Featured Product

    BIS Paper Examines Shadow Banking System in China

    November 08, 2019

    BIS published a working paper that analyzes money creation mechanisms of shadow banking tools in China, investigates their effects on financial risk, and surveys recent regulation. Using the balance-sheet information of 311 listed and non-listed banks from over a decade, the paper investigates the relationship between shadow banking credit and financial risks at both the macro and micro levels. It summarizes the shadow banking regulations implemented by Chinese regulators, discusses the related issues, and sets out policy implications. The paper also highlights the critical role of banks’ shadow in creating credit money and hiding the credit risk incurred by banks.

    Regulatory arbitrage is believed to be a key driver for the emergence of shadow banking worldwide. The case of China is similar but more complex, given China’s unique banking regulations, such as regulated deposit and lending rates in addition to certain lending restrictions. Recent studies have focused on shadow banking as a unique feature of the financial system in China. Appendix B of the paper provides a list of shadow banking related regulations that have been announced or implemented by the authorities such as PBC, CBIRC, and CSRC. The main regulator of Chinese shadow banking is CBIRC, which coincides with the reality that Chinese shadow banking centers on banks rather than on traditional shadow banking, which channels funds through other types of financial institutions.

    The paper clarifies the definition of shadow banking in China, decomposing it into banks' shadow and traditional shadow banking. It finds that, although banks' shadow drives up the credit risk of banks, banks have not adequately assessed that risk or taken the appropriate countermeasures. Banks' shadow impairs the effectiveness of banking regulations aimed at lending and leads to the accumulation of systemic risk. A resulting policy implication indicates that regulators should apply different restrictions to banks’ shadow and traditional shadow banking and focus on the balance-sheet items that banks may use to hide their shadow banking operations.

    The paper proposes policy implications for both the traditional and shadow banking systems. First, appropriate regulation should be applied to the traditional banking system. To avoid an accumulation of shadow banking risk, regulators should avoid applying overly strict traditional policies to traditional banks. and should balance the pros and cons of the shadow banking system. Regulators may need to take measures to protect “shadow funds.” In terms of how to regulate shadow banking more effectively, guidance on general regulation and specific regulatory measures are critical. Current suggestions for regulation guidance include macro-prudential and countercyclical regulation in the Basel III framework, in addition to the functional and category-based regulation.

    The paper concludes that, to strengthen supervision, regulators in China should closely track the evolution of various shadow banking channels, both on- and off-balance sheet. Specific macro-prudential regulation tools, such as asset reserves and risk reserves, should be applied separately to banks’ shadow and traditional shadow banking. In the future, the key to regulating the shadow banking system in China will be to strengthen the regulatory mechanism centered on banks. Both banks’ shadow and traditional shadow banking are intricately linked with the banking system and they draw on banks as the main funding source. The regulatory authorities should seek to enhance their macro-prudential management of the banking system to preempt future excessive growth of financial risks.

     

    Related Link: Working Paper

    Keywords: Asia Pacific, China, Banking, Shadow Banking, Credit Risk, Research, Market Based Finance, Macro-prudential Policy, Systemic Risk, BIS

    Featured Experts
    Related Articles
    News

    BCBS Amends Guidelines on Sound Management of AML/CFT Risks

    BCBS amended the guidelines on sound management of risks related to money laundering and financing of terrorism (ML/FT).

    July 02, 2020 WebPage Regulatory News
    News

    US Agencies Finalize Amendments to Swap Margin Rule

    US Agencies (Farm Credit Administration, FDIC, FED, FHFA, and OCC) finalized changes to the swap margin rule to facilitate implementation of prudent risk management strategies at banks and other entities with significant swap activities.

    July 01, 2020 WebPage Regulatory News
    News

    PRA Letter Sets Expectations on Approach to Managing Climate Risks

    PRA published a letter that builds on the expectations set out in the supervisory statement (SS3/19) on enhancing banks' and insurers' approaches to managing the financial risks from climate change.

    July 01, 2020 WebPage Regulatory News
    News

    EBA Guidelines on Treatment of Structural Foreign Exchange Under CRR

    EBA finalized the guidelines on treatment of structural foreign-exchange (FX) positions under Article 352(2) of the Capital Requirements Regulation (CRR).

    July 01, 2020 WebPage Regulatory News
    News

    FSB Issues Statement on Impact of COVID-19 Crisis on Benchmark Reform

    FSB published a statement on the impact of COVID-19 pandemic on global benchmark transition.

    July 01, 2020 WebPage Regulatory News
    News

    IAIS Publishes List of Internationally Active Insurance Groups

    IAIS published the list of Internationally Active Insurance Groups (IAIGs) publicly disclosed by group-wide supervisors.

    July 01, 2020 WebPage Regulatory News
    News

    FED Temporarily Revises FR Y-9C With Respect to PPPLF and CARES Act

    FED has temporarily revised the reporting form on consolidated financial statements for holding companies (FR Y-9C; OMB No. 7100-0128).

    July 01, 2020 WebPage Regulatory News
    News

    EC Launches Consultation on Review of Solvency II Directive

    EC launched a consultation on the review of the key elements of Solvency II Directive, with the comment period ending on October 21, 2020.

    July 01, 2020 WebPage Regulatory News
    News

    ECB Consults on Supervisory Approach to Consolidation in Banking

    ECB launched a consultation on the guide that sets out supervisory approach to consolidation projects in the banking sector.

    July 01, 2020 WebPage Regulatory News
    News

    IAIS on Package for 2020 Data Collection on ICS and Aggregation Method

    IAIS published technical specifications, questionnaires, and templates for 2020 Insurance Capital Standard (ICS) and Aggregation Method data collections.

    June 30, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5425