Shadow Banking, Bank Ownership, and Bank Efficiency in China

This study uses 15 years of bank data and a one-stage stochastic frontier analysis framework to examine how shadow banking affects the profit and cost efficiency of Chinese banks. Our results indicate that shadow banking is negatively related to both profit and cost efficiency and positively related to earnings volatility, credit risk and liquidity risk of the Chinese banks. In examining the performance of foreign banks with that of local Chinese city commercial banks, we find that foreign banks in China are less profit- and cost-efficient, supporting the home-field-advantage hypothesis that domestic banks are more efficient than foreign banks.