An Empirical Study On The Impact Of Shadow Banking On Financial Stability In China

With competition intensifying and supervision being strict in financial market,various market economies in China continue to develop shadow banking business through financial innovation to cope with the impact of market environment changes.Moreover,the financing and investment demand and regulatory arbitrage of China's market entity also provide opportunities for the expansion of China's shadow banking.Shadow banking features maturity transformation,high leverage ratio,credit risk transfer,and close connection with commercial banks,which means it has implicit financial risks and may pose a threat to financial stability.While promoting the rapid development of the real economy,shadow banking in China also increases the internal risks of the financial system.On the one hand,the rapid growth of shadow banking promotes the diversification of the financial market players,enriches the investment and financing channels of economic entities,and improves the efficiency of capital allocation.Therefore,shadow banking becomes a favorable complement to the credit of tr additional financial institutions,and contributes to the optimization of financial structure and prosperity of financial market.On the other hand,the expansion of shadow banking in China will accelerate currency circulation and the expansion of credit scale,interfering with the effectiveness of monetary policy.The transparency of shadow banking is not high and the risk contagion channels between various shadow banking businesses and institutions are relatively close.In addition,shadow banking business overlaps with the one of traditional commercial banks,which may affect the smooth operation of financial institutions and even threaten the stability of the financial system.This dissertation divides China's shadow banking into two types: shadow banking of financial institutions and shadow banking of non-financial institutions.Firstly,the overall size of shadow banking and the respective size of two types of shadow banking are calculated based on the quarterly data from 2011 to 2017.Secondly,the composite index of financial stability is constructed through factor analysis from the perspectives of financial institutions,macroeconomic environment,stock market and international economic environment.Finally,the VAR model is used to empirically analyze the impact of shadow banking on financial stability in China.The empirical study shows that the expansion of shadow banking in China has a significant impact on financial stability with time lag.In the short term,shadow banking of non-financial institutions can serve as supplementarymeans for traditional financial institutions to provide credit support for the financial system.However,it is bad for the financial system in the long run.The shadow banking business of financial institutions may cause fluctuations in the financial system in the short term,but it will contribute to financial stability in the long run.Therefore,the author proposes various regulatory measures such as prudent macro-supervision and functional supervision to guide the benign growth of shadow banking and prevent cross-infection of risks,so as to promote shadow banking to play a positive role in the financial system.