The Influence Of Chinese Shadow Bank On Financial Stability

Shadow banking and its financial innovation prompted prosperity and development of Europe, the United States and the global financial market at a high speed.But at the same time, the inherent fragility of shadow banking caused the instability in financial markets. And finally, the United States subprime mortgage crisis has been happened.Within a reasonable scale of the shadow banking development is conducive to absorb idle funds and to encourage financial innovation, but the massive shadow banking system will form serious challenges on Chinese formal financial system, reduce the efficiency of monetary policy and greatly enhance our country’s system financial risks. Therefore, the correct estimation of the current development of shadow bank scale and its impacts on financial stable are a important prerequisite for the Central Bank of China to formulate scientific financial regulatory policy.This paper firstly presents a comparative study on the essential characteristics of shadow banking and it’s mechanism on financial stability between China and foreign countries. Give the definition of Chinese shadow banking and build the financial instability index system. Then based on annual data 1991-2011, the size of Chinese shadow banking and the degree of financial instability have been estimated.Based on the measurement results, an empirical research about the influence of China’s shadow banking on financial stability is put out then by using the unit root test, vector autoregressive model(VAR model), Granger causality test,impulse response, variance decomposition and other econometric methods to establish model. The results show that China’s shadow banking is mainly in the way of credit while U.S. and European countries are in the way of asset-backed securitization. The impact on financial stability by shadow banking in China is more serious than some other risk factors (such as inflation rate and banks’ internal risks) and time-lag effect lies in it obviously. In order to keep finance stable, strengthening shadow banking’s innovations and improving financial supervision system are both important.In order to further enhance financial innovation of shadow banking and reduce its adverse impact on financial stability, the following suggestions are proposed according to the above conclusion. Strengthen the financial innovation function of shadow banking to optimize the financing structure of financial markets.Improve shadow banking information disclosure mechanism to enhance the transparency of business transactions. Establish laws and regulations of shadow banking to standardize the development of shadow banking. Set up shadow banking internal control mechanisms to improve self-discipline. Enhance coordination and cooperation between financial regulation departments, and set up shadow financial regulatory coordination committee.Construct a warning mechanism. Regulatory authorities should trace shadow banking activities and estimate the risk of shadow banking and its impact on financial stability.