Placing the Czech Shadow Banking Sector under the Light

Martin Hodula, Martin Macháček and Ales Melecky

Prague Economic Papers, 2020, vol. 2020, issue 1, 3-28

Abstract: The size of the shadow banking sector (SBS) has more than doubled in the Czech Republic over the last decade. This places a potential burden on policy makers. On the one hand, the SBS complements regular banking by expanding access to credit and investments, enabling better risk sharing and maturity transformation, and sup-porting market liquidity. On the other hand, SBS activities can put the stability of the financial system at risk and amplify its procyclicality by exacerbating the build-up of leverage and asset price bubbles. We implement a FAVAR model of the Czech economy to determine the impact of macroeconomic factors on the SBS. We find that the SBS: (i) is sensitive to changes in market interest rates and term spread; (ii) exhibits great procyclicality; (iii) can act as a complement to regular banking and satisfy some additional demand for credit. We also define some potential risks of continued growth of the SBS, linked to our empirical evidence.

Keywords: shadow banking; credit intermediation; Czech Republic; FAVAR (search for similar items in EconPapers)
JEL-codes: E44 G21 G28 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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DOI: 10.18267/j.pep.710

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