This paper researches the impact that shadow banking in China has upon credit creation and the potential effectiveness of monetary policy. Using a credit creation model, we derive the effect that shadow banking has upon the money multiplier and the money supply. The model shows that shadow banking can change the money multiplier, potentially increasing it during an expansion and decreasing it during a contraction. Introducing shadow banking in a CC-LM model results in a shift of the CC and LM curves resulting in a higher equilibrium output. A vector autoregressive model is used to empirically estimate the impact of shadow banking deposits' growth rate on the growth rates of the broad money supply, GDP, and the CPI. The results show that shadow banking's credit creation function in China has a pro-cyclical characteristic, potentially reducing the money supply's controllability and increasing the difficulty in effectively regulating monetary policy. This paper introduces shadow banking into the currency creation process of traditional commercial banks, accounting for the reserve requirement ratio, the excess reserve ratio, the shadow bank leakage rate, and the reserved deduction rate. Future research can determine whether coordinating monetary policy and leverage ratio regulation mitigates the impact of shadow banking. Another area of research is how the shadow banking of non-financial companies affect monetary policy.
Acharya, V., Schnabl, P., & Suarez, G. (2013). Securitization without risk transfer. Journal of Financial Economics, 107 (3), 515-536. http://dx.doi.org/10.1016/j.jfineco.2012.09.004.
Allen, F., Qian, Y., Tu, G., & Yu, F. (2019). Entrusted loans: a close look at China's shadow banking system. Journal of Financial Economics, 133, 18-41. http://dx.doi.org/10.1016/j.jfineco.2019.01.006
Bengtsson, E. (2013). Shadow banking and financial stability: European money market funds in the global financial crisis. Journal of International Money and Finance, 32, 579-594. http://dx.doi.org/10.1016/j.jimonfin.2012.05.027.
Bernanke, B.S. (1983). Nonmonetary effects of the financial crisis in propagation of the great depression. American Economic Review, 73(3), 257-276.
Bernanke, B.S., & Gertler, M. (1989). Agency costs, net worth, and business fluctuations. American Economic Review, 79(1), 14-31.
Buchak, G., Matvos, G., Piskorski, T., & Seru, A. (2018). Fintech, regulatory arbitrage, and the rise of shadow banks. Journal of Financial Economics, 130 (3), 453-483. http://dx.doi.org/10.1016/j.jfineco.2018.03.011.
Chen, Z., He, Z., & Liu, C. (2018a). The financing of local government in the People's Republic of China: stimulus loan wanes and shadow banking waxes. In: ADBI Working Paper No. 800. Asian Development Bank Institute, Tokyo. http://dx.doi.org/10.2139/ssrn.3140074
Chen, K., Ren, J., & Zha, T. (2018b). The nexus of monetary policy and shadow banking in China. American Economic Review, 108 (12), 3891-3936. http://dx.doi.org/10.1257/aer.20170133.
Demyanyk, Y., & Loutskina, E. (2016). Mortgage companies and regulatory arbitrage. Journal of Financial Economics, 122 (2), 328-351. http://dx.doi.org/10.1016/j.jfineco.2016.07.003.
Duca, J. (2016). How capital regulation and other factors drive the role of shadow banking in funding short-term business credit. Journal of Banking and Finance, 69, 10-24. http://dx.doi.org/10.1016/j.jbankfin.2015.06.016.
Elliott, D., Kroeber, A., & Qiao, Y. (2015). Shadow banking in China: A primer. The Brookings Institution: Economic studies.
Harris, M., Opp, C., & Opp, M. (2014). Higher capital requirements, safer banks? Macro-prudential regulation in a competitive financial system. Mimeo. https://dx.doi.org/10.2139/ssrn.2181436.
Huang, J. (2018). Banking and Shadow Banking. Journal of Economic Theory, 178, 124-152. https://doi.org/10.1016/j.jet.2018.09.003
Jeffers, E., & Baicu, C. (2013). The interconnections between the shadow banking system and the regular banking system. Evidence from the Euro area. CITYPERC Working Paper, No.2013/07. http://dx.doi.org/10.2139/ssrn.2220822
Lemma, V. (2016). The Shadow Banking System. London: Palgrave Macmillan UK. http://dx.doi.org/10.1057/9781137496133
Lian, F. (2018). Chinese-style shadow banking and money supply: promoting or repressing? Research from the perspective of credit creation. Wuhan Finance Monthly, 8, 24-29.
Ma, Y., & Duan, Q. (2018). The procyclicality of China's shadow bank and its monetary policy effect: An analysis based on the TVP-VAR Model. Modern Finance and Economics, (12): 146-157.
Mazelis, F. (2014). Monetary policy effects on financial intermediation via the regulated and the shadow banking system. SFB Discussion Paper, 20,182-190.
Mazelis, F. (2016). Implications of shadow bank regulation for monetary policy at the zero lower bound. SFB 649 Discussion Papers. No.SFB649DP2016-043, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
Moe, T. G. (2014). Shadow banking: policy challenges for central banks. Levy Economics Institute of Bard College Working Paper No. 802. http://dx.doi.org/10.2139/ssrn.2439886.
Moody's. (2019). Quarterly China Shadow Banking Monitor. Moody's Investors Service, New York.
Moreira, A., & Savov, A. (2017). The macroeconomics of shadow banking. The Journal of Finance. 72, 2381-2432. http://dx.doi.org/10.1111/jofi.12540
Nelson, B., Gabor, P., & Konstantinos, T. (2018). Do contractionary monetary policy shocks expand shadow banking? Journal of Applied Econometrics. 33, 198-211. http://dx.doi.org/10.1002/jae.2594
Plantin, G. (2015). Shadow banking and bank capital regulation. Review of Financial Studies, 28 (1), 146-175. http://dx.doi.org/10.1093/rfs/hhu0.55
Pozsar, Z., Adrian, T., Ashcraft, A., & Boesky, H. (2010). Shadow banking. Federal Reserve Bank of New York Staff Reports, No. 458. http://dx.doi.org/10.2139/ssrn.1645337.
Qiu, X., & Zhou, Q. (2014). Shadow banking and monetary policy transmission. Economic Research Journal, 5, 91-105. http://jtp.cnki.net/bilingual/detail/html/CMJJ201901007
Sun, G. (2019). China's shadow banking: Bank's shadow and traditional shadow banking. Bank for International Settlements Working Papers, 822: 1-43. https://www.bis.org/publ/work822.htm.
Valckx, N., Amidzic, G., Arregui, N., Blankenheim, J., Ehrentraud, J., Gray, D. & Sugimoto, N. (2014). Risk taking, liquidity, and shadow banking—curbing excess while promoting growth. International Monetary Fund Global Financial Stability Report, 10, 65-104.
Verona, F. (2011). Monetary policy shocks in a DSGE model with a shadow banking system, CEP-UP Working Paper, (01):19-33. https://econpapers.repec.org/RePEc:por:cetedp:1101.
Wang, Z., & Zeng, H. (2014). Theoretical and empirical analysis of the impact of shadow banking on monetary policy. Studies of International Finance, 12, 58-67.
Wu, M., & Shen, C. (2019). Effects of shadow banking on bank risks from the view of capital adequacy. International Review of Economics and Finance. 63, 176-197. http://dx.doi.org/10.1016/j.iref.2018.09.004.
Yang, L., van Wijnbergen, S., Qi, X., & Yi, Y. (2019). Chinese shadow banking, financial regulation and effectiveness of monetary policy. Pacific-Basin Finance Journal, 57, 1-28.
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.