Regulatory arbitrage and window-dressing in the shadow banking activities: evidence from China’s Wealth Management Products

Jinghan Cai (), Alicia Garcia-Herrero () and Le Xia ()
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Jinghan Cai: University of Scranton
Alicia Garcia-Herrero: NATIXIS and Bruegel
Le Xia: BBVA Research
Authors registered in the RePEc Author Service: Alicia Garcia Herrero

No GRU_2016_006, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

Abstract: We examine wealth management products (WMP) issued by Chinese commercial banks, which are an important part of China’s fast growing shadow banking sector. We document that the WMPs’ maturity dates cluster toward the end of a month and then decrease significantly at the beginning of the following month. Our empirical work detects a negative relationship between a bank’s loan-to-deposit ratio (LDR) at the end of a quarter and the number of its issued WMPs expiring within several days of the quarter-end. Our findings suggest that banks are using WMPs as vehicles for their regulatory arbitrage or window- dressing behaviors.

Pages: 21 pages
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