| In recent years,shadow banking activities in China have become increasingly active and formed unique business models which could improve condition of the financing problem of the enterprises whereas could cause systemic risk at the same time.Furthermore,shadow banking is becoming a bigger threat to whole financial stability of the country.Financial stability is one of the foundations in the healthy development of the national economy,and in so effectively curbing the formation of systemic risks are the keys to maintain financial stability.Therefore,this thesis attempts to focus on the uniqueness of the shadow banking business model in China and its systemic risks and procyclicality that could cause financial instability.Firstly,this work specifies the operation model and its risks in the financial activities related to shadow banking in China.Thereafter,the mechanism of systemic risk will be analyzed.Lastly the micro and macro prudential regulation of shadow banking will be studied in order to put forward policy suggestions that would enhance financial stability.Depending on whoever holds a financial license,shadow banking in China is divided into shadow banking within the financial system and outside of it.The former mainly includes off-balance-sheet financing businesses,trust businesses,entrusted loans,and interbank financing and asset securitization,while the latter mainly include small loans,financing guarantees,and P2P lending.Currently,the shadow banking business led by banks have formed a banking system of Chinese characteristics.In general,the products of China's shadow banking are relatively simple,led by banks and play similar role of banks.However,unlike the American banking system,shadow banking in China is not the result of financial liberalization,instead it is a result of the state's financial repression.In China's shadow banking activities there are credit risk,liquidity risk,market risk and operational risk.These risks spread through financial institutions,financial markets,financial infrastructure and asset prices.At the same time there are cross contagion effects between different risk transmission channels,which include collateral chain effects,market volatility and other indirect transmissions including information asymmetry,market competition and indirect transmission mechanisms.In order to attain more intuitive analytic results,this paper based some of its conclusions utilizing the CA model to simulate the shadow banking risk diffusion process based on data obtained from financial trusts and the bank industry.Matlab software was used to perform most of these results.In addition,China's shadow banking activities are obviously procyclical.This characteristic in the period from 2008 to 2014 is evident,and the procyclicality of entrusted loans is more outstanding.In this paper,the method of spectrum analysis was used to confirm the procyclical pattern of shadow banking business activities in China.And China's shadow banking procyclical effect on financial stability is mainly done by asset prices spiral and liquidity spiral.Additionally,based on FSCI the TVP-VAR model was used to make empirical studies on the relationship between shadow banking and financial stability.The results show that the shadow banking exacerbated the financial instability in the short term,but marginally contributed to the financial stability before 2010.However,this trend is reversed after 2010.The systemic risk caused by shadow banking brings severe challenges to financial stability.This is mainly embodied in the weakening of the effectiveness of micro-prudential supervision,and highlights the necessity of macro-prudential regulation,ultimately forcing the financial regulatory framework to be modified.However,there is a dilemma to this regulation.Although shadow banking can exert negative effects to financial stability,there are certain advantages to improve financial stibility in its current form.To a certain extent,the shadow banking activities change the pattern of financial industry,fasten the pace of interest rate liberalization,enrich the supply of assets,and provide a new choice of financing for small and medium-sized enterprises.However,the negative impact of the shadow banking must not be neglected.It is necessary to reform and adjust China's financial regulatory system and management framework of financial stability at the same time in order to enhance the stability of finance system.From micro-prudential regulation,it is necessary to turn from institutional supervision to functional regulation,establish a regulation and cooperation mechanism in the short term,in the medium term,to revise and reform relevant laws,and in the long term,to build a unified financial regulating system.The government should build a flexible mechanism for the management of capital,and introduce a prior commitment supervision and management system in order to increase the elasticity of capital adequacy supervision.Also,the government should strengthen the regulation of shadow banking business sponsored by banks.From macro-prudential regulation,the government should enhance the effectiveness of it and it strengthen the coordination between the micro and macro prudential regulation and pay more attention to economic policies and macro-prudential management cooperation.Alternatively,policymakers should also constantly improve the management framework of the financial stability based on effectiveness of financial regulation parameters.This includes building an early warning system and financial stability monitoring system,setting up a unified special committee to coordinate regulation affairs,and for the central bank to create a better communicational system to socialize the general public of its decisions central,thus reducing any information asymmetry or distortion.Lastly,the financial safety net should be improved with an emphasis on deposit insurance. |
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