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Collateral Monetary Policy, Regional Financial Development, and Nonfinancial Firms' Shadow Banking Activities

Year: 2024

Type: article

Abstract: The disparity in credit access between large firms and small and medium‐sized enterprises contributes to the prevalence of shadow banking activities, where large, nonfinancial firms with high credit ratings have become new financial intermediaries. These activities vary geographically and are affected significantly by collateral monetary policy. This paper examines the effect of collateral monetary policy, its reform, and regional financial development characteristics on large firms' shadow banking activities, with a focus on the medium‐term lending facility (MLF), the primary collateral monetary policy instrument in China. The results indicate that the MLF encouraged large firms' shadow banking activity. However, the MLF reform in 2018 mitigated this effect by broadening the range of acceptable collateral. Regional financial development, such as a higher number of bank branches around firms, facilitated large firms' shadow banking activities and amplified the MLF's stimulating effect. In contrast, regional advancements in digital finance and market development limited both shadow banking activities and MLF's impact.

Source: China & World Economy

DOI: 10.1111/cwe.12552

Authors: Chao Yuan, Hai Jiang, Jiawen Ren, Nikos Kapitsinis

Institutions: Guangdong University Of Finances and Economics, Guangdong University of Finance, Jinan University, University of Copenhagen

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: bronze

Funders: National Natural Science Foundation of China, National Office for Philosophy and Social Sciences