Template-Type: ReDIF-Paper 1.0
Author-Name: Amanda Liu
Author-X-Name-First: Amanda
Author-X-Name-Last: Liu
Author-Name: Jing Liu
Author-X-Name-First: Jing
Author-X-Name-Last: Liu
Author-Name: Ilhyock Shim
Author-X-Name-First: Ilhyock 
Author-X-Name-Last: Shim
Title: Shadow loans and regulatory arbitrage: evidence from China
Abstract: This paper examines how Chinese banks used on-balance sheet shadow loans for regulatory arbitrage and whether the financial market priced in the banks' use of shadow loans and the resulting vulnerabilities in 2016–2020. It finds that banks chose to window-dress their regulatory capital ratio by using shadow loans. It also shows that banks with a higher shadow loan ratio or a lower break-even non-performing loan ratio obtained from reverse stress testing faced higher wholesale funding costs. Finally, after the announcement of a rare bank failure event, more vulnerable banks witnessed lower cumulative stock and bond returns.
Length: 31 pages
Creation-Date: 2022-02
File-URL: https://www.bis.org/publ/work999.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work999.htm
File-Format: text/html
Number: 999
Keywords: bank capital regulation, Chinese economy, regulatory arbitrage, shadow banking, reverse stress test.
Classification-JEL: G12, G14, G21, G28.
Handle: RePEc:bis:biswps:999