China's Commercial Banks To Develop Off-balance Sheet Business

Looking back to the development of commercial banks in the west developed countries, we can see the trend to move the major focus from the traditional On-Balance Sheet business (credit and deposit) to Off-Balance Sheet operations. Since the margins available for many types of conventional On-Balance Sheet business have been diminishing, while at the same time supervisors have acted to restore and strengthen bank's capital adequacy. Banks have to retain their traditional customers base and to boost fee income from sources, which in many countries are (so far at least) largely or wholly free capital requirements. The Off-Balance Sheet operations are taking more and more proportions in bank's total incomes, and with rapid growing ever since. The Off-Balance Sheet activity cannot only increase the income and fees, but also improve the service level of banking. So there is no choice that we have to pay great attention to the Off-Balance Sheet activity in our domestic bank system.With the development of the economy globalization and the intense international competition, China's financial industry is merging into the international economy. Chinese banks are also being influenced by international economy and capitals while utilizing its resources. Since the middle of 1980s, financial innovations have given an impetus to the Off-Balance Sheet activity. However, there is little developing in this area because of less recognition. So there is a large gap between our domestic banks and foreign banks. Domestic banks have made some fee oriented business, such as Letter of Credit, underwrite drafts and standby L/Cs or L/Gs. We have no sophisticated innovations except some Forward Foreign Exchange Transaction, Interchange or Swap to avoid the interest exposure and exchange rate exposure in international trade and settlement. In general, our domestic bank's Off-Balance Sheet operations is weak both in scale and ratio inthe whole income cake.This paper is divided into four parts.The first part gives an overall introduction of the Off- Balance Sheet operation, including its meaning, features and influences.The second part analyzes the slow development of Off-Balance Sheet operation in our domestic banks and the reasons on external and subjective sides.The third part pays much attention on two kinds of Off- Balance Sheet operations: Stand-by Letter of Credit and Asset Securitization.The last part given in the background of China's entry into the WTO, discusses what should we do to increase our Off-Balance Sheet businesses and improve the portion in the whole income cake. It is necessary to create some new techniques to attract more customers and raise the service level and quality; otherwise there would be no room for us in the international banking competition.