Shadow Banking: An Expedient Solution to Government Short-Termism

57 Pages Posted: 20 Apr 2021 Last revised: 7 Oct 2022

See all articles by Zehao Liu

Zehao Liu

Renmin University of China - School of Finance

Ting Yang

North China University of Technology

Jinfan Zhang

Chinese University of Hong Kong (Shenzhen)

Date Written: May 13, 2024

Abstract

We develop a banking model to explain the remarkable growth of China's shadow banking since the global financial crisis. In the presence of local government interventions for low-quality projects due to short-termism, a policy combination of tightening formal banking and loosening shadow banking can reduce inefficiency given the information asymmetry between banks and regulators. This is because the higher funding liquidity risk of shadow banking incentivizes banks to be more disciplined about the quality of projects. We find consistent empirical evidence that when on-balance-sheet financing was constrained by regulators, banks shifted high-quality projects into shadow banking and rejected low-quality ones.

Keywords: Shadow Banking, Information Production, Government Short-Termism, Bank Regulation, Financial System in China

JEL Classification: E40, E50, G20

Suggested Citation

Liu, Zehao and Yang, Ting and Zhang, Jinfan, Shadow Banking: An Expedient Solution to Government Short-Termism (May 13, 2024). Available at SSRN: https://ssrn.com/abstract=3830240 or http://dx.doi.org/10.2139/ssrn.3830240

Zehao Liu (Contact Author)

Renmin University of China - School of Finance ( email )

Ming De Main Building
Renmin University of China
Beijing, Beijing 100872
China

HOME PAGE: http://sites.google.com/view/zehaoliu/home

Ting Yang

North China University of Technology ( email )

Jinyuanzhuang No.5, Shijingshan District, Beijing
Beijing
China

Jinfan Zhang

Chinese University of Hong Kong (Shenzhen) ( email )

Shenzhen
China

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