Interest rate liberalization in China intensifies the exposure of commercial banks' interest rate risks and further increases the difficulty for commercial banks to effectively control interest rate risks, thus putting forward higher requirements for the normal operation and management of commercial banks. With the development of China's financial derivatives market, banking institutions begin to use basic interest rate derivatives to hedge interest rate risks. It is very important to give full play to the maturity transformation Function of commercial banks to enhance the ability of financial services to the real economy. Based on the semi annual unbalanced panel data of 37 listed banks in A-share stock markets from 2006 to 2020, this paper empirically tests the impact of the use of off balance sheet interest rate derivatives on the Maturity Transformation Function of banks in the case of interest rate fluctuations. The empirical results show that: (1) the use of interest rate derivatives helps to weaken the negative impact of interest rate fluctuations on the Maturity Transformation Function of banks. (2) The analysis of the mechanism shows that the use of interest rate derivatives improves the stability of the bank's asset side term structure and liability side term structure, so as to support the effective play of the bank's financial intermediary role. (3) Further analysis shows that the of interest rate derivatives significantly reduces the volatility of bank earnings. This study makes it clear that the use of interest rate derivatives has a positive impact on the commercial banks, which provides evidence for the further development of interest rate derivatives market in China.

Taking the prevalence of the global green development concept and China's green credit development practice as the background, this paper constructs a theoretical model analysis framework with the incentive policy of green credit as the entry point. First, the impact effect of green credit incentive policy is examined using the BVAR model. The results show that the green credit incentive policy suppresses the output level in the short run through the financing constraint channel, but has a positive contribution to output in the long run due to the adjustment of the production structure and the dynamic adjustment of green investment and R&D. Next, the paper constructs a DSGE model embedded with green credit fiscal and tax incentive policies, which explains the impact mechanisms and comparative effects of fiscal and financial policies driving green credit. The model shows that the re-guarantee policy is the most effective and consensual green credit incentive policy. In terms of the policy combination, the combination of the re-guarantee policy and the income tax policy is the current optimal policy pairing, and its policy is able to produce an amplification effect through the balance sheet channels of commercial banks and enterprises at the same time. In addition, a certain intensity of the above policy combination not only can effectively increase the scale of green credit, but also does not produce significant negative shocks to output and inflation. In summary, the findings of this paper provide a useful reference for the formulation and implementation of green credit incentive policies.

This paper is about investigating how different bank liquidity creation activities affect housing markets. Using data of 401 metropolitan statistical areas/metropolitan statistical area divisions (MSAs/MSADs) of the U.S. between 1990 and 2018, we show that not all bank liquidity creation activities boost the housing markets. In particular, unlike asset- side and off-balance sheet liquidity creations, funding-side liquidity creation dampens housing markets. The relationships between liquidity creation activities and housing markets are stronger in regions with inelastic house supply, but flip when banks face external liquidity shocks. We also find that housing markets dominated by large banks are more sensitive to off-balance sheet liquidity creation activities. Finally, as expected, asset-side and off-balance sheet liquidity creations boost housing markets by driving house prices away from fundamental values. Our results offer a more thorough explanation of how bank liquidity creation fuels the momentum of housing markets.

This paper researches into development of China’s shadow banking during 2020-2022, a special period marked by COVID-19 and strengthened global regulation on Non-Bank Financial Intermediation (NBFI). Research focus includes balance sheet evolvement, growth dynamics, and relation with macro-finance. Its business model surprisingly resembles western peers. They both fund underserved sectors and have similar exposure to balance sheet mismatch. Massive holding of bond investment (36.6% of total asset) is funded by uninsured interbank fund and wealth management product, which makes it more closely related with banks’ balance sheet and risk contagion from NBFI to traditional commercial banks more easily. This paper then re-summarizes growth dynamics of China’s shadow banking in a “Pull-Push” framework, and proposes concept of reintermediation in respective to disintermediation. Consecutive regulation on NBFI and real estate sector kept dragging on growth of shadow banking, and rendered it in liquidity surplus, which is invested into interbank market. This paper also provides empirical evidence on relation of China’s shadow banking with macro-finance, and notes several empirical breakdowns of pre- COVID relations among economic and financial indicators. Most important breakdown is the non-functionality of monetary policy transmission channel. Besides, it continued to twist de facto financial regulatory indicators, however with fading impact.

Fintech firms mobilize information technology to provide intermediation services using a broker methodology, whereas dealer banks intermediate using leveraged balance sheets. The integration of Fintech into banking may reduce the unit cost of intermediation by shifting the production function from dealer to broker. A “Fintech score” is derived using nonlinear and machine learning algorithms that show on-balance sheet lending for low Fintech score dealer banks versus securitization, brokered deposits, and non-interest income for high score, broker banks. Using Data Envelopment and Stochastic Cost Frontier Analyses, we find that banks with higher Fintech scores are more operationally efficient and resilient in crises.

We estimate real losses arising from the cross-sectional misallocation of financial liabilities. Extending a production-based framework of misallocation measurement to the liabilities side of the balance sheet and using manufacturing firm data from the United States and China, we find significant misallocation of debt and equity in China but not the United States. Reallocating liabilities of firms in China to mimic U.S. efficiency would produce gains of 51% to 69% in real value-added, with only 17% to 21% stemming from inefficient debt-equity combinations. For Chinese firms that are large or in developed cities, we estimate lower distortionary financing costs.

We study how shadow banking affects the effectiveness of monetary policy in China.Using novel data on bank-issued off-balance sheet wealth management products (WMPs), we show that banks improve their on-balance sheet risk profile by issuing WMPs. This in turn lowers the sensitivity of banks' wholesale funding cost to monetary policy and reduces the effectiveness of the bank lending channel. The effect of our mechanism on total credit is quantitatively similar to the effect arising from the substitution between traditional loans and shadow banking loans previously analyzed in the literature. The channel documented in this paper has novel implications for the regulation of banks' off-balance sheet activities and market-based funding.

Shadow financing through off-balance sheet wealth management products (WMPs) has become increasingly important besides deposits in China. We quantify the economic magnitude of the effect of WMPs on banking stability in an equilibrium model calibrated to Chinese banking sector data. Alternative equilibria emerge, which deviate substantially from the observed banking system and lead to severe financial distress and large welfare losses. Rollover costs from the WMP market and negative shocks to the asset market underlying WMPs can exacerbate banking instability. Moreover, we show that smaller and medium sized banks are comparably relevant for financial stability as the systemically important big 4 banks in China.

We study the causes and consequences of growth in shadow banking by examining the Chinese banks’ issuance of Wealth Management Products (WMPs), which are short-maturity off-balance-sheet substitutes for deposits. Using branching overlap data, we instrument deposit availability with banks’ exposure to competition from a large state-owned bank, which substantially increased loan supply to support the fiscal stimulus during the Global Financial Crisis and competed more aggressively for deposits thereafter. We show that deposit market competition has a causal effect on smaller banks’ reliance on shadow banking: exposed banks increased the issuance of WMPs sharply, creating rollover risk for these banks.

We develop a model of a financial institution to study how shareholder—debt holder conflicts interact with prudential capital regulation and accounting measurement rules. Our analysis highlights the result that, for highly leveraged financial institutions—when prudential regulation play an important role—debt overhang and asset substitution inefficiencies work in opposing directions. We demonstrate that, relative to the “historical cost” regime in which assets and liabilities on an institution’s balance sheet are measured at their origination values, fair value could alleviate the inefficiencies arising from asset substitution, but exacerbate those arising from underinvestment due to debt overhang. The optimal choices of accounting regime and prudential solvency constraint balance the conflicts between shareholders and debt holders. Under fair value accounting, the optimal solvency constraint declines with the institution’s marginal cost of investment in project quality and the excess cost of equity capital relative to debt capital. Fair value accounting dominates historical cost accounting provided the solvency constraints in the respective regimes take their optimal values. If the solvency constraints are sub-optimally chosen, however, historical cost accounting could dominate fair value accounting.