Macro determinants of shadow banking in Central and Eastern European countries

Abstract

Our study aims to quantitatively assess some of the determinants of shadow banking dynamics in 11 European Union (E.U.) countries from Central and Eastern Europe (C.E.E.) over the period 2004-2017. Using panel data estimation techniques and a quarterly data set compiled from several publicly available data sources, we alternatively evaluate the impact of six macroeconomic and financial variables on two dependent variables corresponding to two different measures of the shadow banking sector, namely the broad one (including all non-monetary financial institutions, except insurance corporations and pension funds) and the narrow one (excluding from the above one the investment funds, other than money market funds [M.M.F.]). Our findings confirm that shadow banking is sensitive to overall macroeconomic conditions and that economic growth positively influences the expansion of this segment of the financial sector. In addition, a higher demand for funds from institutional investors, which also reveals a more developed financial system, supports the expansion of the shadow banking sector. Moreover, in a low interest rate environment, the search for yield makes investors turn to shadow banks, while the development of the shadow banking sector is also found to be complementary to the development of the rest of the financial system, in particular, traditional banks.

Shadow banking: a bibliometric and content analysis

“…The limited number of studies on the topic suggests scope for further exploration of factors leading to the development of SB. As suggested by Apostoaie and Bilan (2020) and Hodula et al (2017), the impact of regulative arbitrage opportunities on SB could be addressed in this regard. Consistent with Kou et al (2021a), our study suggests that country-specific analyses can provide essential recommendations for improving the financial systems of particular countries.…”

“…Independent variables comprised real GDP growth rate, term spread, the growth rate of the total financial assets of pension funds and insurance corporations, money market interest rate, growth rate of the total reserves (excluding gold), and the growth rate of the total assets reported by the Monetary Financial Institutions (as defined by the European Central Bank). Apostoaie and Bilan (2020) found that developments in the traditional banking sector, institutional investors sector, and money market interest rate, overall liquidity and economic conditions influence the SB sector positively. Term spread, however, was found to negatively influence the SB sector.…”

What Drives Shadow Banking in the New EU Member States? Empirical Panel Cointegration Approach

“…The core determinants selected in our model have been previously used in academic literature (Kim, 2016;Barbu, Boitan and Cioaca, 2016;Apostoaie and Bilan, 2019) Considering the definitional ambiguities of the shadow banking system (SBS), it is difficult to empirically map the dependent variable. As already mentioned, there has not been an internationally harmonised definition of SBS for a sufficiently long period.…”

“…Hence, when specifying the econometric model and selecting the variables, we had to search for an 'appropriate' measure of the size of shadow banking that would be comparable across the selected group of countries. In empirical terms, we followed the approach by Kim (2016) and Apostoaie and Bilan (2019) to define the size of a shadow banking system as the value of the total assets of other financial intermediaries (OFIs), expressed as a percentage of the GDP.…”

“…Therefore, there is strong evidence that the hypothesis of complementarity between the two sectors holds, supporting the view that market-based finance can progress alongside traditional banking. This could also point to the existence of some common roots between both processes (such as the development of ITC technologies, European integration, and financial innovation), resulting in a generalised development of the financial system (Apostoaie and Bilan, 2019).…”