Competitions in Different Banking Markets and Shadow Banking : Evidence from China

This study contributes to the empirical literature by being the first piece of research investigating the inter-relationships between competitions in different banking markets (deposit market, loan market and non-interest income market) and shadow banking using a sample of data from the Chinese banking industry over the period 2003-2013. In addition, the current study fills in the gap of the empirical literature by investigating the determinants of competition in different banking markets as well as the factors influencing the size of shadow banking in China. Competitions in different banking markets are measured by Boone indicator and a three-stage least square estimator is used to address the issue of endogeneity. The findings suggest that a larger volume of shadow banking leads to a decline in the level of competition in the Chinese deposit market, loan market and non-interest income market, while an increase in the level of competition in the loan market, deposit market and non-interest income market leads to an expansion of shadow banking industry in China. The findings provide important policy implications to the Chinese government and regulatory authorities to improve the performance of Chinese commercial banks