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Shadow banking and non-performing loans: international evidence

Mugabil Isayev (School of Business, ADA University, Baku, Azerbaijan)
Omar Farooq (School of Business, ADA University, Baku, Azerbaijan)

Journal of Financial Regulation and Compliance

ISSN: 1358-1988

Article publication date: 4 January 2024

Issue publication date: 3 April 2024

55

Abstract

Purpose

This paper aims to document the impact of shadow banking on non-performing loans (NPLs) of publicly listed banks in an international setting.

Design/methodology/approach

This paper uses the data from 27 countries and various estimation strategies to test the arguments presented in this paper. The sample covers the period between 2002 and 2020.

Findings

The empirical results suggest that banks headquartered in countries with high shadow banking activity have fewer NPLs than otherwise similar banks headquartered in countries with low shadow banking activity. The findings remain qualitatively the same in different sub-samples and after replacing the main variables with their alternate proxies. The paper also shows that this relationship is sensitive to bank-specific characteristics. Moreover, the paper also indicates that the stringency of banking regulations weakens the relationship between shadow banking and NPLs.

Research limitations/implications

The study’s data limitations prevent a detailed year-by-year analysis of NPLs and shadow banking, restricting insights into their evolving dynamics. In addition, the focus on country-level shadow banking data limits the exploration of how multinational banks’ activities in various jurisdictions impact individual banks’ NPLs.

Originality/value

The paper not only documents the effect of shadow banking on NPLs but also shows that the relationship between shadow banking and NPLs weakens as banking regulations become more stringent.

Keywords

Citation

Isayev, M. and Farooq, O. (2024), "Shadow banking and non-performing loans: international evidence", Journal of Financial Regulation and Compliance, Vol. 32 No. 2, pp. 168-183. https://doi.org/10.1108/JFRC-07-2023-0105

Publisher

:

Emerald Publishing Limited

Copyright © 2023, Emerald Publishing Limited

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