted lending activities under capital regulation. We show that an increase in the entrusted loans increases the bank's interest margin, equity risk, and the liability of deposit insurer. Entrusted loans can help spur bank equity return, but there is a trade-off in terms of reduced banking stability. We also find that the reduced margin and the increased equity risk by capital regulation are reinforced when the bank additionally conducts entrusted lending activities. Relaxing regulatory capital requirements may produce superior return performance and greater safety for the bank carrying on shadow-banking entrusted loans.

Keywords: Shadow banking; Entrusted loans; Bank interest margin; Capital regulation (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:41:y:2016:i:c:p:98-109

DOI: 10.1016/j.iref.2015.09.003

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