Research On The Effect Of Shadow Banking On The Regional Financial Stability In China

Under the control of interest rate and credit, the shadow banking in China has developed rapidly in recent years. On one hand, shadow banking complements traditional commercial banks, improves the social financing system, and promotes financial innovation and market-oriented interest rates. On the other hand, as shadow banking has characteristics of low transparency, less regulation and supervision arbitrage, it has weakened the effectiveness of macro-control, disrupted financial market pricing, thus reducing financial stability. Therefore, it is necessary to study the effect of shadow banking to financial stability in China.Firstly, the paper defines the scope of shadow banking, which is divided into five parts, off-balance sheet activities of commercial banks, trust business, securities assets management business, non-bank financial institutions and private loan. Then this paper calculates the size of shadow banking from2003to2014.Then, the paper describes the mechanism of both positive and negative effects of shadow banking on financial stability, and proposes the hypothesis of threshold effect between them. The paper measures the relative size of the shadow banking and financial stability index and tests the threshold effect through the nonlinear regression models using national and regional data. The empirical results show that the threshold of national relative size of shadow banking is71.2%, that of east area, central area, west area and northeast area respectively are82%,54%,45%,37%.At last, the paper puts forward regulatory suggestions including the establishment of macro-prudential supervision system, speeding up reform of the financial system and strengthening the market discipline. The paper recommends implementing differentiation regulation based on different types and religions of shadow banking. For example, we should isolate the risk, reduce the channel activities of trust and securities, and enhance the supervision of private loan. As for different parts, we should encourage financial innovation in eastern region, while implement structural adjustment and stimulate the market vitality in other regions.