Shadow banking shadowed in banks' balance sheets: Evidence from China's commercial banks

Using hand-collected data, we creatively construct an 'on-balance-sheet shadow banking business' (OBS-SBB) measure to precisely quantify commercial banks' shadow banking activity concealed on their balance sheets. We show that OBS-SBB activities could both increase individual and systemic risks. To further test the underlying mechanisms, we use China's implementation of Basel III as an exogenous shock and employ the difference-in-differences approach. We find that banks demand OBS-SBB in order to bypass capital requirements, previously less-capitalised banks significantly increase their OBS-SBB ex-post, and greater impact is found among small and medium-sized banks and during loose monetary policy periods.