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Nonbank financial institutions and financial stability: Time series analysis

Author

Listed:
  • Zheng, Licheng
  • Huang, Xiaoqing
  • Lu, Xiaoyong

Abstract

While the rapid growth of nonbank financial institutions (NBFIs) has transformed financial landscapes globally, their impact on financial stability remains unclear. NBFIs can promote market liquidity and innovation; however, their complex structures may introduce systemic risks. This study employed a vector autoregression model to examine the short- and long-term effects of NBFI expansion on financial stability in China from 2010 to 2020. Findings indicate that financial NBFIs negatively affect financial stability in the short term but exhibit positive effects over the long run; however, nonfinancial NBFIs exhibit consistent negative effects. Variance decomposition suggests a lagged effect of NBFI expansion on financial stability, which becomes more pronounced in the medium to long term. These findings underscore the need for nuanced, forward-looking regulatory approaches to balance NBFI growth with financial system resilience for a comprehensive understanding of evolving financial ecosystems.

Suggested Citation

  • Zheng, Licheng & Huang, Xiaoqing & Lu, Xiaoyong, 2025. "Nonbank financial institutions and financial stability: Time series analysis," Finance Research Letters, Elsevier, vol. 73(C).
    • Handle: RePEc:eee:finlet:v:73:y:2025:i:c:s1544612324015733
    DOI: 10.1016/j.frl.2024.106544
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    More about this item

    Keywords

    Nonbank financial institution; Financial stability; Time series analysis; Vector autoregression; Systemic risk;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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