In the Shadow of Banks: Wealth Management Products and Issuing Banks’ Risk in China
68 Pages Posted: 18 Jun 2019 Last revised: 1 Mar 2021
Date Written: February 28, 2021
We study the causes and consequences of growth in shadow banking by examining the Chinese banks’ issuance of Wealth Management Products (WMPs), which are short-maturity off-balance-sheet substitutes for deposits. Using branching overlap data, we instrument deposit availability with banks’ exposure to competition from a large state-owned bank, which substantially increased loan supply to support the fiscal stimulus during the Global Financial Crisis and competed more aggressively for deposits thereafter. We show that deposit market competition has a causal effect on smaller banks’ reliance on shadow banking: exposed banks increased the issuance of WMPs sharply, creating rollover risk for these banks.
Keywords: Shadow banking, off-balance sheet liabilities, deposit competition, fiscal stimulus, rollover risk.
JEL Classification: G2, E4, L2
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