Nonlinear effects of shadow banking on banks' systemic risk

By employing a Panel Smooth Transition Regression (PSTR) model, we investigate the nonlinear effects of shadow banking on systemic risk for Chinese listed banks, and explore the transmission mechanisms. Our findings indicate that: (1) banks involved in shadow banking can not only increase bank-specific tail risk but also enhance systemic linkage, thereby contributing to an increase in systemic risk. (2) Shadow banking exhibits nonlinear dynamic effects on banks' systemic risk, contingent upon capital and liquidity. Specifically, shadow banking is positively related with bank-specific tail risk and systemic risk in the “low-capital” and “low-liquidity” regimes, while positively associated with systemic linkage of banks in the “high-capital” and “high-liquidity” regimes. (3) The nonlinear effects of shadow banking on systemic risk of government-linked banks differ from those of non-government-linked banks. (4) The nonlinear effects of shadow banking on banks' systemic risk can be affected by monetary policy. These findings provide valuable guidance for enhancing the monitoring of shadow banking and implementing differentiated macro- and micro- prudential regulation as well as monetary policy.