DP14957 In the Shadow of Banks: Wealth Management Products and Issuing Banks’ Risks in China
We study the rise and risks in bank issuance of Wealth Management Products (WMPs), which
are off-balance-sheet substitutes for deposits without the regulatory interest rate ceilings and
constitute the largest shadow banking segment in China. We show that competition for deposits
has a causal effect on the WMP issuance of small and medium sized banks (SMBs), where we
instrument deposit competition by SMBs’ geographical exposure to the large (Big Four) banks.
The Big Four banks substantially increased their loan supply to support the RMB 4 trillion
stimulus initiated in response to the global financial crisis, and thereafter grew more aggressive
in the deposit markets in order to stay below the regulatory ceiling on the loan-to-deposit ratio.
In response, SMBs issued more WMPs and more frequently, besides also establishing fewer
branches in cities with greater competition from the Big Four banks. We find that this growth
of WMPs imposed rollover risks for all the bank issuers, as reflected in higher yields on new
WMPs, higher borrowing rates in the inter-bank market, and adverse stock market performance
of WMP-issuing banks on days with heightened rollover risks.