Solution to reduce shadow-banking problems

Regulatory implications
Strategies Reform
Principals reform

1. Create accounting standard or policies

Eliminate a strong accuracy accounting standard for banks or financial institutions that
has funding for investment as their main objective. Even though in the global world has
the international accounting standard but we still see that the financial institutions hided
some liabilities, some problem in accounting transparency, and organizational control and
management that cant be validated. Case examples are ENRON a company from the
U.S. and WORLDCOM. The presenting of financial statements needed to be prevented
from any default accounting adjustments and Off-balance Sheet Transactions. The WMPs
case is a good example that serious auditing is needed to show all the transaction.
Sometimes we need to consider it as case-by-case. For example, some financial
institutions have significantly abnormal in growth. The auditor needs to be reliable and
has the auditing morality without moral hazards. Pushing for improved transparency and
risk management on bank-related shadow banking products.
2. Closer monitoring with appropriate regulations
The authorities should monitor closer at country level of the institutions that provide
credit insurance or credit guarantee and also the non-bank lending businesses. They need
to be control under appropriate regulatory at the same time not killing the business model
itself. So that the finance sector can grow in effective way.

Reform Chinas shadow banking

Shadow banking in China is a big issue and growing rapidly in Chinese finance sector.
The problem in Chinas shadow banking sector are perceived to be manageable, however
it should be reformed. Most of the analysis, articles and report only focus on its risks,

which obviously do exist and are significant. In contrast, the benefits on society seem to
be greater. Thus, shadow banking should not be abolished; it should be reform to keep its
benefits and its importance. The right strategy is to find the best balance between its
benefits and risks.
We have provided some of the suggested strategies and key principals for reforming the
shadow banking in China.
The strategies:
Untighten the policy obligations for banks and constraints that are not about
safety.
Banks in China are intervened by the government, trough limits, and requirements. The
Banks that adopt the government policies are the Agricultural Development Bank of
China, China Development Bank, and Export and Import Bank of China. They are the
primary sorts when government provides credit. It is good having authorities provide
some guidance to banks to prevent them from risks. But in China, it seems like
authorities direct banks too much especially in credit system. The authorities should make
regulations that are not very tough for banks.
Clearly define the safety for the different financial institutions
Biggest underlying risk in China is implicit guarantees. They believe that there will be
another party bail them out even though there is no promises from guarantors. Central
bank is a last hope for institutions when theyre facing liquidity. However, will the PBOC
help the shadow bank? This is unclear. And leads to many problems. Authorities should
make clear which institutions are able for lender of Central banks and assistance. Also
they should clearly say that the Wealth management products that customers buy are
backed/ guarantee by Banks or not. If China doesnt clarify on guarantee it will still be
distortions. Institution will find riskier product to offer but virtually perceived as safe due
to believing in bailout.
Tighten the regulation of shadow banks and increase their transparency.

Banks have large volume of rules applicable to them, and also supervise them closely by
regulators and authorities. On the other side, many shadow banks operate with less
regulation and supervision. And many of them operate illegally Such as guarantee
companies that provide direct loans. This unfairness is huge. That makes businesses
move to do shadow banks. Currently, trust companies are forcing to have more capital
requirements and more supervision than in the past. But most of businesses in shadow
banking still operate in less regulatory.
To put an end to monetary policy overly depending on banks
Traditional Chinese policy disorder is being jeopardized by the role of banks based on its
controlling characteristics. Banks will most certainly be unable to get back their share of
finance thus The People's Bank of China (PBOC) is forced to use alternatives for
operating its monetary policy. As a result, like most developed economies this would
lead to an implementation of target interest rates. With the refinement of shadow banking
regulation, there are high chances in the implications for monetary policy. Finally, we
insist authorities to consider the interrelationships of monetary policy and regulatory
reform with no further recommendations to be suggested.
Focus on building the corporate bond markets and the institutional investor base
China promoting its corporate bond and other capital markets to diversifying funding
source. Bond markets dominated by successful investors are efficient method to allocate
credit to those large companies that able to issue bond in efficient volumes. Moving away
this business from banks forcing them to lend to SMEs if they want to continue to grow.
Focusing on cleaning up corporate governance and equity market
Improving in the operation and regulatory in both corporate government and equity
market will leads to create some benefits in shadow banking. Many businesses in China
operate in high debt leverage because it is hard to raise capital by equity market. The
higher in proportion of leverage makes it harder to borrow in good term and thus creates
higher risk for lenders. Moreover, there is problem with Chinese corporate governance. In
the organization, the owners always act and do business for their own interests rather than

the whole benefits for company. That might be conflict within an organization and create
higher risk to lender, thus makes the company more difficult to borrow in good credit
term.
Key principles to reform
1. Expand financial services to households, rural businesses and SMEs.
Small and Medium-Sized Enterprises (SMEs) always have a hard time getting bank
loans. This makes a huge demand for loans from shadow banking sector. The largest
banks, which is dominate the Chinese financial system also has a bias favor to lend to
SOEs or State-owned Enterprises. It is because implicit State guarantees; favored market
positions for some SOEs that make them better credit risks.
2. Diversify financial services provision beyond the current bank-centric model
Chinese finance sector still be leaded by banks, provide large majority of social credit.
We want a more diverse credit system and less relies on banks because:
Financial Stability Bank is a cyclical business it can has risk when there is economic
booms or recessions.
Competition High return in bank ROE in recent years means less competitiveness in
finance sector.
Efficiency Banks are favored by government policies. This reduces the efficiency,
innovations and discourages customer service.
Market-based choices Shadow banks are less ruled by government so that they are more
bureaucrats this is another reason to conserve shadow banking or even extend it.
3. Increase the efficiency of the financial sector
Encourage firms in financial sector to try to increase their performance and financial
services to customers to be greater than banks. That will encourage banks to boost up its
capability and efficiency because in order to survive in the businesses and gain
competitiveness, institutions including banks need to improve its efficiency.
4. Promote the wider financial reforms being introduced in China.

Nowadays, there are many Shadow Banking businesses in China. They are very effective
in bank activity. They can make many truncations by avoid restrictions. The shadow
banking can achieve the economic benefits. They can gain a lot of benefit and smooth to
implementation of financial activity. Therefore, China need to reduce the shadow
banking. The reason is reform undertaken to develop shadow banking do not conflict
with the larger reform the financial in China.
5. Increase systemic safety
Shadow banking has been seen as risky financial stability due to 1.Lower in standard than
banks 2.Implicit guarantees 3.Lack of transparency 4.Regulatory inconsistency 5.Lack of
integrated regulatory framework. An example is credit guarantee companies making
direct loans, which they are not allowed to exercise.
6. Increase consumer opportunity and safety.
Banks have limited to offer the service to customers. Bank cannot deliver the attractive
interest rate. On the other hand, the shadow bank have more potential to manage products
that have high yield. It is better that bank deposits. The shadow banks can support
customer by managing the loan with reasonable terms. Moreover, reforms also improve
consumer safety by ensuring that purchase of wealth management. They must understand
that the risk will attach.
7. Ensure that the PBOC exercises appropriate monetary policy
Monetary policy influence economic prices and activities, by changing credit condition
and interest rates. Monetary policies are increasing due to the more in credit providers
from both banks and non-banks financial institutions. There was a time when PBOC
allowed short-term inter-bank credit to rein the shadow bank. That make the rate went up
and higher that expected.

References:
http://www.oliverwyman.com/content/dam/oliverwyman/global/en/2015/feb/Bringing-Light-Upon-The-Shadow.pdf
http://www.brookings.edu/~/media/research/files/papers/2015/05/12-reformingshadow-banking-china/elliott--shadow-banking.pdf