The nexus between commercial bank lending and shadow banking assets: do bank risks and profitability moderate? Evidence from emerging markets

ABSTRACT

This study constitutes an initial attempt to examine bank risks and profitability effects on commercial bank lending-shadow banking nexus in emerging economies (EMEs). One-step and two-step system GMM results suggest that commercial banks’ credit risk, capital risk and profitability have a key role in the bank lending-shadow banking nexus. Findings also reveal that shadow banking can act as both substitutes and complements to traditional banking. Moreover, high institutional demand and lower restrictions on bank activities are found to be among the main drivers of shadow banking expansion.

KEYWORDS:

• Shadow banking
• commercial banking
• bank risk
• institutional factors
• emerging economies

JEL CLASSIFICATION:

• G21
• G23

Highlights

• This study addresses the impact of bank risks and profitability on commercial bank lending and shadow banking nexus in EMEs from 2013–2018.

• Results support the complementary and substitution role of shadow banks.

• Interaction terms imply commercial banks’ credit risk, capital risk and profitability influence bank lending-shadow banking nexus.

• Findings also confirm ‘Institutional demand’ and reverse ‘Regulatory arbitrage’ hypotheses.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Author calculations based on FSB (2020) database.

² FSB provides data only for: Argentina, Brazil, Chile, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa and Turkey.

³ One of the major shadow banking activities.

⁴ Due to robustness, we didn’t accept that profitability significantly affects BL-SB nexus since different results are provided by one and two-step system GMM.

⁵ Results are available upon request.

⁶ Results are available upon request.