How Does Shadow Bank Affect Bank Ranking in China?

Chung-Hua Shen, Meng-Wen Wu, Ting-Hsuan Chen and Jiahua Wang

Emerging Markets Finance and Trade, 2020, vol. 56, issue 3, 641-658

Abstract: This study analyzes the safety and soundness of the Chinese banking system based on capital adequacy, asset quality, management, earnings, liquidity, and growth (CAMELG). In particular, we investigate how the Chinese style of shadow banking system (referred here as “bank shadow”) affects bank rankings. The Chinese style of shadow bank refers to banks that engage in unregulated credit activities that differ considerably from shadow banks that are activities created by non-bank financial institutions. The Chinese style of shadow bank transforms risky corporate loans into interbank lending. Therefore, risky weight assets are underestimated, thereby resulting in bias of the observed high capital and liquidity measures. Moreover, the weights of the capital and liquidity measures are distorted. Hence, the CAMELG-based ranking is incorrect. Bank regulators and shareholders should incorporate the effect of shadow bank into observed financial ratios in assessing the safety and soundness of the banking system.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:56:y:2020:i:3:p:641-658

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DOI: 10.1080/1540496X.2018.1530654

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