Shadow Money, Banking Competition and Stability: Evidence from China

62 Pages Posted: 23 Jul 2020

See all articles by Xu Feng

Xu Feng

Tianjin University - College of Management and Economics

Eva Luetkebohmert

University of Freiburg, Institute for Economic Research; affiliation not provided to SSRN

Yajun Xiao

Xi'an Jiaotong-Liverpool University (XJTLU)

Date Written: August 23, 2019

Abstract

We study how competition for shadow money impacts banking stability. In our model, banks
compete for insured depositors and uninsured shadow money investors and default endogenously.
We estimate and calibrate our model to the Chinese banking sector and we find that shadow money investors are run-prone while depositors are not. Multiple equilibria emerge and may lead to severe financial distress with large welfare losses. Negative shocks to assets underlying shadow money amplify financial fragility. Furthermore, rollover costs can cause runs on shadow money. Imposing capital requirements on shadow money improves banking stability, but the effectiveness is limited.

Keywords: banking competition, bank runs, financial stability, shadow funding, wealth management products

JEL Classification: E44, G01, G21, G28, G32

Suggested Citation

Feng, Xu and Luetkebohmert, Eva and Xiao, Yajun, Shadow Money, Banking Competition and Stability: Evidence from China (August 23, 2019). Michael J. Brennan Irish Finance Working Paper Series Research Paper No. 19-9, Available at SSRN: https://ssrn.com/abstract=3313226 or http://dx.doi.org/10.2139/ssrn.3313226

Xu Feng

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

Eva Luetkebohmert

University of Freiburg, Institute for Economic Research ( email )

Rempartstr. 16
Freiburg, D-79098
Germany

affiliation not provided to SSRN

Yajun Xiao (Contact Author)

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
JiangSu province 215123
China

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