Effects of Shadow Banking on Return — Empirical Study Based on Chinese Commercial Banks

Abstract

We study the effect of shadow banking, proxied by the share of net fees and commissions income to total revenue on the return and risk-adjusted return of Chinese commercial banks. We find that as banks tilt their product away from traditional lending business and toward fee-based business, or shadow banking business, its level of earning increase. In addition, the relation of shadow banking business and the risk-adjusted return, denoted by sharp ratio, is positive. Besides, we also discover that the variables we select, such as shadow banking ratio, capital adequacy ratio has more crucial impacts on risk-adjusted return than on ROAA. Together, our empirical evidence is broadly consistent with the notion that shadow banking is associated with higher return and risk of commercial banks.