Shadow Banking and Bank Stability: Fresh Evidence from A Cross-Country Analysis

This study examines the impact of shadow banking on bank stability using a sample of 41 countries from 2004 to 2021. The findings show that shadow banking is negatively associated with bank stability. However, a U-shaped relationship between shadow banking and bank stability implies that shadow banking is positively related to bank stability in the long term. The results also emphasize that institutional quality and bank capital regulation, individually, may hardly affect the relationship between shadow banking and bank stability. Furthermore, this study found that institutional quality and Basel capital regulation may jointly reduce the negative effect of shadow banking on bank stability. Therefore, these policies should be considered simultaneously in light of the rapid growth of shadow banking. Empirical findings are robust across different regression techniques and settings.