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The regulatory arbitrage and window dressing in shadow banking: the example of Chinese wealth management product

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  • Jinghan Cai
  • Alicia García-Herrero
  • Fengyun Li
  • Xia Le

Abstract

We document that in China the maturity dates of bank-issued wealth management products (WMPs) cluster toward the end of a month and then decrease significantly at the beginning of the following month. Our empirical work detects a negative relationship between a bank’s loan-to-deposit ratio (LDR) at month-ends and the number of its issued WMPs expiring within several days of the month-end. Moreover, this WMP clustering and the negative relationship disappear after the reform in which regulators bring up measures for banks with a high deposit deviation degree in 2014. We also document that the banks tend to arrange the high-return WMPs to expire around month-ends to attract customers, and this clustering of high-return WMPs also disappears after the reform. Our findings suggest that banks actively, rather than passively, use WMPs as vehicles for their regulatory arbitrage or window dressing behaviours.

Suggested Citation

  • Jinghan Cai & Alicia García-Herrero & Fengyun Li & Xia Le, 2019. "The regulatory arbitrage and window dressing in shadow banking: the example of Chinese wealth management product," Economic and Political Studies, Taylor & Francis Journals, vol. 7(3), pages 314-336, July.
    • Handle: RePEc:taf:repsxx:v:7:y:2019:i:3:p:314-336
    DOI: 10.1080/20954816.2019.1633825
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    Cited by:

    1. Chen, Ting-Hsuan & Shen, Chung-Hua & Wu, Meng-Wen & Huang, Kuo-Jui, 2021. "Effect of shadow banking on the relation between capital and liquidity creation," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 166-184.
    2. Feng, Xu & Lütkebohmert, Eva & Xiao, Yajun, 2022. "Wealth management products, banking competition, and stability: Evidence from China," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    3. Shah, Syed Mehmood Raza & Fu, Qiang & Dawood, Muhammad & Ishfaq, Muhammad, 2020. "Issuance of Wealth Management Products and Expected Yields; A Shadow Banking Perspective," MPRA Paper 104147, University Library of Munich, Germany.
    4. Liu, Zehao & Xie, Chengbo, 2021. "Liquidity, capital requirements, and shadow banking," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 1379-1388.
    5. Acharya, Viral & Qian, Jun & Su, Yang & Yang, Zhishu, 2020. "In the Shadow of Banks: Wealth Management Products and Issuing Banks’ Risks in China," CEPR Discussion Papers 14957, C.E.P.R. Discussion Papers.

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