Chinese shadow banking – Scale, Risk and Regulation

Abstract

After the U.S. financial crisis in 2008, shadow banking business in China has shown rapid development. Shadow banking refer to credit intermediary involving financial entities and financial activities outside the traditional banking regulatory system. The shadow banking system in western countries represented by the United States is mainly based on securitization and various types of financial derivatives. Different from the shadow banking system in Western countries, the shadow banking activities in China mainly revolve around commercial banks, so it can also be called commercial bank-centric shadow banking system. This master thesis first looks at the development history of Chinese shadowbanking system, identifying two different phases of Chinese shadow banking system development. Then an overall picture of how the Chinese shadow banking system is constituted is given, covering the main components within the shadow banking system. Further, this master thesis investigates the operation model of commercial bank-centric shadow banking system. As the two most important operation models, commercial bank wealth management business and interbank business are elaborated in this thesis. Besides, the main risks of the shadow banking business and the mechanisms of risk generation, transmission and amplification are also discussed. Based on the highly risky characteristics of shadow banking business, the current regulatory measures of Chinese financial regulators over the past 10 years are summarized and classified based on different regulation purposes. In addition to the above qualitative analysis, this thesis constructs a panel data set based on the annual report and financial report data of 146 listed commercial banks in China from 2010 to 2020, as well as the regulatory data in the past 10 years, and conducts an econometric empirical analysis to investigate the correlation between commercial banks’ shadow banking business scale, regulatory intensity and commercial banks’ default risk. The findings show that as the scale of commercial banks’ shadow banking business increases, the default risk of commercial banks increases; conversely, as the intensity of financial regulation increases, the default risk of commercial banks decreases accordingly. Finally, based on the qualitative and quantitative analysis results, this thesis provides feasible suggestions for future regulation of Chinese shadow banking system, while reflecting on the research methods applied in this paper and providing possible improvement points for further research.