China's shadow banking industry plays a vital role in the country's money-creation process, extending far beyond traditional loans, according to a new report from the Bank of International Settlements.
"This poses a number of challenges to monetary policy operations and financial risk management," the report's authors note
Looking at money-creation mechanisms of China's shadow banking sector in detail, the BIS goes on to provide accurate measurements, investigates its effects on financial risk and surveys recent regulations.Highlighting the critical role of banks' shadow in creating credit money while hiding the credit risk incurred by banks. The challenges posed to monetary policy regulation and financial risk management are also assessed.
- Clarification of the definition of shadow banking in China, decomposing it into banks' shadow and traditional shadow banking.
- Quantification of the scale of shadow banking in China using the deduction approach, with the aim of avoiding miscalculation issues such as double-counting and overestimation.
- Relationship between shadow banking credit and financial risk is investigated at both the macro and micro levels. Finally, the monetary policy challenges posed by Chinese shadow banking is discussed and the recent trend to tighten regulation surveyed.
Read the full paper at: https://www.bis.org/publ/work822.htm