Research On The Incentive Compatible Mechanism Of Shadow Banking Capital Regulation

The fast development of shadow banking is considered as the root of the2008global financial crisis. As the credit intermediation outside the formal bankingsystem, shadow banking accumulates a large number of risk due to the less regulated.In China’s financial system which is based on indirect financing, the main functionof shadow banking is to promote credit, term and liquidity conversion to fundingneeds. It also determines the credit risk remains the biggest risk for shadow banking.Adequate capital is an effective tool to deal with credit risk, incentive compatibilitycapital regulatory regime is conducive to guard against shadow banks risk. So thispaper studies the mechanism of incentive compatibility launched on shadow bankcapital regulation.The article first defines the shadow banking definition, characteristics, discussesthe operation of the shadow banking system and the reasons for the rise of shadowbanking. Then this paper analyzes the current situation and the shadow bankingcapital regulation problems in capital regulation. Then the article expounds theshadow banking capital arbitrage behavior in detail, and it points out that thecalculation of capital adequacy ratios result in regulatory capital arbitrage. Theregulatory capital arbitrage ultimately leads to regulatory of capital adequacy ratiotends to fail. Based on this analysis, this paper uses game theory to build shadowbanking capital regulation mechanism of incentive compatibility. Firstly, this paperanalyses the incentive compatibility characteristics of PAC, then this paper usessequential game analyses the feasibility of introducing PCA to the shadow of bankcapital regulation. Secondly, based on this model, shadow banking capital regulationof PCA model has been established. At last, this paper establish a PCA model whichregulators random regulate the operations of shadow banking, then this paper usesthis model to analyse the determinants of optimal capital level of the shadowbanking. Finally, this paper proposes institutional arrangements of supportingshadow banking capital regulation incentive compatible mechanism by the methodof institutional economics.The conclusion of this article includes: firstly, the current capital regulatory deficiencies in the information disclosure and is unable to prevent systemic risk.Secondly, incentive conflict of the capital regulatory induced shadow bankingcapital arbitrage. Thirdly, incentive compatible capital regulation institution shouldafford shadow banking some discretion. Fourthly, to achieve Shadow banking capitalregulation incentive compatible mechanism, the regulators should strengthen theinstitutional arrangements from these four aspects, including incentive mechanismconstruction, supervise compliance management, strengthening informationdisclosure and coordination of financial regulation.