Document Type : Research Paper
Authors
1 Assistant Professor, Department of Finance and Banking, Allameh Tabataba’i University, Tehran, Iran
2 Master of Economic Sciences, Allameh Tabatabai University, Tehran, Iran
Abstract
In recent decades, the functioning of financial markets and banks has undergone significant changes. Many institutions resembling traditional banks have emerged outside the regulatory framework of the central bank, a phenomenon known as shadow banking. Instead of engaging in the traditional activities of conventional banks, shadow banking employs a more diverse set of resources and instruments, lead to changes in economic risks and influencing economic policies in various countries. The present study aimed to examine shadow banking and its relationship with traditional banking from 2011 to 2021 in Iran. It relied on the modeling of money demand functions within a system of simultaneous equations along with the Minflex Laurent flexible functional form. Moreover, the BEKK–GARCH model was used to address heteroscedasticity. The findings indicate that shadow banking has grown at an increasing rate over the past decade. According to the Morishima elasticity of substitution, conventional banking and shadow banking alternated in replacing each other during the 2010s. Additionally, the results showed that the spillover effect of short-term deposit shocks and fixed-income funds on Islamic bonds was positively significant, while the effect of shocks from fixed-income funds on cash and short-term deposits was not significant.
1.Introduction
Since the early 1960s, a new phenomenon has emerged in the banking sector and has rapidly expanded, which involves the shift of intermediation from traditional banks to non-banks outside the supervision of the central bank (Buchak et al., 2018). These institutions, known as shadow banks, have grown rapidly in both developed and emerging countries over the past decades, playing a crucial role in the development of their monetary and financial markets (Łasak, 2015). However, shadow banking has also posed several challenges. Many financial experts attribute the recent global financial crisis to the complex structure of shadow banking, supported by a global consensus on the significant role of shadow banks in the 2007–2009 financial crisis (Pozsar et al., 2013; Lysandrou & Nesvetailova, 2014). Shadow banking presents both an opportunity and a challenge. While companies and households benefit from shadow banking as an alternative financial channel, maintaining financial stability in the market has become even more complex and challenging (Allen & Gu, 2020). In the present study, the term cash includes paper money, foreign currency, coins, traveler’s checks, and short-term deposits as liabilities of bank deposits. Fixed-income funds and commercial papers are considered the liabilities of shadow banks. The study is based on the hypothesis that substitutability or complementarity between bank services and shadow banks is a critical factor in the effectiveness of monetary policies. An explanatory framework was developed to examine whether the relationship between traditional banking services and shadow banking in Iran is complementary or substitutive.
2.Materials and Methods
To model the money demand function, the study used the Minflex Laurent flexible functional form within a dual approach encompassing both conventional and shadow banking, as well as demand systems proposed by Diewert (1974). Additionally, Barnett’s (2002) approach was employed to ensure the systematicity conditions of classical models, namely monotonicity, curvature, and positivity. The BEKK–GARCH model was used to address heteroscedasticity and estimate the model. MATLAB R2018b, Eviews11, and WinRATS10 were used estimate the theoretical models of the study.
3.Results and Discussion
The Morishima elasticity of substitution between different components of money demand showed that despite fluctuations in the level of elasticity, the elasticity of all components is less than one. Furthermore, since all elasticities are positive, the components act as substitutes for each other. Among the examined elasticities, the highest average substitution occurred with Islamic securities compared to changes in fixed-income funds, while the lowest substitution occurred with fixed-income funds compared to changes in cash. In addition, investigating the response to shocks in each component of money demand revealed several points. First, the reaction of assets to demand shock fluctuations was initially positive for cash, although for Islamic securities, this effect decreased after three periods or months. The reaction of cash fluctuations to cash shock was significantly greater and increased for all assets. Second, the reaction of each asset to short-term deposit shocks was positive but small, except for the case of cash in which it was slightly negative in the first and second periods. This reaction increased during subsequent periods in the case of short-term deposits themselves. Third, concerning the fixed-income fund shock, although it was negative in the first period, it became positive in subsequent periods. The shock related to Islamic bonds and short-term deposits maintained a stable positive trend, and shocks from fixed-income funds increased for three periods but had a decreasing but positive trend thereafter. Fourth, investigating the reaction of fluctuations to shocks in Islamic securities showed that-except for cash which had a positive increasing trend-the trend for the other three assets initially increased and then decreased.
4.Conclusion
The results indicate that the demand for shadow banking services has gradually increased in Iran, aligning with global economic trends and the advantages shadow banks offer over conventional banks. Although shadow banks in Iran are perceived as competitors to conventional banks, studies show that the limitations imposed by unilateral policies in Iran’s monetary market have led many shadow banking activities to be conducted by institutions related to conventional banking. In fact, utilizing shadow banking capacities has helped establish stability in Iran’s conventional banking system. This finding aligns with the results of the Financial Stability Board (2013) and the related studies (Liu & Xie, 2020; Moshirian, 2014). According to these studies, many shadow banking services by conventional banks are carried out to bypass central bank regulations. Moreover, the findings of the present study on the substitution between conventional and shadow banking are consistent with the findings of Serletis and Zhou (2019), as contrasted to Lin and Li (2017), Górnicka (2016), and Noeth and Sengupta (2011), who view conventional and shadow banking as two complementary systems.
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