What’s Lurking in the Shadows of China’s Banks

IMF Blog, September 15, 2014

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Shadow banking: financial intermediation that takes place outside of banks. The profession lacks a uniform definition; IMF has used terms including “off-balance sheet and nonbank financial intermediation,” “nonbank intermediation,” and “shadow banking.”
In China, a common operational definition is: total social financing less bank loans (excluding equity issuance).
Note on labels: focus is on the facts and functions of nonbank intermediation rather than on the name.

Rapid expansion since the global financial crisis in 2008; the “pink part” in Figure 1 has more than tripled since 2008, albeit from a low base.
Shadow banking has accounted for half of the increase in overall credit to the economy (total social financing)—even more than bank loans.
The pink part (shadow bank or nonbank intermediation) consists of four components:
- Corporate bonds (largest component of so-called shadow banking).
- Entrusted loans: corporate-to-corporate loans administered by a bank (bank acts as bookkeeper with no “skin in the game”).
- Bankers’ acceptances: letters of guarantee issued by a bank; “undiscounted” until they are discounted and recorded as bank loans.
- Trust loans: lending by trust companies that, on paper, merely bring borrower and investor together for a fee.
Comparative size:
- Broader measure (the pink area in Figure 1): 55 percent of GDP.
- Forthcoming October Global Financial Stability Report estimate (subtracting corporate bonds): 35 percent of GDP.
- Corporate bonds account for nearly 20 percent of GDP.
- Financial Stability Board’s filtered estimates suggest China’s shadow banking sector is quite small relative to international comparisons when parts not formally involved in “credit intermediation” are excluded.

Marks progress in financial development.
Provides companies with alternative borrowing channels.
Provides households with more investment opportunities, important given the ceiling on deposit interest rates.

Circumvention of regulations: shadow banking can be used to bypass rules such as the deposit interest rate ceiling (and other regulations).
- Example: customers buy bank wealth management products offering higher returns instead of deposits; those products may invest through shadow banks in assets resembling bank loans.
Movement of intermediation outside formal banking -> reduced application of safeguards such as:
- Capital requirements
- Provisions against loan losses
- Loan-to-deposit ratios
- Established supervision and regulation
Uncertainty over economic substance: unclear whether entities like trusts are mere loan arrangers or are lending like banks and taking on credit risk.
Investor protection and moral hazard:
- Investors appear largely protected from losses in fixed income trusts and wealth management products; few observed cases of investor losses.
- Perception of implicit guarantees by trust companies or selling banks (reputational risk).
- Risk of investors underestimating underlying risk and allocating too much saving to these products.
Regulatory challenge: supervisors and regulators are trying to keep up with a fast-moving sector; recent successes exist but sector remains a huge challenge.

Shadow banking in China is simultaneously a sign of financial development and a source of potential systemic risks.
Measurement depends on definitions: broader measures yield substantially larger shares of GDP (55 percent) than narrower measures (35 percent).
The forthcoming October Global Financial Stability Report will provide a broader discussion of shadow banking in China and elsewhere.

Source: What’s Lurking in the Shadows of China’s Banks — Steven Barnett, Shaun Roache; September 15, 2014

中国银行的影子中潜藏着什么; 作者：Steven Barnett和Shaun Roache; 2014年9月15日
- 中国银行的影子中潜藏着什么; 作者：Steven Barnett和Shaun Roache; 2014年9月15日 (Markdown version)
- 中国银行的影子中潜藏着什么; 作者：Steven Barnett和Shaun Roache; 2014年9月15日 (PDF)