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| Risk Prevention and Credit Tightening Effects of Shadow Banking Regulation: Evidence from China's New Asset Management Regulations |
| LIU Chenghao, LIU Chong, LIU Liya
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| School of Finance, Shanghai University of Finance and Economics;Shanghai Institute of International Finance and Economics |
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Abstract Starting in 2014, China introduced a series of regulatory measures to prevent or resolve the risks associated with shadow banking. A key regulation is the “Guiding Opinions on the Regulation of Asset Management Business of Financial Institutions,” which was issued in April 2018 and is commonly known as the “New Asset Management Regulations.” This regulation aims to address specific issues, such as multi-layered nesting, rigid redemption commitments, and regulatory arbitrage, while also guiding the flow of social funds toward the real economy and effectively controlling systemic risks.
China's shadow banking sector is typified by wealth management products, trust, and entrusted loan businesses, with bank wealth management products being the largest component. Funds raised through wealth management products by commercial banks are often channeled into non-standard assets through complex shadow banking systems in efforts to seek high returns. This leads to serious problems, such as fund idling and maturity mismatch, thereby accumulating substantial risks. The New Asset Management Regulations effectively restrain the issuance of bank wealth management products and reduce bank risks.
Commercial banks can issue wealth management products to alleviate competition for funds from other banks and non-bank financial institutions. Thus, these products generate supplementary finance under interest rate liberalization. If banks' issuance of wealth management products is hindered, it may lead to deposit competition between commercial banks. According to data released by the People's Bank of China, structured deposits, which had zero year-on-year growth in April 2017, grew by nearly 50% in March 2018, with the year-on-year growth rate of personal structured deposits approaching 80% in July 2018. This rapid growth of deposits is largely driven by banks offering attractive high deposit interest rates. However, the high cost of deposits may be transmitted to the real economy through loans. Therefore, while the New Asset Management Regulations have effectively mitigated risks, it remains to be determined whether they have also intensified deposit competition between banks, and whether the persistently high cost of deposits is the root cause of problems such as expensive financing for enterprises. Exploring these issues can reveal how to regulate banking competition, promote coordination between financial regulation and monetary policy, and reduce comprehensive financing costs for enterprises, thereby supporting the high-quality development of the real economy.
Accordingly, this study manually collects micro-level data on deposit interest rates, loan interest rates, and the outstanding balance of wealth management products at the bank level from semi-annual data of listed banks for 2014-2020. The New Asset Management Regulations are treated as an exogenous quasi-natural experiment, and a difference-in-differences model is employed to explore the risk prevention and credit tightening effects of shadow banking regulation at the commercial bank level. The results show that the New Asset Management Regulations cause banks that rely substantially on wealth management products to reduce credit allocation to high-risk industries, indicating the regulations' risk prevention effect. Furthermore, the regulations directly impact banks' funding sources, forcing banks in the experimental group to increase deposit interest rates and engage in deposit competition, resulting in credit tightening effects.
The key contributions of this paper are as follows. First, this paper enriches the literature on the impact of financial regulation on credit supply. Previous studies mainly focus on capital and liquidity regulation, with limited examination of shadow banking regulation, and primarily discuss the impact of regulation on the total volume of credit supply, paying less attention to credit prices. Second, this paper broadens the literature on the impact of shadow banking regulation on commercial banks. Many studies analyze the relationship between the New Asset Management Regulations and systemic risk and financial stability from a macro perspective, and a few studies examine the interaction between the regulations and individual firms from a micro perspective. However, few studies investigate how shadow banking regulation affects bank risks and credit supply. Third, this paper contributes to the literature on the relationship between bank liabilities and assets. Most scholars focus on the impact of bank liability structure on bank assets, whereas few scholars explore how bank liability (deposit) costs affect bank decision-making and transmit to the real economy. Finally, this paper empirically explores the relationship between shadow banking regulation and the transmission of monetary policy, and provides policy recommendations for how regulatory authorities can strengthen macro-prudential supervision and coordination with monetary policy.
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Published: 03 August 2023
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