Shadow Banking And Bank Valuation

Being a part of the whole financial system, shadow banking is less affected by regulatory constraints compares to the traditional banking operation. As a result, the shadow banking descent from traditional banking and still depends on the activities of traditional banking. In fact, the shadow banking will erode the credit market’s shares of traditional banking, but will return the favor by improving banks’ profit margin. At the same time, the shadow banking sector might brought about a larger possibility of credit risk because its operations are highly leveraged and maturity mismatched.The absolute valuation method is not applicable to the modern commercial banking due to its high leverage, large intangible assets, and mixed operation. Therefore, his paper put forward a P/E valuation model combined the off-balance-sheet income factors with the valuation methods of shadow banking and commercial banks proposed in the past. Through empirical analysis on the factors affecting earnings ratio, the author confirmed that the shadow banking will result in a significant impact on the valuation of commercial banks. Firstly, this paper selected13A-share listed banks as the sample. Secondly, it used the time series data of2007-2013to form a two-step EG analysis. The results showed a equilibrium relationship between the P/E ratio of those listed banks and factors including GDP growth, new RMB loans accounted for social incremental financing, BETA and ROE of listed bank stocks, the bad loan ratio, net interest margin, off-balance-sheet business revenue growth, and the percentage of off-balance-sheet business revenue. Last but not least, this paper raised a Granger Causality Test on the variables, and found a2steps lag-order correlation between the variables.