How does monetary policy respond to the dynamics of the shadow banking sector?

Abstract

We investigate the response of the central bank to the change in size of nonbank financial intermediaries. Using quarterly data for the United States over the period 1946:Q1‐2016Q4, we find that when faced with an increase in the asset growth of the securities' brokers and dealers and the shadow banking sector, the monetary authority reacts by raising the short‐term nominal interest rate. This response is stronger in the case of sharp variation in the size of the balance sheet of nonbank financial intermediaries. From a policy perspective, our study suggests that an extended version of the original Taylor rule—embedding both price stability and financial stability concerns—provides a good characterization of the monetary policy reaction function.

Asymmetric effects of monetary policy on non-bank financial intermediation (NBFI) assets: a panel quantile regression approach

“…The results observed at the lowest quantile (10th) are consistent with the “waterbed effect,” uncovered by Nelson et al . (2018) and confirmed by several studies (Mazelis, 2016; Chen et al ., 2018; Gabrieli et al ., 2018; Yang et al ., 2019; Agnello et al ., 2020; Gong et al ., 2021; Qanas and Raza, 2022). It implies that under a contractionary MP environment, traditional bank assets shrink while the assets of NBFI expand.…”

“…In this regard, the impact of MP on NBFI has been a widely contested subject for the last decade (among others, IMF, 2014;Mazelis, 2016;Kim, 2017;Chen et al, 2018;Gabrieli et al, 2018;Nelson et al, 2018;Yang et al, 2019;Agnello et al, 2020;Gong et al, 2021;Giuzio et al, 2021;Qanas and Raza, 2022). Yet, the previous studies have no clear consensus on whether expansionary/contractionary MP enhances or weakens NBFI.…”

“…Through this non-deposit funding, banks offset the effect of tightening MP on their supply of loanable funds (bank lending channel). In response to a MP contraction, NBFI entities also intensify securitization activities to circumvent the challenge posed by the liquidity dry-up (Agnello et al ., 2020). Furthermore, a hike in interest rates raises the cost of repaying existing loan contracts, perhaps motivating economic actors to refinance bank loans in the shadows (Hodula, 2019).…”

Shadow banking contraction and innovation efficiency of tech-based SMEs-based on the implementation of China’s New Asset Management Regulation

“…Compared to other developed countries, Chinese shadow banking is a product of off-balance-sheeting of domestic assets in the context of restricted bank credit impulses and less securitization of assets (Agnello et al, 2020 ; Allen et al, 2019 ; Irani et al, 2021 ). This kind of unofficial banking agencies manifest themselves mainly as “shadow of banks”, which essentially as a partial replacement for commercial bank credit driven by SMEs’ financing needs (Guo & Xia, 2014 ).…”

Unconventional monetary policy reaction functions: evidence from the US

“…4 These formulations include adding equity prices(Chadha, Sarno and Valente, 2004;Rigobon and Sack, 2004;Bernanke and Kuttner, 2005), housing prices(Aoki, Proudman and Vlieghe, 2004;Iacoviello, 2005;Iacoviello and Minetti, 2008;Bjornland, Jacobsen and Henning, 2010), asset wealth and its composition(Sousa, 2010;Castro and Sousa, 2012), debt service-to-income and leverage ratios(Field, 2015), the financial cycle(Turner, 2017, or the asset growth of non-bank financial intermediaries (e.g. securities' brokers and dealers and shadow banks)(Agnello et al, 2019) to otherwise standard Taylor-type monetary policy reaction functions. 5 See, for instance,Clarida, Gali, and Gertler (1998),Woodford (2003), andOrphanides (2001Orphanides ( , 2003 andRudebusch (2002).…”