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

Kaiji Chen, Jue Ren and Tao Zha

No 21890, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We argue that China's rising shadow banking was inextricably linked to potential 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 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.

JEL-codes: E02 E5 G11 G12 G28 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-cna, nep-mac and nep-tra
Note: AP EFG LE ME
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Citations: View citations in EconPapers (24)

Published as Chen, Kaiji, Jue Ren, and Tao Zha. 2018. "The Nexus of Monetary Policy and Shadow Banking in China." American Economic Review, 108 (12): 3891-3936.

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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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