The Research On The Effect Of Shadow Banking On China’s Monetary Policy Tools

With the development of shadow banking, China’s financial structure and financial system are taking place a significant change, and this change in financial system will undoubtedly brings challenges for monetary policy which mainly rely on commercial banking system. It means that the status of commercial banks in financial system become lower and the traditional monetary policy transmission channels become narrow. Therefore, shadow bank’s credit creation has interfered with money supply and the effect of monetary policy tools. Although monetary policy tools do not act directly on the shadow banking, because of the shadow banking system has the function of credit creation and has a very high correlation with commercial banking system, it makes commercial banks in the face of the central bank’s monetary policy have the chance of regulatory arbitrage. Therefore, it becomes more difficult to determine the monetary policy tool’s direction and intensity, and the difficulty of the operation of monetary policy tool increases. In addition, the specific impact of shadow banking on monetary policy tools is different in different times. Thus, the effect of monetary policy tools to regulate the money supply is also different, which is called asymmetric effect. Because central bank uses monetary policy tools to adjust money supply to be a reasonable amount determines the effectiveness of monetary policy directly, therefore, study the effect of shadow banking on monetary policy tools and the asymmetric effects of monetary policy tools have important theoretical and practical meaning.Firstly, this paper introduces the definition of shadow banking. Shadow banking is the institutions that are engaged in credit intermediation business outside the commercial banks system, which has liquidity, duration and credit conversion function, showing high leverage, severe maturity mismatch, information opacity and lack of supervision characteristics. And from off-balance sheet business of commercial banks, entrusted loans, no discount bank acceptance bills and informal finance introduce the development of China’s shadow banking.Secondly, this paper focuses on the direct and indirect credit creation mechanism of shadow banking. The direct credit creation mechanism is the pattern that shadow banking forms by securitization or repurchase agreements within the system of credit intermediation chain, including repurchase chain and securitization chain, it’s the main credit creation mechanism of American shadow banking; indirect credit creation mechanism is the mode that shadow banking operates independently or by way of its cooperation with commercial banks to enhance the ability of commercial bank’s credit creation, it’s the main credit creation mechanism of china’s shadow banking.Thirdly, this paper analyzes the credit creation of shadow banking and its effect on the statutory deposit reserve ratio, rediscount policy and open market operations, and points out that the development of shadow banking interferes with the implementation of monetary policy and effectiveness of monetary policy tools. Based on the above theoretical analysis, the establishment of MS-VAR model which contain money supply (M2), the shadow banking (YZ), the statutory reserve ratio (DR), open market operations (OMO) and the benchmark interest rate (IBR), the development of China’s shadow banking is divided into steady growth and the rapid growth of the two states, researches the influence of shadow banking on the effectiveness of monetary policy tools and the asymmetric effect of monetary policy tools, from an empirical perspective. Through empirical study finds:the development of the shadow banking reduces the effectiveness of monetary policy tools, and leads the statutory deposit reserve ratio, open market operations and rediscount policy showing significant asymmetric effects in the regulation of money supply. It means that in a state of rapid growth of the shadow banking, monetary policy tools to adjust the money supply less effective than the effect of steady growth state. The development of China’s shadow banking system shows obvious regime switches feature, and in different regime, the shadow banking has a different effect on monetary policy tools, that means the faster development of shadow banking, the greater impact on monetary policy tools.Finally, based on the conclusions of theoretical analysis and empirical research, this paper suggests that, in order to improve the effectiveness of monetary policy tools, the monetary policy operations of central bank should consider regime switches feature of the shadow banking system. Meanwhile, central bank must reform and innovation monetary policy tools. Besides, the regulatory authorities should also guide the shadow banking standardized and moderate development.