Shadow Banking and the Bank Lending Channel of Monetary Policy in China

Despite the swift rise of shadow banking in China over the last decade, the challenge it poses to the monetary policy effectiveness is understudied. Using a novel dataset of listed Chinese banks, we find that aggressive issuance of off-balance sheet WMP impedes an efficient transmission of monetary policy. Such hampering effect arises from the fact that shadow banking helps banks remove risky assets thereby lowering the sensitivity of their wholesale funding cost to monetary policy, in line with the view of Bernanke et al. (2007) and Disyatat (2011). This mechanism complements the substitution effect between shadow and traditional bank loans documented by Chen et al. (2018)