Shedding Light on Shadow Banking
Jan 29-2019
Should shadow banking be banned outright? Is financial innovation too dangerous to be good? NSD Dean and Professor Yao Yang called for reflections on the latest bout of policies on banking and financing. He gave the speech at the NSD Policy Talk on January 18th. Banks are now required to shift off-balance sheet activities into balance sheets, and transfer wealth management to asset management firms whose business scope is severely restrained. Besides, other shadow banking businesses have been sharply curtailed, which has led to the abrupt contraction of consumption loans. Such stringent policies have caused the drying up of liquidity in the economy. The downfall of the stock market is partly related to China-US trade war, and certainly has something to do with the inertia of the financial system. Many private enterprises are busy looking for money. Prof. Yao suggested that the local governments should have more funds to work with, including paying civil servants and keeping project going, by bringing forward the release of ad-hoc bonds as well as having money transfer from the Ministry of Finance ahead of schedule. The Central Bank might find it worthwhile to consider buying the shares or bonds of some firms on the verge of bankruptcy and thus directly inject liquidity into the market. Besides these expedient measures, he advised that the relevant banking and financial authorities should work together to look at the root causes impeding financial innovation and blocking the flow of liquidity, so as to weed out bad policies and keep the good ones.
