The Value Choice for Legal Regulation of Financial Risks in Shadow Banking

Liao Jingyi＊

Sichuan Academy of Social Sciences

Abstract: It is of vital importance for shadow banking supervision to have correct targets for the curtailment of financial risks. In fact, the process of selecting legal regulation targets for shadow banking financial risks is equivalent to a process of achieving specific goals or objectives by means of legal regulation. The establishment of a regulatory system for shadow banking should consider the objective and practical needs of the sector, prioritize security as the desired value, and reasonably establish a value system for risk control.

Keywords: shadow banking, financial risk, development of security, value choice

Encompassing various financial intermediary services outside of the conventional banking system, shadow banking usually adopts nonbank financial institutions as a vehicle to transform risk factors such as credit,liquidity, and maturity of financial assets, and in so doing plays the role of a “quasi-bank” (2020). As it has yet to be subject to the current regulatory system, it breeds a considerable number of financial risks. As a result, it was deemed an important economic driver during the 2008 financial crisis. As legal provisions are created for a variety of regulatory objectives, it is hardly possible for the law to ignore shadow banking as it seeks to mitigate financial risks and promote the sound and stable development of financial markets. To regulate the financial risks of shadow banking, it is necessary first to clarify the objectives. In other words, what legal decisions to make regarding risk control could weigh heavily on the theoretical research and system construction of financial risk control.

The Realistic Objectives of Risk Control by Law

In the field of finance, legal control revolves around the values of security, efficiency, freedom,and fairness for conventional banks and shadow banks alike. However, our current legal system for financial regulation does not fully consider the objectives and practical needs of shadow banking, as the existing mechanism was established by the state based on intensive intervention in formal finance,and as such does not cover shadow banking. Its objectives of legal regulation and system design are insufficient for it to directly exert effective control over the financial risks of shadow banking.Therefore, a value system recoupment must be pursued under the guidance of legal control objectives for sound legal control of shadow banking.

The legal regulation objectives are directly related to the main contradictions and fundamental problems facing us today. It was proposed during the 19th National Congress that socialism with Chinese characteristics has entered a new era. The principal social contradiction is the contradiction between “unbalanced and inadequate development and the people’s ever-growing needs for a better life.” The fundamental problem of shadow banking is that it stays isolated from the regulatory system,and this isolation generates considerable risks. Therefore, the legal regulation objectives must address the above-mentioned main contradictions and fundamental problems if the developing regulatory system is to be effective.

Legal Control Objectives: the Logical Perspective

In order to determine the objectives of legal regulations for shadow banking financial risks, we should pay more attention to the fundamental problems and basic contradictions to be solved by the legal system. Consideration should also be given to the functions or methods of regulations required to mitigate the fundamental problems and basic contradictions. It will be necessary to be problemoriented in setting legal regulation objectives through in-depth reflection on why shadow banking financial risks require legal restraint. Only in this way can we effectively solve the main contradictions and fundamental problems and realize the value system pursuit of shadow banking in terms of efficiency and equitableness. It could be said that the legal regulation of shadow banking financial risks is equivalent to the legal adjustment of specific social relations, which counts as a process of pursuing the sound and coordinated development of the financial markets by giving a balanced view to distinct values, preventing the failure of the financial markets, and promoting a stable economic growth. Legal regulation could be classified from horizontal and vertical perspectives into a set of dual objectives.

Horizontally speaking, the objectives of legal regulation fall into two areas, i.e., economic and social. These are the two fundamental perspectives from which legal regulation could exert control.The economic objective refers to aspects within the economy in which the law can directly exercise its effect. The social objective refers to aspects within the social realm that are indirectly affected by legal intent. There is a certain degree of overlap between the two objectives. Hence they remain interdependent and affect each other. Therefore, such a “dual nature” should also be considered in determining the legal regulation objectives to reflect the innate connection between them before the unity of economic and social objectives is achieved.

Vertically speaking, the dual objectives of legal regulation can also be divided into two areas,namely the basic and the ultimate. The basic objective requires that the behavior of market entities be well regulated, adjusted to specific economic relationships, and the legitimate rights and interests of various market participants be well protected. The ultimate objective refers to the resolution of conflicts and contradictions between personal interests and social interests after the basic objective has been achieved, thereby promoting stable economic growth and sound social development. The realization of the basic objective of legal regulation is only a prerequisite for achieving the ultimate goal, which is the supreme goal pursued by the law. Therefore, the law should aim at an effective unity of the basic and the ultimate objectives.

As can be seen, when the dual objectives of legal regulation are divided into the economic and the social, the economic element is more directly related to market participants. When they are divided into the basic and the ultimate, the basic serves as the fundamental objective.

This basic setup of the above-mentioned legal regulation objectives can also reflect the value contained in the law. Specifically, the adjustment of social relations reflects the utility value of the law; and the resolution of the contradiction between personal interests and social interests reflects the purpose and value of the law. The legal regulation objectives of risks should be linked to the basic problems to be solved by the law, and basic contradictions should be resolved by coping with these basic problems, wherein the value of the law also lies. Therefore, it is necessary for these issues to be reflected in the objectives of legal regulation.

The Specific Forms of Legal Regulation Objectives

The previous section has presented an overview of the dual objectives of legal regulation. Further clarification of these objectives is still needed if the financial risks of shadow banking are to be controlled legally. It can be pointed out that the government and financial institutions are both willing to see measures being taken to control risks. On the part of the administration, only by following the effective control of market risks can the stable development of the financial markets be maintained.For financial institutions, risk control means reducing losses and obtaining greater benefits. The best possible strategy is first to prioritize control over risks that have been anticipated, since unknown risks are more difficult to estimate and more difficult to control.

Regulation of the financial risks of shadow banking serves the need to reduce wasteful use of resources, save the cost for the financial markets and will safeguard public interests at the same time. The adoption of legal measures to reduce the financial risks of shadow banking to a minimum constitutes an issue of social governance concepts and that of the application of laws. Generally speaking, legal regulations pursue the following specific objectives:

To resolve the problem of financial market failures.

General economic principles believe that the market, as an “invisible hand,” plays an irreplaceable role in optimizing resource allocation, improving economic efficiency, and maximizing interests. However, the market is not free from defects such as a tendency towards volatility and recklessness, which could lead to chaos. These shortcomings and their consequences, taken to a certain extent, lead to “market failures,” which are not unseen in the field of shadow banking.Therefore, it is indispensable to regulate shadow banking by law to exert control over its financial risks.

On the one hand, the financial market failures caused by risks inherent in shadow banking dictate the need for legal regulation. Compared with other industries, the financial sector is more prone to market failures due to its high risks and dependence on external factors, among others,and the harmful consequences of such failures are more serious. Specifically, imperfect legislation or inadequate internal risk control for shadow banking could lead to speculation and chaos in the shadow banking markets, which could ultimately lead to market turmoil and even failures. Therefore,it is of great significance to intervene in the shadow banking industry and regulate its financial risks to cope with the forgoing problems, maintain the stability and orderly development of the financial markets, protect the interests of investors and other participants in the shadow banking market, and safeguard overall social interests. On the other hand, shadow banking as an innovation in the financial field exhibits a dynamic relationship with legal regulations rather than a static one of one-way control,with legal regulation. Such a dynamic relationship not only drives the in-depth development of shadow banking but also forces us to face and mitigate the risks of shadow banking and the failure of financial markets from different perspectives.

To solve the problem of irrational behaviors of market participants.

In the wake of the financial crisis in the 1930s, Keynesianism came to the fore as the dominant school of economic thought in the Western world, spurring the development trend of the entire world. As the commodity exchange market gradually transmuted to an emerging capital market,financial capital joined with commercial capital to form a new financial oligarch. New businesses such as securities, insurance, trusts, futures, together with the traditional banking sector, gave rise to large-scale capital operations which to a certain extent surpassed the needs of the physical economy, i.e., industry and commerce, before evolving into a means of capital appreciation. The high risks of capital speculation inevitably led to instability in the physical commercial market.Additionally, the capital markets have continued to pursue financial innovations in order to meet the needs of profit-seeking investors, and a large number of sophisticated, complex shadow banks have come into being, which bred further instability in the market (He & Wei, 2007, pp. 587-589).The legislature must tolerate innovation to meet actual demands, while the norms of private laws,which support and direct the “invisible hand” as a guiding concept, are gradually failing in the face of innovations. In pursuit of substantive fairness, the legislature needs to contain the oligarchs and support more vulnerable groups. The public power of the state, therefore, should intervene in private law relations that were originally on an equal footing with it to guide and regulate these legal relations. Thus, a tendency has developed for public power to directly intervene in commercial relations.

The behaviors of participants in the shadow banking market are susceptible to various internal and external factors, prone to recklessness and likely to deviate from rationality; therefore, their acts need to be constrained by shadow banking regulations. Legal provisions could be adopted to control the financial risks of shadow banking and guide the behavior of participants by limiting them to an appropriate and rational range. The legislation will assume a set of collective action plans to effectively prevent irrational behavior and promote the sound operation of the market.

To solve the problem of interest group transfers and rent-seeking.

The interest group theory was formed after the 1970s amidst the questioning of government regulation in finance. The interest group theory emphasizes the actual effect of government regulation and believes that “financial regulation pursues the maximization of its own interests far more than the protection of public interests” (Yang, 2014, p. 20). According to rent-seeking theory, rent-seeking,a phenomenon in financial regulating, will likely cause wasteful use of social resources and lead to unfair market operations.

The above two theories both contradict or question the effectiveness of financial regulation. As has been noted above, nevertheless, there is a dynamic and ever-evolving relationship between financial innovation and financial regulation. Shadow banking has emerged amid the rapid development and evolution of the global financial market since the 1980s. Meanwhile, theoretical research on financial regulation has also become more sophisticated, as it no longer focuses on phased and fragmented studies, but gives more consideration to the overall landscape and dynamic nature of the industry, and pays more attention to self-adaption to new trends in the industry. The regulation of financial risks in shadow banking is carried out precisely in this dynamic process, focusing not only on the exploration and updating of regulatory concepts, but also on the innovation of regulatory policies and methods. In such a process of dialectical unification, legislation will fully harness its role and exert its influence in relation to shadow banking financial risks.

The Value System of the Legal Regulation of Risks

The target value of legal regulation can be considered from two perspectives. First, there is the intrinsic value of a legal regulation, namely, the intrinsic function of a legal regulation itself, which reflects the utility or value of the legislation. As this perspective mainly considers the inherent institutional function of the law, this is also known as intrinsic value or instrumental value. The other aspect concerns the external value of legal regulation, namely, the value that the public or researchers hope to achieve or expect from the legal regulation. This consists of the evaluation,judgment, or expectation of the actual functions of legal regulation. Since this is a type of evaluation which involves many subjective factors, such as cognitive competency and the legal awareness of external subjects, it is also known as subjective value or purpose value. In fact, people will make their judgments on whether legal regulation can meet their needs and the extent to which their needs can be satisfied. Therefore, the external value of legal regulation also bears directly upon the judgments on its subjective value.

The Intrinsic Value of Legal Regulation

The intrinsic value of legal regulation consists lies within its actual function. From the perspective of integration of the internal and the external, the inherent value of legal regulation can be interpreted as the institutional function of the legislation. The inherent value of general legal regulation is implicitly contained in its standard and is reflected in the practical application of the legislation. It is generally believed that the function of law is to resolve disputes, fulfill justice, and exercise social control (Friedman, 1994, pp. 19-21). These are also the basic functions of the law. The legal regulation of the financial risks inherent in shadow banking plays an important role in macro-control and microintervention in the financial field, and the functions thereof are also in line with the basic functions of the legislation in general.

According to the principle of the legal function, the functions mentioned above are usually summarized as the normative function and protective function of the law. The legal regulation of the financial risks in shadow banking necessitates the further clarification and specification of these functions in terms of objectives and adjustment methods. Since legal regulation is adjusted from the perspective of normative function and protective function, it plays an important role in regulating supervision and supervisory behavior to ensure the effective implementation of macrocontrol and market supervision. Specifically, the normative function is embodied in regulating the behaviors of the state or market entities and the protective function in the balanced protection of the interests of market participants. The effective implementation of legislation will help achieve macroeconomic goals, maintain microeconomic order in the market, ensure fair and effective competition, give equal weight to efficiency and well-being, and resolve market failures.

Thus, the direct effect of legal regulation lies in adjusting the relationship between macroeconomic regulation and market regulation, adjusting governmental supervisory behaviors, safeguarding the state’s macroeconomic regulation and market regulation through legislation and protecting market participants’ legitimate interests. The intrinsic value of legal regulation is reflected in the effects mentioned above.

In short, the function of legal regulation is mainly to standardize regulatory behavior and ensure effective adjustment. At the same time, mechanisms or standards that contain many macro-control or market adjustment methods can be adopted for macro purposes. Legislation is an instrument for various market participants to safeguard their rights and interests in macroeconomic policies and market supervision, and the above-mentioned systemic functions of legal regulation are represented in the intrinsic value created by the legal regulations. Whether it is the normative function, protective function, or a corresponding adjustment function, it will facilitate or guarantee efficiency and fairness, in addition to establishing order. Efficiency, fairness, and order are the universal pursuits of various stakeholders. The realization of the functions of legal regulation and the value pursuits of different stakeholders, including people’s expectations, judgments, and confirmations of the value of legal regulation, all contribute to the perceived external value of the regulations.

The External Value of Legal Regulation

The external value of legal regulation consists of a stakeholder’s expectation, perception, feedback,and subjective judgment or value tracking formed in the operation of the functions of legal regulation.Does legal regulation have a positive effect? What function should it exert? The value judgments of different stakeholders may differ when they consider these issues. Therefore, the external value of legal regulation can be subjective.

According to the analysis of the functions of legal regulation, regulatory acts will directly affect the allocation of financial market resources, as well as economic and social stability. Stability in the financial markets is an important goal that all countries are actively pursuing. To achieve stability,some important influencing factors, such as efficiency, fairness, and order, should be considered. Only with compliance to the requirements of efficiency, fairness, and order will it be possible to achieve the goals mentioned above. Therefore, these concepts have become important evaluation criteria for the legal regulation functions and have come to define the merits of legal regulations as expected and pursued by stakeholders.

In fact, efficiency, fairness, and order have become the measures of legal value evaluations,defined to a certain extent as universal human values. When a particular type of law or legal system is able to accommodate multiple value propositions, efficiency, fairness, and order tend to be upheld.Because shadow banking involves the allocation of market resources, economic and social stability,and conflicts of interest among market participants, the efficacy of legal regulation resides in satisfying the corresponding objectives of efficiency, fairness, and order. Although realizing these value objectives requires a combination of institutional and non-institutional factors, legal regulation does play the most essential role in solving these problems. Therefore, it is possible for regulations to exert control through macro-adjustments and market supervision to ensure their efficiency and fairness in micro- and macro-economic operations. As this is conducive to meeting people’s needs for efficiency, fairness, and order, it is necessary for legislation to embody the value of efficiency,fairness, and order.

Efficiency, fairness, and order, as the general values to be pursued in legal regulation, represent the value of external subjective evaluation. There are also close connections between different values.For example, fairness helps to create order, and order is usually more efficient; fairness based on efficiency is fairness to a higher degree. Efficiency and fairness are sometimes contradictory but sometimes compatible; efficiency and fairness are more important values to be analyzed, individually and in combination. The fundamental contradiction that legal regulation needs to resolve is that between personal interests and social interests. It is the basic value pursued by legal regulation to solve these contradictions and effectively strike a balance between efficiency and fairness, as this is also an important basis for establishing the purpose of legal regulation. Determining the external value helps to clarify the objectives that people seek to achieve through legal regulation and to evaluate its operational effectiveness.

The internal value and external value of legal regulation constitute the “dual structure” of its value system. The two values are correspondent with each other. Intrinsic value represents the value pursued as an objective of legal regulation and is based on the objectivity and utility of value. Extrinsic value is subjective and is based on the externality and subjectivity of the general value theory. The two types of values are distinguished based on different cognitive perspectives and classification standards. In the value system of legal regulation, both are indispensable parts that constitute a regulatory value system of different aspects and levels.

In this value system, internal and external values are at different levels, with internal values at a relatively basic level and external values, although based on the internal value level, are higher. In addition, the “dual structure” of the value system also shows that the dual values should be considered as a system, and one cannot be stressed alone over the other.

To Establish a Value Hierarchy that Puts Security First

The above-mentioned legal regulation objectives are independent yet also interdependent with the values. Order and security are more oriented toward the overall interests of society, while freedom,efficiency, and fairness pay more attention to the interests of individuals or groups. The realization of freedom, efficiency, and fairness is conducive to achieving order and security, and the realization of order and security also guarantees the further deepening of freedom, efficiency, and fairness. They are unified in the value system of the objectives of law. However, conflicts also occur between these values, arising not only amongst individuals and within communities, but also between individuals and communities, which creates a value hierarchy. Therefore, it is necessary to weigh the various interests in specific scenarios to harmonize the value of each objective.

One of the characteristics of shadow banking is that it is outside the legal regulation system. As a result, the financial risks of shadow banking cannot be identified in time and to be avoided, which ultimately damages the entire financial environment. At present, the shadow banking ecosystem is unbalanced relative to the overall financial environment; yet, the ecological environment of finance is closely linked to financial security. Only in a good financial ecosystem can financial security be achieved to the greatest extent possible. Conversely, the lopsidedness of the financial ecosystem will undermine financial security and leave the financial market in a chaotic and unstable state. Therefore,we must pay attention to the construction and maintenance of balance in the financial ecosystem,aim for financial ecological balance, actively grasp the trend and path of financial development,and clarify the value system of legal regulation to take timely measures to promote the security and stability of the overall financial marketplace.

Financial Security as the Primary Value

Financial security comprises different contents when considered in different ranges. From the perspective of internal national security, financial security includes macro-financial security, mesofinancial security, and micro-financial security. Macro-financial security mainly involves the security of a state as a whole; meso-financial security refers to the local financial security of a specific area;and micro-financial security, which has the closest relationship with market participants, mainly refers to the financial security of individual financial institutions and financial market participants. From the perspective of a sovereign state, “Financial security under the background of financial globalization signifies the autonomy and stability of domestic financial development” (Zhang, 2003), which also represents a country’s overall competitiveness in the international financial community and its ability to resist international financial risks and crises.

Although the financial risks in China’s shadow banking have not grown to the point of causing a financial crisis, the mounting scale of the sector will inevitably lead to strong market demands for security. For a country as a whole, financial security means the ability to withstand various financial risks and crises at home and abroad to ensure the security of the entire financial system,which will ultimately guarantee economic security and the stable operation and security of the entire society.

Judging from its financial practices, China’s financial system and institutions still have room for improvement because the financial risk identification and prevention system is not yet complete. Based on China’s current status of financial development, therefore, security is the value to be prioritized as an objective. Our legal regulation of financial risks in shadow banking must first focus on the realization of financial security. As for stability in financial order, the realization of financial freedom, efficient financial operations, and the construction of a fair financial environment will all be achieved under the premise that financial security will be fully guaranteed. The legal regulation of the financial risks of shadow banking is a guaranteeing mechanism to maintain the security, order, fairness, and development of the shadow banking market. In order to improve the efficacy of legal regulations, it is necessary to focus on the trend of new developments in shadow banking and pursue self-adjustment and improvement on the basis of the overall financial environment.

Giving priority to financial security as an objective means that it is necessary to have an accurate understanding of the concept of financial security. Financial security does not mean that there are no risks or potential threats to financial security in the financial market; this is because financial risks, universal and extensive, objectively exist. No matter how perfect the law is, it can hardly rein in all financial risks. Financial security means that risks or threats are limited within a controllable range by the law, especially when the current legislation is able to effectively identify, prevent, and manage risks to safeguard the relative security and stability of the overall financial environment.Admittedly, financial security is a concept and state subject to development and change. The law must keep abreast of the times, respond to innovations and developments in the financial sector quickly,optimize its system and structure, and take corresponding measures to deal with different levels of risks effectively.

Guarantee Freedom with Order

Freedom and risk, like the two sides of a coin, accompany, support, and contradict each other. It is commonly believed that the liberty of one person may be accompanied by prospective gain or loss to a correlative person (Commons, 2010, p. 75), which explains why freedom also breeds risks. Risk is objective in the context of financial freedom, which also means a crisis is potential. Freedom leads to externalities, and it is precisely because of market failures that state intervention is necessary. If the market is compared to the human body, assuming the market regulation mechanism to be an immune system, then government intervention is an antibiotic therapy for diseases. It is critical to rely on one’s own immunity to fight diseases; however, the market cannot recover when risks increase if there is no external intervention. It is to be conceded that excessive government intervention is like the overuse of antibiotics, and although it may suppress the disease for a short span of time, it often comes at the expense of the patient’s immunity. Development means an expansion of freedom; in pursuing freedom as an ultimate value, one does not give up because of risks and crises. The expansion of freedom must always be accompanied by risks. Freedom itself is not to be faulted; if the pursuit of freedom leads to bad results,then we can only say that it is the means, method, or approach of gaining freedom that is in the wrong.Freedom is the highest value of human society, and in order to achieve this goal, we should formulate laws and establish systems around the nexus of this value (Ma, 2020).

Financial freedom ensures lasting growth and prosperity in the financial market. Under the system of a socialist market economy, the rational use of market resources and the continuous development of the social economy will be promoted only when market entities are able to operate freely and compete freely and when market resources are allocated in unfettered flows between various sectors of production. One of the purposes of the legal regulation of financial risks in shadow banking is to maintain order in the financial market to ensure the realization of freedom by means of order. It is not the aim of financial supervision to restrict or interfere with freedom. On the contrary, financial supervision is to intervene and restrict certain financial activities in order to achieve financial freedom. Financial freedom is not simply equivalent to freedom of a certain individual or that of a certain group, but financial freedom for the macroeconomy. Two aspects are included therein: On the one hand, the behavior of financial market entities must be appropriately restrained and restricted. On the other hand, the government’s control of financial activities is also to be put under restriction.

The outbreak of the subprime mortgage crisis had a lot to do with ineffective financial market supervision. The lesson from this is to strengthen and improve financial market supervision and legal regulation of shadow banking financial risks. China’s economic system is a socialist market economy, which implies the coexistence of freedom and supervision. On the one hand, the government encourages market entities to operate and compete freely in order to maximize the use of market resources and increase social wealth. On the other hand, however, free competition should not be unconstrained, otherwise, its drawbacks could lead to irreparable losses. This speaks to the conflict and contradiction between freedom and order, but the two are not stuck in an antagonistic relationship, but one of a unified dichotomy, which means that they can coordinate and coexist under certain conditions. That would require the government to make trade-offs and appropriately implement prudent fiscal, monetary, and financial and industrial policies to maintain financial order for the realization of financial freedom.

Generally speaking, the government should stick to the concept of financial order. Under the guidance of this concept, the focus should be laid on the overall interests of society; ability should be strengthened to prevent financial risks in advance, the system of governance over and response to financial risks should be improved during and after the event, and a complete legal regulation mechanism for shadow banking financial risks should be established. This will not only fully guarantee the freedom of financial activities for financial market entities, encourage financial innovation, but also effectively supervise the operational order in the financial market. When the “two hands” of regulation and market behaviors are duly leveraged, the healthy and orderly development of the financial market can be realized.

Promote Development with Efficiency

The healthy development of the market requires an established legal system to allocate power,rights, and obligations. The definition of rights, in turn, depends on the establishment of the legal system. Shadow banking in China is yet to be subjected to legal regulation, which has affected the efficiency of the financial system at large. Therefore, as regards the control of financial risks in shadow banking markets, attention should be paid to improving the operational efficiency of the financial system, formulating explicit legal provisions, and efficiently allocating rights and obligations.

Legal regulation is essential to the sound and orderly operation of financial activities, but if the efficiency of legal regulation itself is lackluster, the legislation will not be able to play its role to the full. Therefore, improvement in the efficiency of legal regulation should be the objective of deepening financial reform. In practice, however, legal regulation of the formal financial system is relatively high at present, and the allocation of financial resources is biased, resulting in the inefficient operation of the formal financial system. On the one hand, some of the financial resources are frittered away. On the other hand, market players such as farmers and small- and medium-sized enterprises (SMEs) lack access to financial resources. The concept of the value of legal regulation needs to be reformed in addition to innovations in the concept of the value of China’s legal system itself.

The inherent endogeneity of shadow banking dictates that even if it is granted legal status by legislation, it is impossible for sovereign agencies to adopt the same regulatory mode and measures as those for conventional banks. It is necessary to give full play to the role of shadow banking’s selfregulatory supervision, distinguish between deposit-absorbing financial activities and non-deposittaking activities, and implement differentiated supervision accordingly. Prudential supervision is necessary for deposit-absorbing financial organizations and activities, while non-prudential supervision is required for non-deposit-absorbing financial activities. The access conditions,exit conditions, and specific operating standards of the two should be treated differently. The establishment of this mode of combining self-regulation and government supervision, as well as the implementation of differentiated regulatory measures, will not only reduce the wasteful consumption of resources, but will also improve the efficiency of financial operations.

To guide the sound and standardized operation of shadow banking through laws is equivalent to improving the efficiency of financial resource allocation and reducing the financial risks of shadow banking. The private governance mechanism that respects the endogenous nature of shadow banking fully embodies the economic efficiency principle of the resource consumption while making maximum welfare. Admittedly, the legal system, when embodying solely the principle of efficiency,cannot be a just law by itself (Rawl, 1988, p. 67). Efficiency must be combined with other values, such as equality, welfare, freedom, etc. Justice is only fulfilled with a combination of these values.

In conclusion, the pursuit of the objectives of legal values by humankind is diversified, and there will inevitably be conflicts between diversified values. Take fairness and efficiency as an example.When stress is being put on fairness, efficiency may not be realized to the greatest extent. Conversely,when efficiency is unduly emphasized, fairness may not be fulfilled, at least not in the full sense of fairness. Another example is security and efficiency. On the one hand, security is the prerequisite and basis for achieving efficiency; this is because in a relatively secure environment, the realization of efficiency will face less resistance and fewer obstacles, and there will be greater certainty for its achievement. On the other hand, efficiency also drives the realization of security. With efficiency being guaranteed, the realization of security is more certain and consistent. When efficiency is low,the realization of security will be uncertain and unclear. In the legal regulation of the financial risks of shadow banking, security should be the primary value, freedom should be ensured by means of order,and efficiency should be pursued to promote growth. A legal system only adapts to new developments in modern society when it fully considers each legal value and chooses the value hierarchy according to the objectives of legal regulation objectives, and it is such a system that is fully able to harness its effectiveness to promote the development and prosperity of a modern economy and its financial markets.