The Impact of Shadow Banking Risk on Systemic Financial Risk in China

After the subprime crisis, China's shadow banking industry has expanded rapidly, becoming an important financing channel outside the traditional banking system. However, because it is not subject to the conventional regulatory framework, shadow banking has increased systemic financial risks while raising financial leverage.Inadequate regulation of shadow banking could lead to systemic financial risks in the financial system and jeopardize economic stability. This paper discusses the advantages and disadvantages of shadow banking and its impact on monetary policy. Meanwhile, this paper further elaborates on the importance of macro and macroprudential regulation, and at the same time proposes some solutions to further emphasize the importance of macro and macroprudential regulation, and suggests that regulators should strengthen the regulation of shadow banks activities, such as shadow banking, no longer jeopardize the financial system. Then, this study also suggests that the regulator should provide awareness of the risk of shadow banking for the borrowers or investors, especially trying to avoid those borrowers who are not able to repay the loan joining shadow banking institutions. When the risk of shadow banking system accumulates into a crisis, the regulator needs to respond in the first instance and identify timely contingency measures for that crisis. This will minimize the risk of shadow banking and increase the probability of Chinas prevention of systemic financial risks.