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Chinese Shadow Banking:
Effects and Policy Options
Lecturer:Tao Shen
Institute of China-ASEAN Research
Guangxi University
Diversified Research Perspective
Typical Form Effects
Perspective
International comparison
Perspective
Positive Effects & Negative
Effects Perspective
Macro-level & Micro-level
Effects Perspective
Positive Effects
1
Achieving Interest rate marketization 2
Accumulating experience of Financial regulation 3
Complementary to traditional banking 4
Promoting Development of real economy
5 Developing diversified financing channels
Company Logo
Negative Effects
1
risk and limitation 2
efficacy of macro-control policies 3
systemic risk of commercial banks 4
social stability
5 financing costs and the development of SMEs
Macro-level
Effects
Micro-level
Effects
The national economy
The financial system
Monetary policy
Commercial banking system
Small and medium-sized enterprises(SMEs)
Macro & Micro-level Effects Perspective
Macro-level Effects Perspective
Meeting the market’s capital requirements and
promoting economic development
One reason of real economic “hollowing”
Market-oriented economy
The National Economy
Positive Effects
Negative Effects
The Financial System
Positive Effects Negative Effects
financial resources allocation
optimized
multi-level capital market
decentralize system risks
Innovative financial instruments
promote the financial market
Complex business and regulatory
difficulties make the responsibility
unclear
Risk transfer to formal financial
institutions easily
Excessive leverage will expand risk
Lead to credit proliferation
Maturity mismatch increase the liquidity
risk easily
1 2 3
Monetary Policy
Draft
Effective Stability
30
70
SMEs
complement to credit operations
Promoting financial innovation
strengthen ability to manage risk
Traditional commercial banks transform
into securitized commercial banks
Accelerating internal and external
financial disintermediation
Distorting intermediate business
reputational risk and credit risk
Meeting capital
requirements
solving asymmetric
information
Increasing private
borrowing costs
crowding out
funding for SMEs
Commercial banking system
Positive
Negative
Micro-level Effects Perspective
International comparison Perspective
Risk
Abroad
Domestic liquidity
High
leverage Financial crisis
Theoretical Analysis
Based on Ponzi financing, which is the least secure
financing type
Optimizes the allocation of financial resources and improves the
operating efficiency of financial markets
Explaining obvious characteristics by introducing provisions of
legal private finance
Financial unstable Theory
Efficient Market Theory
Property rights Theory
Abundance in normative analysis
Less in empirical analysis
Method
Conclusion
Impulse Response
Function
negative impact on CPI and
M1, impact tends to zero
weaker over time
negative impact on
economic growth, positive
impact is deeper than
negative impact
Introduction
Author:Cheng Jian
Zhang xiao long
Variables:
CPI , GDP
M1,RATE, Entrusted loans
Trust loans
Goal: the impact of
Shadow banking on CPI,
GDP and M1
Method
Conclusion
Variance
Decomposition
greatest impact on
inflation rate
minimal impact on
economic growth
Introduction
Author:Yu Jing
Variable:
RGDP,RCPI,RM1
RSB
Goal: further evaluation
impact of shadow baking
on three economic
indicators(GDP,CPI,M1)
•Limit executive
remuneration
•“Golden parachute”
Strengthen supervision
of federal government
Increasing liquidity
requirements of fund
assets in Money market
United States——Multi-level regulation
first second third
EU——systemic risk control
European Systemic Risk Board
Expand financial regulationscope ,focus on risk control
• Hedge funds and private equity
• Credit rating agencies
• Financial Institutions
Japan—— Financial legislation
June
2009
December
2009
December
2009
Cabinet Office
Ordinance
Amendment Act on
Financial Instruments
Business
Amendment Act on
principle of
consolidated
supervision of
major banks
Financial
Instruments
Exchange
Amendment Act 2
Financial
Instruments
Exchange
Amendment Act 1
May
2010
International financial organizations
FSB
Basel Ⅲ
Before After
Defined shadow banking
standards
Strengthen monitoring
methods
Established regulatory
framework
capital requirements for
banks
Regulatory standards of
leverage ratio
Improvement on capital
instruments
Encourage financial
globalization
Not regulated Cross-
border risks
Not regulated on same
leverage ratio
existed procyclicality in
Financial regulatory
system
Lacked consideration
on systemic risk
Basis for policy options
Bank
Change in
Macroeconomic
SMEs &
Real Estate
shadow
banking
Impact Model
Relation to the entire
national economy
Operational difficulties
Unable to pay
off debts
seriously
situation turn out
Deterioration the
real economy
Macro perspective for shadow
banking development
Improving the supervision of
shadow banking
Concerned the associated risks
between the commercial banks
and shadow banking
policy
option
Macro
environment
Regulatory
Banking
system
Macro-environment
Environment Chinese
characteristics Reform
Monetary
policy
Healthy environment
Right direction
Prudential
regulatory
framework
Interest rate
marketization
Business
diversification
Quantity
Price-based
Regulation
Principles 1
Effective regulation measures 2
Principles
More
International cooperation
Precautionary regulatory
Full disclosure of information
Comprehensive regulatory
Effective regulation measures
Establish and improve relevant financial
legislation
Take shadow banking system into
Regulatory system
Implement dynamic supervision policies
Effective
Supervision
∆ Specialized investment banking regulators
∆ Reducing internal risk
∆ Dynamic supervision
Banking system
Actively absorb
innovations
Policy options
Establish
a firewall
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