The Shadow Banking System Operation Mechanism, Regulation And Compared

In the United State, Shadow banking refers to the financial entities that pursue credit intermediation like banking but is outside of the scope of the commercial banks and is unregulated or hardly regulated. The activities undertaken by the shadow banks are characterized by high leverage, low transparency, short of regulation and high interconnectedness. High specialization is another feature of the US shadow banking system. There is specialized shadow banking institution at the every link of shadow banking business. After subprime loan crisis, the US promulgates Dodd-Frank Act. The act aims at strengthening the regulation of shadow banks, mitigating the shock posed by the banks to the financial stability. The act, however, does not constrain the mixed operation of financial industry in US and does not make specific rules regulating government-sponsored enterprise like Fannie Mae and Freddie Mac and insurance company.In China, trust company, finance company and small-loan company and other non-bank institutions are pursuing credit intermediation like banks. But unlike US, these institutions are regulated strictly. The cooperation between trust and banking is the main shadow banking business in China. Through cooperation, banks can move assets in-balance sheet into off-balance sheet so as to avoid regulation and expand business. Since this cooperation affects the effectiveness of the monetary policy to some extent, the regulatory authority has paid attention to the cooperation.Compared with US shadow banking system, China shadow banking business is simple but the motive is not very same. The funding difficulty of the medium-sized and small enterprises and other people, together with the insufficient coverage of commercial bank business and the avoiding of regulation promotes the development of shadow banking. Since the scale of shadow banking system is small and the regulation is strict, the stability of financial system is not hampered virtually. As to the development of China shadow banking system, the paper recommends that the relevant regulatory authority should continue prudential regulation. The requirement of information disclosure of shadow banks should be imposed. Yet, the independent financial innovation by the financial institutions and the expanding of business should be permitted. The authority should strive to develop basic financial derivatives with the aim of providing financial institutions with more risk hedging instruments. The regulatory authorities should also strengthen the coordination between them so as to improve the efficiency of financial supervision and reduce the cost of regulation.