Le Xia (BBVA Hong Kong): The Regulatory Arbitrage and Window-dressing in Shadow Banking: The Example of Chinese Wealth Management Product
Co-authors: Jinghan Cai (University of Scranton), Alicia García-Herrero (Natixis SA), Fengyun Li (Renmin University of China)
We document that in China the bank-issued wealth management products (WMP)’s maturity dates cluster towards 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 behaviors.
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