The impact of banking regulatory policies on the expansion of shadow banking business in China

Abstract

To better examine how shadow banking activities are affected by banking regulation, this paper uses the implementation of new regulatory standards in China's banking sector in 2011 as a quasi-natural experiment to test whether China's banking regulatory policies were effective in curbing shadow banking activities from 2007 to 2019 using data on banks' entrusted loans to measure the size of shadow banking business. The findings of this study are as follows: Firstly, the new regulatory standards had effectively inhibited the development of shadow banking business such as entrusted loans. Mechanism analysis showes that CAR had a significant positive impact on entrusted loans, once the CAR fell, the entrusted loans decreased. Meanwhile, the higher the LIR was, the more shadow banking activities Chinese banks were likely to engage in. Further insight reveales that among banks with larger assets and higher profitability, the impact of the new regulatory policies on shadow banking business was more significant. The results remain robust when the paper also consideres the policies issued in 2017 for shadow banking. The findings of this paper demonstrate the actual effect of China's regulation on shadow banking from a micro perspective and provide a scientific and theoretical basis for the implementation of regulatory policies.