The role of shadow banking regulation in bank liquidity creation: evidence from China’s new asset management regulation

This study examines how China’s New Asset Management Regulation (NAMR) affected bank liquidity creation between 2013 and 2022 using panel data on 42 listed Chinese banks. We find that the NAMR led to a significant decline in on-balance-sheet liquidity creation, while off-balance-sheet liquidity creation remained unaffected. The regulation tightened banks’ funding conditions, which is associated with lower profitability and higher risk exposure, thereby potentially constraining banks’ capacity to create liquidity. These effects are more pronounced among non-state-owned banks, small banks, banks with higher pre-policy funding costs and greater reliance on interbank business, and in regions with weaker pre-policy regulatory enforcement and more developed microfinance sectors. By identifying the spillover effects of off-balance-sheet regulation on banks’ core on-balance-sheet functions, this study contributes to the literature on shadow banking regulation and liquidity creation and provides new insights into how regulatory reforms reshape financial intermediation in emerging markets.