Research On The Effect Of China's Shadow Banking System On Financial Stability

The outbreak of the American sub-loan crisis in 2007 and the following global financial crisis caused by it again aroused the attention and research of the shadow banking system.The shadow banking system is a dynamic and complex three dimensional system involving products,institutions and markets.The basic functions of the shadow banking system are term transition,liquidity conversion and credit risk transformation.On the one hand,the emergence and development of shadow banking system is reasonable and innovative.The shadow banking system developed to meet the diversified demand of fundraisers and investors,and which brings diversified financial products and business has enriched investment and financing channels for the economic subjects,and becomes a favorable supplement to the indirect financing taking commercial bank credit as the representative,which promotes the transformation of indirect financing to direct financing,improve the efficiency of funds allocation,which is conducive to the optimization of financial structure and financial market prosperity.On the other hand,the risk of the shadow banking system can not be ignored,the shadow banking system is concealed,opaque,and various activities basically occurred off the balance sheet,out of institutions and is in OTC market,which is mostly free from the monetary authorities and supervision of regulatory authorities or lack of regulation,with the characteristics of maturity mismatch(short-term liabilities,long-term assets)high leverage(financing leverage ratio is about 2 times of traditional financial institutions)and so on,which determine the huge risks of shadow banking system and will pose a threat to financial stability.On July,2017,General Secretary Xi Jinping pointed out at the national finance conference that financial work should return to the source of servicing entity economy and play the decisive role of the market in the allocation of financial resources,optimize the financial structure and strengthen functional supervision.So we need to further reform the financial system,to further improve the proportion of direct financing,improve the multi-level capital market,add direct financing tools,promote the balanced development of investment and financing to optimize the financial structure,improve the efficiency of finance servicing the real economy,promote the supply side structural reform.China's economy has entered a new norm,the traditional growth momentum weakened,new growth momentum is cultivated.We will complete the five major tasks "remove disqualified production,remove inventory,remove deleveraging,reduce costs,make up the short board",which still need financial reform,improve the efficiency of finance servicing real economy,promote economic restructuring and structural adjustment(Sheng Songcheng,2016).The two most basic characteristics of the shadow banking are regulatory arbitrage and efficiency obtained which greatly promote the development of shadow banking system:regulatory arbitrage refers to after 2009 global financial crisis,the regulatory authorities increased the supervision to the banking system,that will provide space of regulatory arbitrage for the shadow banking,and provide more development opportunities for shadow banking system(Philip Halstrick,2011);efficiency obtained refers to the allocation of funds outside bank intermediaries between the capital surplus and deficit because of financial disintermediation,which make the supply of financial products and services more decentralized,and improve the efficiency of capital allocation(Pozsar et al,2010).Although China still maintains a bank dominated financial system,taking indirect finance as the core pattern,but the non traditional credit finance grows rapidly,and the influence of Chinese shadow banking system on financial stability can not be ignored.Since 2009,due to the policy shift,the proportion of fund giving from traditional credit channel to economy and society accounted for a rapid decline,the importance of non-traditional credit finance relatively increased,which promoted the rapid development of China's shadow banking system.It is estimated that by September 2013,the scale of China's shadow banking in the broad sense was 27 trillion Yuan,accounting for 19%of all the bank assets(Hu Bin.2014).So the study of the shadow banking system impact on financial stability is very necessary in China.This paper firstly sums up the existing literatures on shadow banking and financial stability,summarizes the meaning and definition scope of the shadow banking,meaning and measure methods of financial stability,and the viewpoint the impact paths of the shadow banking on financial stability.On the basis of that this paper give the definition of shadow banking system,measure mechanism of financial stability,and the theoretical paths that the shadow banking system affects the financial stability,then analyzes the current development of China's shadow banking and makes estimation of the scale of china's shadow banking system,and calculates financial stability index to measure financial stability,so provides data to support the following empirical analysis,and finally makes empirical tests of the effect of China's shadow banking system on financial stability,and gives the research conclusions and policy suggestions.This paper argues that the shadow banking system of China has the very big difference to Western countries which contains highly innovative financial derivatives.The main function of the shadow banking system in China is not trading,maturity transformation and liquidity transformation,but financing.So this paper focuses on the characteristics of financing and give defination to the shadow banking system of China,the basic characteristic of shadow banking is financing,and can play the functions of maturity and liquidity conversion and credit conversion,not absorb deposits,and can not be defined as commercial banks,which is non-traditional credit financing,is a "three-in-one" comprehensive system with products or tools,institutions and market.Compared with the previous research,this paper makes a more comprehensive measure of the shadow banking system,considers both the interbank business,financial products,trust loans and entrusted loans business related to commercial banks,and shadow banking businesses of non bank financial institutions such as financial companies,insurance companies and securities companies,also considered private finance such as private lending,so the research of this paper is more practical.In this paper the shadow banking system can be divided into three subsystems:the sub shadow banking system in the banking system,the sub shadow banking system in non bank financial institutions and in non financial institutions.According to the scale of social financing,assets and liabilities ratio of financial sector,stable relationship of financial and economy as well as according to the definition of shadow banking system from the angle of function in this article,from the four ways we estimated the scale of China's shadow banking system,and fund that the first layer of the shadow banking system related to the banks accounted for the largest.On the measurement of financial stability,on the basis of the existing research according to the connotation of financial stability this paper take four groups of indexes to measure the financial stability including financial institutions running smoothly,steady operation of financial market,ability to withstand external shocks of financial market and stable operation of asset prices.there are four first level indicators and 11 basic indicators,and by principal component analysis to determine the weights of each indicators that influence financial stability,and finally calculate the financial stability index to measure the degree of financial stability.The dissertation of this paper is based on the theory of financial structure,financial fragility theory,financial and economic cycle theory,and financial arbitrage theory,from four aspects that is funds financing,currency circulation,risk conduction and financial supervision to analyze the mechanisms of the shadow banking system impact on financial stability,to provide a theoretical basis for the empirical test.The empirical analysis of this paper consists of three major parts.In the first part,following by the analysis of the specific performance of the effect of the shadow banking system on the four aspects of financial stability:the smooth operation of financial institutions,steady operation of financial market,the ability to withstand external shocks of financial market and stable operation of assets prices,successively make empirical tests to find the direction and degree of the effect of shadow banking.Then using the estimated shadow banking data and the constructed financial stability index data,to develop the FGLS model for empirical analysis,found that the development of shadow banking is conducive to financial stability but there is a time lag,and the following empirical tests of the impact of the three subsystems of the shadow banking system on financial stability showed that the influence of the first level of shadow banking system on financial stability is the maximum.Finally,test the path selection of the influence of the shadow banking system on financial stability,put forward two hypotheses according to four aspects of theoretical analysis,make empirical test using the SVAR model,and use impulse response function to analyze interaction between variables,find that the risks of shadow banking conduction is mainly through bank channels,and has weaker impact on the effectiveness of monetary policy,but conversely the development of the shadow banking system is heavily influenced by the development of the real economy development of banks.Intheory,the development of the shadow banking system conform to the dialectical relationship between financial innovation and financial supervision,and the two parties will promote each other in the game,so the scale of the shadow banking system did not shrink a lot because of tighter regulation,but operate more standardized and less concealed.From the empirical results,the development of China's shadow banking system have both prons and cons to financial stability.As long as proper regulatory policy put into effect,we can get the positive role of shadow banking system and inhibit its negative effect,and reduce or eliminate the potential threats to financial stability.The focus of the policy should be adopting measures to regulate the healthy development of China's shadow banking system,continue to maintain the stable and healthy operation of the financial system.