Shadow Banking and Risk: the Case of Iran

Tabatabaie, Seyed Masoud; Makiyan, Seyed Nezamuddin; Nasrollahi, Zahra

doi:10.48308/jep.5.1.83

Shadow Banking and Risk: the Case of Iran

Document Type : Original Article

Authors

¹ Ph.D. Candidate in Economics, Yazd University , Yazd, Iran

² Associate Professor in Economics, Yazd University, Yazd, Iran

³ Professor in Economics, Yazd University, Yazd, Iran

10.48308/jep.5.1.83

Abstract

Banks and financial institutions face various risks. The effective management of these risks plays a vital role in the efficiency and effectiveness of these banks. One of these risks is shadow banking in the financial institutions. This paper conducts the research to discuss the effects of shadow banks on banking risk. The research problem of the paper is how the operations of Iranian state banks affects risk and which policy should be used. We analysis this risk with a selection of state banks from 2016 to 2022. Capital structure, asset quality, liquidity, capital adequacy and banks' size are considered as explanatory and control variables. We used the ratio of off-balance sheet items to total asset, bank claims from subsidiaries and bank investment in securities as the indicators of shadow banking respectively in three models estimation of the effects of shadow banking on risk based on Panel Data. The results show that shadow banking, with the three indicators which used, significantly increase the risk, while capital structure offset part of such an effect. In other words, increasing the ratio of off-balance sheet items to assets, bank claims from subsidiaries and bank investment in securities leads to higher risk. However, a perfect capital structure can offset part of increasing effect of shadow banking on the risk. Results also indicate an increase in asset quality, liquidity, and capital adequacy lead to a decrease in the risk, while expansion of banks' size increase the risk.

Keywords

References

Adrian, Tobias & Shin, H. S., (2009). The shadow banking system: Implications for financial regulations. Federal Reserve Bank of New York, Staff Report, No. 382.

Asr-e Bank (1402). Available at https://asrebank.ir/?p=70927 (in Persian).

Avkiran, N. K., Ringle, C. & Low, R., (2015). Monitoring transmission of systemic risk from shadow banking to regulate banking, 28th Australasian Finance and Banking Conference.

Baltagi, Badi, (2008). Econometric Analysis of Panel Data, John Wiley & Sons.

Bank of International Settlements, (2012). 82nd Annual Report, Available at: https://www.bis.org/.

Buiter, Willem H., (2008). Central bank and financial crises, Federal Reserve Bank of Kansas City.

European Central Bank, (2015). ECB warns of risks posed by shadow banking sector, Available at: https://www.ft.com/.

European Systemic Risk Board, (2016). EU shadow banking monitor, Available at: https://www.esrb.europa.eu/.

Fan, H. & Pan, H., (2020). The effect of shadow banking on the systemic risk in a dynamic complex interbank network system, Complexity, 1-10.

Financial Stability Board, (2013). Strengthening oversight and regulation of shadow banking, Available at: https://www.financialstabilityboard.org/.

Financial Stability Board, (2015). Global shadow banking monitoring, Report 2015, Available at: http://www.fsb.org/.

Gill, Amarjit, et al., (2011). The effect of capital structure on profitability: Evidence from the United States, International Journal of Management, 28 (4), Part 1.

Hsu, S., Li, J. & Xue, Y., (2014). Shadow banking and systemic risk in China, PERI Working Paper, No. 349.

International Money Fund, (2014). Global financial stability report 2014: Risk taking, liquidity and shadow banking curbing excess while promoting growth, Available at: https://www.imf.org/.

Ji, G., Kim, D. S. & Ahn, K., (2019). Financial structure and systemic risk of banks: Evidence from Chinese reform. Sustainability, 11, 1-22.

Kodres, Laura E., (2013). What is shadow banking, Financial & Development, (50) 2, 42-43.

Lee, C. C., & Hsieh, M. F., (2014). Bank reforms, foreign ownership, and financial stability, Journal of International Money and Finance, 40, 204 -224.

Makipour, A., Salahmanesh, A., Anvari, E. & Bahraminia, E., (2023). Analysis of the effects of monetary policy in Iran's economy with the existence of shadow banking, using the dynamic stochastic general equilibrium method, Stable Economy Journal, 4(2), 174-206, (in Persian)

Makiyan, S. Nezamuddin, & Amareh, Javad, (2021). Investigating cyclical status of monetary and financial policies in Iran , Quantitative Economics, 8 (4), 67-92.

Makiyan, S. Nezamuddin, & Amareh, Javad, (2022). The effect of institutional quality on monetary policy in Iran’s economy: a DSGE approach , Journal of Ekonomi, 3 (2), 128-134.

McCulley, P., (2009). The shadow banking system and Hyman Minsky’s economic Journey, Available at: https://www.cfainstitute.org/.

Millán, I. R., (2014). Global trends of shadow banking, Banco Bilbao Vizcaya Argentaria (BBVA), Global Economic Watch.

Pournejati, M. & Houshmand Neghabi, Z., (2021). The effect of shadow banking on banking risk and capital adequacy in banks admitted in Tehran Stock Exchange, Journal of Accounting and Management Vision, 4(41), 13-28, (in Persian).

Qiu, Q., (2020). Shadow banking and the commercial bank loan loss provisions, Modern Economy, 11 (1), 155-164.

Roubini, N. & Miham, H., (2011). Crisis economics: A crash course on the future of finance, Penguin Publishing Group.

Tang, J. & Wang, Y., (2016). Effects of shadow banking on return - Empirical study based on Chinese commercial banks. International Journal of Financial Research, 7(1), 207-218.

Wu, M.W. & Shen, C. H., (2019). Effects of shadow banking on bank risks from the view of capital adequacy, International Review of Economics & Finance, 63, 176-197.

Zhou, S. & Tewari, D. D., (2019). Shadow banking, risk-taking and monetary policy in emerging economies: A Panel Co-integration approach, Cogent Economics & Finance, 7, 1-17.