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Shadow banking, implicit guarantees, and risk-taking

Published online by Cambridge University Press:  24 November 2025

Shen Guo  and
Zheng Jiang
Shen Guo
Affiliation:
China Academy of Public Finance and Public Policy, School of Innovation and Development, Central University of Finance and Economics, Beijin 100081, China
Zheng Jiang*
Affiliation:
China Academy of Public Finance and Public Policy, School of Innovation and Development, Central University of Finance and Economics, Beijin 100081, China
*
Corresponding author: Zheng Jiang; Email: jiangzheng@cufe.edu.cn
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Abstract

This paper investigates the welfare implications of the rise of shadow banking in China, driven by regulatory arbitrage and implicit guarantees. Although shadow banking can improve social welfare by relaxing constraints on banks’ capacity to expand credit, it may also hurt social welfare due to the risk-taking behavior induced by implicit guarantees. We study the optimal level of guarantees and shadow banking in a model that balances these benefits and costs. Our findings suggest that reducing the existing degree of guarantees and shrinking the shadow banking sector could enhance social welfare in China.

Keywords

shadow bankingimplicit guaranteesrisk-takingwelfareE44G21G23G28

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Articles
Information
Macroeconomic Dynamics , Volume 29 , 2025 , e157
Copyright
© The Author(s), 2025. Published by Cambridge University Press

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