Prague Economic Papers 2020, 29(1):3-28 | DOI: 10.18267/j.pep.710

Placing the Czech Shadow Banking Sector under the Light

Martin Hodulaa, Martin Macháčeka, Aleš Meleckýa
a VSB - Technical University of Ostrava, Ostrava, Czech Republic

The size of the shadow banking sector (SBS) has more than doubled in the Czech Republic over the last decade. This places a potential burden on policy makers. On the one hand, the SBS complements regular banking by expanding access to credit and investments, enabling better risk sharing and maturity transformation, and sup-porting market liquidity. On the other hand, SBS activities can put the stability of the financial system at risk and amplify its procyclicality by exacerbating the build-up of leverage and asset price bubbles. We implement a FAVAR model of the Czech economy to determine the impact of macroeconomic factors on the SBS. We find that the SBS: (i) is sensitive to changes in market interest rates and term spread; (ii) exhibits great procyclicality; (iii) can act as a complement to regular banking and satisfy some additional demand for credit. We also define some potential risks of continued growth of the SBS, linked to our empirical evidence.

Keywords: shadow banking, credit intermediation, Czech Republic, FAVAR
JEL classification: E44, G21, G28

Received: December 14, 2017; Accepted: September 21, 2018; Prepublished online: September 24, 2019; Published: February 25, 2020  Show citation

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Hodula, M., Macháček, M., & Melecký, A. (2020). Placing the Czech Shadow Banking Sector under the Light. Prague Economic Papers, 29(1), 3-28. doi: 10.18267/j.pep.710
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