In the Shadow of Banks: Wealth Management Products and Issuing Banks' Risks in China

65 Pages Posted: 29 Jun 2020 Last revised: 16 Aug 2020

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Jun "QJ" Qian

Fanhai International School of Finance, Fudan University; University of Pennsylvania - Wharton Financial Institutions Center

Yang Su

University of Chicago Booth School of Business

Zhishu Yang

Tsinghua University - School of Economics & Management

Date Written: June 2020

Abstract

We study the rise and risks in bank issuance of Wealth Management Products (WMPs), which

are off-balance-sheet substitutes for deposits without the regulatory interest rate ceilings and

constitute the largest shadow banking segment in China. We show that competition for deposits

has a causal effect on the WMP issuance of small and medium sized banks (SMBs), where we

instrument deposit competition by SMBs' geographical exposure to the large (Big Four) banks.

The Big Four banks substantially increased their loan supply to support the RMB 4 trillion

stimulus initiated in response to the global financial crisis, and thereafter grew more aggressive

in the deposit markets in order to stay below the regulatory ceiling on the loan-to-deposit ratio.

In response, SMBs issued more WMPs and more frequently, besides also establishing fewer

branches in cities with greater competition from the Big Four banks. We find that this growth

of WMPs imposed rollover risks for all the bank issuers, as reflected in higher yields on new

WMPs, higher borrowing rates in the inter-bank market, and adverse stock market performance

of WMP-issuing banks on days with heightened rollover risks.

Keywords: deposit competition, financial fragility, regulatory arbitrage, Rollover Risk, shadow banking

JEL Classification: E4, G2, L2

Suggested Citation

Acharya, Viral V. and Qian, Jun and Su, Yang and Yang, Zhishu, In the Shadow of Banks: Wealth Management Products and Issuing Banks' Risks in China (June 2020). CEPR Discussion Paper No. DP14957, Available at SSRN: https://ssrn.com/abstract=3638062

Viral V. Acharya (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jun Qian

Fanhai International School of Finance, Fudan University ( email )

Shanghai
China
86-21-63895501 (Phone)
86-21-62934572 (Fax)

HOME PAGE: http://www.fisf.fudan.edu.cn/show-65-69.html

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
Philadelphia, PA 19104
United States

HOME PAGE: http://fic.wharton.upenn.edu/fic/

Yang Su

University of Chicago Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
7732195792 (Phone)
60615 (Fax)

Zhishu Yang

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China
+86-10-62771769 (Phone)
+86-10-62785562 (Fax)

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