Off-balance Sheet Activities,Bank Performance And Bank Crisis

For over a decade,the commercial banking industry in China has been forced to face disadvantageous conditions such as the slow-down of macro-economics,the increasingly developing financial disintermediation,the closing reform on interest rates,and the narrowing interest rate gap.What seems to worsen the situation is the unexpected challenge brought by foreign commercial banks,non-banking financial institutes,online financing,and mobile payment application technology companies.All have been affecting the revenues from commercial banks' traditional business significantly.Therefore,in order to counter the disadvantages and challenges,the commercial banks are endeavoring to expand off-balance sheet business activities,the revenue of off-balance activities and the percentage have been obviously improved.But compared with international level,the percentage of off-balance activities revenue is significantly lower,product variety and business structure are obviously different.Will this lead to our country's influence of the off-balance activities to bank performance is different from other countries?based on current studies,there is no single unified and convincing conclusion on what impact the increase in revenue generated from off-balance sheet business activities would bring to commercial banks performances.Numerous and different evidence have been presented based on across time periods and countries,regarding either the profitability or the riskiness,as a consequence of the increase in revenue generated from off-balance sheet business activities.With regard to the increase,some scholars conclude that it will significantly boost the profitability of commercial banks,some others may argue with the opposite conclusion,there are also some studies showing that there is not an obvious connection between them.The same types of results can be found while scholars are discussing the impact of increasing off-balance sheet activities on commercial bank riskiness.As for this paper,data from 72 countries across from 1999 to 2013 are collected,and with dynamic panel model we can analyze the influence of different percentages of off-balance sheet businesses on commercial bank performances(which includes profitability and riskiness).Meanwhile,data from 59 commercial banks in China across 2006 to 2015 is collected,a similar analyze on the influence of different percentages of off-balance sheet businesses on commercial bank performances is conducted with dynamic panel model.And the two results will be compared and studied.Finally a conclusion is reached that on a national level,the increase of percentage in off-balance sheet activities will have a positive impact on commercial bank profitability during the current period,but will put a significantly negative impact on commercial bank profitability in the next period;it will diversify the riskiness during the current period greatly,but will also raise the riskiness during the next period greatly.However,the results from commercial banks in China show that the increase of percentage in off-balance sheet activities will cause a significantly negative influence on current-period performance,and leave an insignificant impact on next-period performance.Also,such increase does not have significant effect on riskiness.The primary reasons for this may be the low portion of off-balance sheet activities contributed to revenue,the lack of rational capital structure,the lowering percentages of net interest income and the decreasing net interest margin.Since the results from international data show that the increase of percentage in off-balance sheet activities will have a positive impact on commercial bank profitability,will it have any impact on commercial bank riskiness?In later parts of this paper,international data will be employed and analyzed with panel logit model,and as a result,the percentage of off-balance sheet activities is positive and significant variable to commercial bank riskiness,and will produce positive influence on the happening of crisis in the next term.Therefore,the percentage of off-balance sheet activities can be included into the early warning model for banking crisis.There are a few innovations in this paper.First of all,the paper summarizes the conduction path of the impact of commercial banks' off-balance sheet business on their performance in theory,and analyzes the empirical results of the impact of the off-balance sheet business of China's commercial banks on their performance.Secondly,most previous studies on this topic employs the traditional way of static panel model,while this paper uses dynamic panel model,so that measuring errors,missing variables,and reverse cause-effect relations are hopefully fixed.Thirdly,with regard to the selection of international samples,most studies prefer to stick with a singular continent(such as Asia or Latin America),or countries from EU or OECD,and it lacks comprehensiveness,whereas in this paper,both developed and under-developed countries across continents are selected.In addition,when it comes to the selection of domestic commercial bank samples,most researches tend to pick listed banks,whereas this paper annexes urban commercial banks and rural commercial banks that have 5 years of accessible data.Hence,this paper produces a more solid argument.Fourthly,when analyzing the impact of percentage of off-balance sheet activities on commercial bank performance,dynamic panel regressions are run accordingly for different types of commercial banks and different types of off-balance sheet activities for the sake of empirical results of robustness.This is rarely conducted in previous studies.Finally,there are plenty of researches about banking failure and off-balance sheet riskiness,but few are about the possibility of banking failure due to an increase in portion of revenue brought by off-balance sheet activities.This issue is discussed in this paper with Panel Logit model,and follow through with a discussion on the lag(1)term,furthermore,it suggests that as a variable,the off-balance sheet activities can be included in an early warning model.