Shadow Bank Development Causes, Impacts And Regulatory Studies

The financial crisis that began in 2008 has a strong impact on the financialmarket and the real economy of the United States and other countries and regions allover the world. It is widely agreed by researchers that the shadow banking systemplayed an important role in causing and aggravating the financial crisis. Consequently,the concept of shadow banking has attracted considerable public attention. Since then,a large amount of researches have been made by practitioners and researchers on thedevelopment of shadow banking system and a large number of regulatory reformshave been proposed and implemented around the globe.The economy and financial market of China has rarely been affected by the 2008 financial crisis because of the development stage of the financial market. However,the direct financing section in China has been developed drastically in recent years. Aseries of problems concerning the shadow banking system are worthy of study anddiscussion, including defining the concept and scope of the Chinese shadow bankingsystem, seeking the underlying reasons of the development of the shadow bankingsystem, studying the impact of the shadow banking system to the real economy,financial markets and macroeconomic policies and drawing lessons from internationalexperience to improve the supervision of the Chinese shadow banking system, etc..In Chapter Two, the thesis studies academic theories including Marxist theoriesof economics, theories of financial intermediation innovation and theories of financialregulation that provide a solid theoretical foundation for the research of theemergence and development of the shadow banking system. However, there existconsiderable different views about the concept, the characteristics, the emergence anddevelopment, the scale, the risks, the influences, and the supervision of the shadowbanking system at home and abroad. The majority of studies suggest that shadowbanking institutions and businesses in Western countries mainly consist of assetsecuritization, liquidity improvement, leverage amplification products, hedge fundsand so on. In contrast, the emergence and development of Chinese shadow bankingsystem serving as credit intermediary in the financing system is mainly due toavoidance of the loan ceiling, capital adequacy ratio and other regulatory limits.Hence, there exist tremendous differences between the shadow banking system inwestern countries and in China concerning definition, characteristics, scale, impactsand supervision.In Chapter Three, the thesis focuses on the categories of shadow bankinginstitutions and businesses. Firstly, study the emergence and development of shadowbanking in the western countries, and study the emergence and development ofChinese shadow banking system from a comparative perspective. The thesis makesclear definitions and classifications of Chinese shadow banking system. After that, thethesis studies the operation mechanism of different kind of shadow bankinginstitutions and businesses in China for our further discussion on the empiricalanalysis of the reasons for the emergence and development of the shadow banking,the impact of the shadow banking system and the regulatory reform proposal of theshadow banking system.There is a reason for everything, so does the shadow banking system. In ChapterFour, the thesis figures out that with the worldwide rise of the science and technologyin the late 20 th century, financial innovation has become the theme of the course offinancial development. On the contrast, the fast development in recent years ofChinese shadow banking system exhibits different reasons from the western countries,which include regulatory arbitrage, financing gap and other factors. The thesisvalidates the reasoning with the econometric methods in the empirical analysis. As theresult of econometric analysis shows, the increase of the ratio of monthly newlyincreased loans to the industrial added values lead to an increase of the shadowbanking scale, indicating that the current supply of credit cannot fully meet thefinancial needs of endogenous economic development in China. The structuralimbalances between the formal financial supply and demand of funds in the realeconomy boost the development of the shadow banking system to some extent.Meanwhile, the coefficient of commercial banks’ capital adequacy ratio is negative atthe 5% significance level, indicating that an increase in the capital adequacy ratiohave a significant negative impact on the scale of the shadow banking system. In thissense, shadow banking system is strongly motivated by the arbitrage of regulatoryrequirements.In the financial crisis, it is witnessed that American and European shadowbanking system has imposed huge negative influence on the financial system and thereal economy. In Chapter Five, the thesis carefully examines how the shadow bankingsystem of the western countries influence the real economy, the financial system andthe macro policies. At the same time, the thesis investigates the potential influencesand risks arising from Chinese shadow banking system in the corresponding aspects.In spite of the fact that the shadow banking system has a positive influence on thedevelopment of the real economy, the innovation of financial system and theconstruction of a multi-level financial market, it cannot be denied that it has increasedthe cost of financing and accumulated risks of the financial market and the economyand damage the effectiveness of the macro policies.Through the studying of the shadow banking emergence and developmenttrajectory, the thesis figures out that the rapid development of American and Europeanshadow banking system goes hand in hand with internal and external environmentalfactors such as financial innovation, technological advancement and easy laws. Andfrom a deeper perspective, both the motivation of regulatory arbitrage and theevolution of the financial system have been a key factor leading to the development ofthe shadow banking system. Considering the stage of development of China’sfinancial markets and financial system, there is still obvious difference from Americanand European. Through empirical analysis, the thesis verifies directly and derives theconclusion that regulatory arbitrage, financing gap and some other factors areimportant reasons for the rapid development of Chinese shadow banking. Theconclusion also provides us with the key point in the regulatory reforming process.At the end of this paper, the thesis studies the current situation of regulation bothin western countries and in China. Drawing lessons from the practice and experienceof the shadow banking regulatory reforms by the international organizations, theUnited States, the United Kingdom and European Union regulators, the thesis studiesthe compatibility between the financial regulation and financial developments, andtestify the effectiveness of the supervision of the shadow banking system. In thisprocess, the thesis presents the goals for better regulatory systems and the ways ofimplementation. In detail, the thesis proposes regulatory reform suggestions includingdeepening financial reforms, taking advantage of both market mechanism andsupervision, constructing the shadow banking system of macro-prudential regulatoryframework and strengthening supervision in key areas.