Shadow Banking and Loan Pricing of Commercial Banks : Evidence from China

We examine the role of regulatory arbitrage via wealth management products (WMPs), in the determination of lending rates in China. Using hand-collected data we find WMP yields are positively associated with lending rates whereas the effect of WMP scale varies across bank size. For the big-5 state-owned banks, the negative “transfer-effect” of high-risk high-yield loans into shadow bank credit dominates the positive “funding-cost-effect” of banks becoming more dependent on wholesale funding. For smaller banks, the positive funding-cost effect dominates. Our findings remain robust during the post 2013 interest rate libaralisation period, and for using trust loan yields as another proxy for WMP yields. We find no evidence that interbank market instruments such as negotiable certificates of deposits have a significant direct effect on lending rates for either the big-5 or the smaller banks