Systemic Risk Arising from Shadow Banking and Sustainable Development: A Study of Wealth Management Products in China

Abstract

Shadow banking is a main way for the financial market to serve the real economy today, and this process is closely related to systemic risk. This study examines the impact of shadow banking associated with sustainable development in China’s banking on systemic risk. We analyze the data obtained from a rich sample of 31 listed commercial banks in China and shadow banking represented by wealth management products (WMPs) by constructing a dynamic complex interbank network model. The results show that the risks and vulnerabilities generated by shadow banking spread out through the interbank network and cause systemic risk to increase. The effect operates through increasing the number of default banks, reducing banks’ survival rate and profit, and forcing central bank bailout funds expansion. However, it has a positive impact in terms of augmenting liquidity and enhancing investment opportunities. Furthermore, the variability in the influence of different categories of shadow banking is assessed, emphasizing that short-term shadow banking exerts a more pronounced impact on systemic risk. In addition, the heterogeneity of the shadow banking effect on different types of commercial banks is explored, revealing that local and rural commercial banks experience a more conspicuous effect compared to state-owned and joint-stock banks. Our findings highlight that improving external supervision, promoting financial internal governance, and constraining credit linkages are vital for alleviating the increase in risks in shadow banking and maintaining the sustainable development of banking.