The Unintended Consequences of Regulation: Evidence from China’s Interbank Market

HKIMR Working Paper No.06/2019, March, 2019

44 Pages Posted: 15 Mar 2019

See all articles by Xian Gu

Xian Gu

Durham University Business School

Lu Yun

Central University of Finance and Economics (CUFE)

Date Written: March 1, 2019

Abstract

In this paper we use evidence from China’s interbank market to examine the unanticipated consequences of regulation on the financial system. We find that banks tend to use newly introduced and lightly regulated financial instruments in the interbank market to get around regulation in the search for funds. Specifically, we find that banks which face greater competition have engaged more heavily in the issuance of interbank negotiable CDs and interbank wealth management products, especially when market rates are high. Moreover, these interbank activities are closely associated with banks’ proprietary trading, suggesting the potential risk of contagion in the financial system.

Keywords: Interbank, Negotiable CDs, Interbank WMP, Proprietary trading

JEL Classification: G20, G21, G28

Suggested Citation

Gu, Xian and Yun, Lu, The Unintended Consequences of Regulation: Evidence from China’s Interbank Market (March 1, 2019). HKIMR Working Paper No.06/2019, March, 2019, Available at SSRN: https://ssrn.com/abstract=3344899 or http://dx.doi.org/10.2139/ssrn.3344899

Xian Gu (Contact Author)

Durham University Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

Lu Yun

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

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