Working Paper: CEPR ID: DP14957
Authors: Viral V. Acharya; Jun Qian; Yang Su; Zhishu Yang
Abstract: The rise of shadow banking and attendant financial fragility in China can be traced to intensified deposit competition following the global financial crisis (GFC). Deposit competition intensified after the GFC because the GFC slowed down banks’ deposit growth from cross-border money inflows and simultaneously led to fiscal stimulus supported by banks’ credit expansion. Exploiting the fact that one big state-owned bank was particular affected by the GFC through these two channels, we document – by exploring small and medium-sized banks’ branch-level overlap with this big bank – that deposit competition increased banks’ reliance on shadow banking. In particular, exposed banks issued Wealth Management Products (WMPs)—short-maturity, off-balance-sheet substitutes for deposits—creating rollover risks for the issuers, as reflected by higher yields on new WMPs, higher borrowing rates in the interbank market, and lower stock-market performance during liquidity stress.
Keywords: shadow banking; regulatory arbitrage; rollover risk; financial fragility; deposit competition
JEL Codes: G2; E4; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| competition for deposits (G21) | WMP issuance of SMBs (G24) |
| competition from BOC (L19) | deposit-to-asset ratios of SMBs (G21) |
| deposit-to-asset ratios of SMBs (G21) | WMP issuance of SMBs (G24) |
| competition for deposits (G21) | deposit-to-asset ratios of SMBs (G21) |
| WMP issuance of SMBs (G24) | funding attraction (Z33) |
| higher yields on new WMPs (E43) | WMP issuance of SMBs (G24) |
| increased borrowing rates in interbank market (E43) | WMP issuance of SMBs (G24) |
| adverse stock market performance (G10) | WMP issuance of SMBs (G24) |
| shortfall in deposits (G21) | WMP issuance of SMBs (G24) |
| investment opportunities available to SMBs (F23) | WMP issuance of SMBs (G24) |