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

Despite the swift rise of shadow banking in China, the challenge it poses to the monetary policy effectiveness is understudied. By tracing the shadow funding of banks, we construct a novel data of bank-issued off-balance sheet Wealth Management Products (WMPs) to provide a consistent and precise measure of shadow banking involvement for individual bank. We show that aggressive issuance of WMPs impedes an effective transmission of the monetary policy. Such hampering effect likely arises from the fact that shadow banking helps banks to move risky assets off their balance sheets and improve upon their risk pro files, 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).