Working Paper: NBER ID: w21890
Authors: Kaiji Chen; Jue Ren; Tao Zha
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.
Keywords: No keywords provided
JEL Codes: E02; E5; G11; G12; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary tightening (E52) | banks' behavior (G21) |
| monetary tightening (E52) | entrusted lending (F34) |
| small banks' response to monetary tightening (E44) | risky entrusted loans (G21) |
| large banks' response to monetary tightening (E44) | risky entrusted loans (G21) |
| regulatory restrictions (L51) | small banks' risk-taking behavior (G21) |
| regulatory loopholes (G18) | entrusted lending (F34) |
| small banks' risk-taking behavior (G21) | systemic risk (E44) |