The Implicit Guarantee Channel: How Policy Uncertainty Affects Shadow Banks

36 Pages Posted: 30 Nov 2023

See all articles by Ji Huang

Ji Huang

The Chinese University of Hong Kong (CUHK) - Department of Economics

Zongbo Huang

The Chinese University of Hong Kong, Shenzhen - School of Management and Economics and Shenzhen Finance Institute

Xiang Shao

Fudan University - School of Management

Date Written: November 15, 2023

Abstract

We study the impact of policy uncertainty on shadow banking activities. When policy uncertainty heightens, banks set higher return targets when issuing new off-balance sheet shadow products. Concurrently, they extend stronger implicit guarantees to maturing products, signaling product safety and reassuring investors during uncertain times. When banks provide stronger implicit guarantees, policy uncertainty triggers risk spillovers from the shadow banking sector to the wider banking system, undermining financial stability. Consequently, our findings shed light on the post-crisis regulatory guidelines concerning step-in risk.

Keywords: Shadow Banking, Implicit Guarantee, Private Safe Asset, Policy Uncertainty

JEL Classification: G21, G23, G28

Suggested Citation

Huang, Ji and Huang, Zongbo and Shao, Xiang, The Implicit Guarantee Channel: How Policy Uncertainty Affects Shadow Banks (November 15, 2023). Available at SSRN: https://ssrn.com/abstract=4633606 or http://dx.doi.org/10.2139/ssrn.4633606

Ji Huang

The Chinese University of Hong Kong (CUHK) - Department of Economics ( email )

Shatin, N.T.
Hong Kong

Zongbo Huang (Contact Author)

The Chinese University of Hong Kong, Shenzhen - School of Management and Economics and Shenzhen Finance Institute ( email )

Xiang Shao

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

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