Moreover, the Federal Reserve promotes financial stability through its supervision and regulation of financial institutions. A central tenet of the Federal Reserve's efforts in promoting financial stability is the adoption of an approach to supervision and regulation that, in addition to a traditional approach focused on the safety and soundness of individual institutions, accounts for the stability of the financial system as a whole. In particular, a supervisory approach accounting for financial stability concerns informs the supervision of systemically important financial institutions (SIFIs), including large bank holding companies, the U.S. operations of certain foreign banking organizations, and financial market utilities (FMUs). In addition, the Federal Reserve serves as a "consolidated supervisor" of nonbank financial companies designated by the FSOC as institutions whose distress or failure could pose a threat to the stability of the U.S. financial system as a whole (see "Financial Stability Oversight Council Activities" later in this section). Enhanced standards for the largest, most systemic firms promote the safety of the overall system and minimize the regulatory burden on smaller, less systemic institutions.
Some of these activities are also discussed elsewhere in this annual report. A broader set of economic and financial developments are discussed in section 2, "Monetary Policy and Economic Developments," with the discussion that follows concerning surveillance of economic and financial developments focused on financial stability. The full range of activities associated with supervision of SIFIs, designated nonbank companies, and designated FMUs is discussed in section 4, "Supervision and Regulation."
Vulnerabilities related to financial-sector leverage appear low, in part because of regulatory reforms enacted since the financial crisis. Core financial intermediaries, including large banks, insurance companies, and broker-dealers, appear well positioned to weather economic stress.
Overall, broker-dealer leverage remained low. Leverage for bank-affiliated dealers fell slightly in the latter part of the year and stayed at the relatively low levels reached in the post-crisis period. Measures of hedge fund leverage remained elevated compared with their post-crisis levels. The increased use of leverage by hedge funds exposes their counterparties to risk and raises the possibility that adverse shocks would result in forced asset sales that could exacerbate price declines. That said, hedge funds do not play the same central role in the financial system as banks or other institutions.
Vulnerabilities associated with funding risk continued to be modest in 2019, in part because of the post-crisis implementation of liquidity regulations for banks and the 2016 money market reforms.4 The stress that emerged in short-term funding markets in mid-September highlighted the potential for shocks that can adversely affect the smooth functioning of these large and systemically important markets. These developments led to a higher assessment of vulnerabilities stemming from liquidity and maturity transformation toward the end of the year, raising the level of vulnerability from low to moderate.
Banks, securities dealers, money market mutual funds (also referred to as money market funds, or MMFs), and other financial market participants lend to and borrow from each other for short periods, typically ranging from overnight to two weeks, against high-quality collateral. These short-term secured loans are known as repurchase agreements (repos). The repo market allows securities dealers to finance their own inventories of Treasury securities or to finance purchases of Treasury securities by levered investors, such as hedge funds. Interest rates on these and other short-term loans among financial institutions spiked in mid-September, and some rates remained relatively elevated through early October. The pressures in repo markets in this particular episode appeared to be driven by short-lived changes to demand and supply that occurred against a backdrop of increasing Treasury securities outstanding and declining reserves in the banking system. The Federal Reserve conducted a number of operations to keep the federal funds rate within the target range, relieving pressures in short-term funding markets.5 That said, these developments underscored frictions in the intermediation of credit in short-term money markets, warranting further careful monitoring of vulnerabilities in this segment going forward.
Nonbank designations guidance. On December 4, 2019, members of the FSOC voted to approve the final interpretive guidance on nonbank financial company determinations.6 The guidance describes the approach that the council intends to take in using an activities-based strategy. The key focus of the guidance is on the council working with relevant financial regulators to identify products, activities, or practices that could raise potential risks to financial stability and to address those risks, leveraging the expertise of primary financial regulatory agencies.
In the past year, the FSB has examined several issues, including monitoring of nonbank financial intermediation, challenges in correspondent banking, the emergence of so-called global stablecoins, transitioning away from the use of LIBOR (London interbank offered rate), asset management, fintech (emerging financial technologies), evaluating the effects of reforms, and development of effective resolution regimes for large financial institutions.
In terms of regulations, in 2012, the former CBRC issued Policy Document No.27 to support outstanding private enterprises to invest in banking and financial institutions. City commercial banks were one of the main targets. Table 1 reports reports the shareholding of large private shareholders before and after the introduction of the regulatory policy. The mean shareholding of large private shareholders increased from 6.9% to 8.2%, with the difference being significant at the 1% level. Thus, the policy seems to have been effective.
Industrial policies guide the flow of bank loans, realize the allocation of funds to key industries, and thereby promote the adjustment of the industrial structure. Enterprises that are selected and supported by industrial policies generally have high growth prospects. Thus, information that is otherwise difficult to obtain (such as enterprise growth capabilities) is transmitted to banks, which alleviates the information asymmetry between banks and enterprises [13, 14]. Further, government guidance and intervention can change the development prospects and investment behavior of enterprises. For instance, it can improve the total factor productivity of enterprises and the entire industry, which further enhances bank loan support for these industries [19, 42, 43]. In addition, companies can use the industrial policy support as a signal to banks, which is actually an invisible guarantee from the government. Furthermore, companies that receive policy support are usually encouraged and supervised by the government, which makes it easier for them to obtain bank loans [15, 16].
Table 3 reports the correlation matrix. The correlation coefficient between LPS and IndLoan was 0.247 and was highly significant. It shows that the increase in the shareholding of large private shareholders has increased bank lending to their industries. This preliminarily confirmed our Hypothesis 1.
Then, show why Chinese city commercial banks are interesting research setting. Why the case of Chinese city commercial banks is important for body of knowledge? How it suits the research context? How researchers from other countries can learn from the case of Chinese city commercial banks? Yes, the author can elaborate it with the existing paragraph 3.
In 4.3 Robustness check, we have retained Tables 16, 17, 18, and 19 from the original manuscript, which are now Tables 5, 6, 7, and 8, respectively. We did not retain Table 4 in the original manuscript, which reports the effect of China's banking regulatory policy on the impact of private large shareholders, because it is not relevant to the moderating effect of industrial policy in the Robustness test. This makes the article clearer as you emphasized.
Response 1 Your comments are very professional and important. At present, there are not many scholars studying the relationship between large shareholders and industrial loans of banks. This leads us to be unable to effectively summarize the mixed relationship. Fortunately, the relationship between large shareholders and the total scale of bank loans has received some attention. Therefore, we show the mixed findings between them.