An Empirical Study On The Impact Of China’s Shadow Banking Of Commercial Banks’ Robustness

Shadow banking refers to non-bank financial institutions that operate outside the controls of regulatory authorities while providing the core functions of traditional commercial banks. Shadow banking started relatively recently in C hina. Its specific construction, form and scale differ greatly from the institutions based in Europe and the United States. It is however undeniable, that rapid development of shadow banking in China has had a significant impact on the operation of China’s commercial banks. On one hand, it prompted commercial banks to change the ir business type and improve the degree of innovation of products and services. It also amplifies the system risk in the financial market due to its high leverage and maturity mismatch. The banking industry plays a central role in the process of economic development. C hina’s economic growth is tightly interwoven with the banking industry and therefore it is important we better understand the theoretical and practical significance of this relationship.There is some controversy in our banking system around the conception of shadow banking. In mid-December 2013 the general office of the State Council issued a “notice on the relevant issues to strengthening shadow banking supervision”.(Refer to document No.107), It officially announced a regulatory frame-work for C hina’s shadow banks. With the publishing of document 107 it clearly defined the type of supervision and division of responsibilities related to shadow banking. At the same time it indicated future plans to strengthen supervision. This paper combined the qualitative and quantitative analysis methods based on the impact from China’s shadow banking on robustness of commercial banks. A PVAR model was used to conduct empirical research comparing shadow banking and commercial banks. This paper consists of five chapters. The main methods of research are:Literature review and Theoretical analysis——Data processing—— Empirical Research and Conclusions.They can be divided into three parts:The first part is literature review and theoretical analysis. By sorting through the relevant research results, both in domestic and from abroad, the related definitions of shadow banking can be summarized. The characteristics of shadow banking combined with actual outcomes observed in C hina, help to define shadow banking. In the analysis, the causes of shadow banking, using the method of game theory describes the game problem between the innovation of shadow banking systems and the regulatory process of the government departments. It also illustrates the effect of shadow banking’s development on the robustness of the commercial banks, separating the positive and negative aspects.The second part is the data processing, based on previous research results, calculates the size of C hina’s shadow banking. Because this paper chooses the panel model, according to the construction process of commercial banks ’ robustness index system, I selected the index that can reflect the individual characteristics, and then selected relevant data from 19 commercial banks to calculate the robustness index. This index will be used for the empirical research in part three.The empirical study in part three uses the data in part two to construct a PVAR model. Through the panel estimation, impulse response and variance decomposition analysis, we can draw conclusions and put forward relevant suggestions. The model results show the development of shadow banking has had a positive impact on the robustness of commercial banks. We should take an objective view of the development of shadow banking. We cannot deny its existence or condone its activities but neither can shadow banking be completely suppressed. Our only option is to create guidelines to maximise the positive outcomes that can be achieved when combined with China’s current banking environment.