Shadow Money, Banking Competition and Stability: Evidence from China
62 Pages Posted: 23 Jul 2020
Date Written: August 23, 2019
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
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