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An Empirical Study about Influence of China¡¯s Shadow Banking on the Stability of the Financial System

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  • Bo Liu
  • Shuai Shao
  • Yan-yang Gao

Abstract

With the rapid development of the financial system in recent years, all kinds of financial derivatives teem and the size of the shadow banking is becoming more and bigger. It has become an important factor affecting the stability of China¡¯s financial system. The influence of shadow banks on the financial system has two sides, on the one hand it is advantageous to the development and expansion of small and medium-sized enterprises as lubricant of corporate financing, on the other hand, features of shadow banking that highly leveraged and term mismatch also bring uncertainty to China¡¯s financial system. Firstly, this paper calculates the size of the shadow banking in China, and then builds a fuzzy comprehensive evaluation system to evaluate the risk of China¡¯s financial system. When determining the evaluation index, this paper apply KMV model to calculate the credit risk of China¡¯s securities market, and the maximum entropy method to determine the index weight. After getting China¡¯s financial system risk index and the size of shadow banking, this paper constructs the VAR model and makes the parameter estimation and impulse response analysis. Analysis results show that in a certain degree, the increase of the scale of shadow banks can reduce the risk of the financial system, but if it is over some certain threshold, it will increase the overall risk of the financial system.

Suggested Citation

  • Bo Liu & Shuai Shao & Yan-yang Gao, 2016. "An Empirical Study about Influence of China¡¯s Shadow Banking on the Stability of the Financial System," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(4), pages 104-112, April.
    • Handle: RePEc:ibn:ijefaa:v:8:y:2016:i:4:p:104-112
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    References listed on IDEAS

    as
    1. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    2. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    3. Bengtsson, Elias, 2013. "Shadow banking and financial stability: European money market funds in the global financial crisis," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 579-594.
    4. Dimitri B. Papadimitriou & L. Randall Wray & Yeva Nersisyan, 2010. "Endgame for the Euro? Without Major Restructuring, the Eurozone is Doomed," Economics Public Policy Brief Archive ppb_113, Levy Economics Institute.
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    Cited by:

    1. Alexey Vasilenko, 2018. "Systemic Risk and Financial Fragility in the Chinese Economy: A Dynamic Factor Model Approach," Bank of Russia Working Paper Series wps30, Bank of Russia.

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    More about this item

    Keywords

    shadow banking; KMV model; fuzzy comprehensive evaluation; maximum entropy method; VAR model;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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