Shadow Banking: Definition, Classification And Risk Prevention

Shadow banking is a concept which attracted much attention recent years.However, after several academic discussions, there is no agreed conclusion but onlypersonal opinions so far. Shadow banking system is especially a vague concept andalways be confused with shadow banking. In this paper,firstly, the writer goes throughrelevant literature, points out four defects about the definition of shadow banking insome existing literature, and gives his own definition of shadow banking system, aswell as the concept that the shadow banking system is not simply a sum of shadowbanking. On this basis, the writer analyzes the reason of rapid development of theworld shadow banking system. Considering the actual situation of China, the writeralso points out that even though the system has been there for years, it grows veryslowly until the financial crisis. The reason why the shadow banking system in Chinais different from the other part the world, concluded by the writer, that it’s the resulthow China reacts against to the financial crisis.Lots of charts and data are used in thispaper to prove writer’s point of view and to introduce the current situation ofdevelopment of China’s shadow banking system. Secondly, through analysis of thevulnerability and risk spreading mechanism of shadow banking system, the paperindicates that its vulnerability is stemmed from excessively strengthen “moneymultiplier” and innovation, while the rapidly spreading of risk is result from the panic.Finally, based on some quantitative model from some scholars, this paper states thatthe reason why shadow banking system in China is not mature and brings manyproblems to the economy is not because of lack of regulation just like other developedcountries, but over-strict regulation on commercial banks. In order to develop theshadow banking system under the premise of regulation, the regulation of commercialbanks must be relaxed. The writer also comes up with two specific methods todemonstrate the risk management and development of shadow banking system.