Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/172898
Authors: 
Chen, Kaiji
Ren, Jue
Zha, Tao
Year of Publication: 
2016
Series/Report no.: 
Working Paper No. 2016-1
Abstract: 
We argue that China's rising shadow banking was inextricably linked to potential balancesheet 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.
Subjects: 
Regulatory arbitrage
asset pricing
institutional asymmetry
entrusted loans
risk taking
shadow loans
bank loans
nonloan investment
nonbank trustees
small banks
large banks
balance sheet
optimal decisions
JEL: 
G28
E02
E5
G11
G12
Document Type: 
Working Paper

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