A Study On The Effect Of Off-Balance Sheet Business On Commercial Banks’ Performance And Risk

Upon the completion of China’s interest rate marketization and the intensified competition of traditional credit business, commercial banks are making great efforts to develop the off-balance sheet business nowadays in order to convert their profit models into more profitable ones. However,the rigorous expansion of the off-balance sheet business has also brought potential risks to the banking sector. Therefore, what kind of impact the off-balance sheet business development will exert on the commercial banks’ operating performance has become a hot topic, keenly discussed by the government, the industry and the academic circles.This thesis mainly contains five chapters, with the first two chapters involved in the research background, research significance and literature review. In recent years,commercial banks are vigorously developing the off-balance-sheet business in order to avoid supervision and obtain additional revenues. For such purposes, they have not only expanded the business in terms of the scale, but also brought forth innovations in the business category. However, such accomplishments of the off-balance sheet business are also accompanied with potential risks which has attracted considerable attention of the regulatory authorities, so that a series of regulatory documents were introduced then to confront such risks. The literature review in the second chapter compiles and summarizes the information regarding the impact of the off-balance sheet business on the banking operations and the operating performance of commercial banks in separate ways,finding that no consensus has been reached on the pros and cons of the development of off-balance sheet business. On the one hand,the development level of the off-balance sheet business for the sample banks varies distinctively from countries, backgrounds and histories, and different conclusions can be drawn with the same hypothesis; On the other hand, the time lag exists in the disclosure of financial information and risk exposure due to the rapid growth of the off-balance sheet business, increasing the difficulty of consensus reaching.The third chapter is a comprehensive summary of the development of off-balance sheet business. It includes the latest definition of off-balance-sheet business and its business types, the development history of off-balance-sheet business and the type of risk involved in off-balance sheet business. Based on the international general agreements of "Basel 3" and the real condition of the domestic off-balance sheet business development,China Banking Regulatory Commission makes clear guidelines on the off-balance sheet business development and risk management. The development history of the off-balance sheet business represents the process of continuous innovation of commercial banks. It has not only changed its original profit model and business direction, but also brought about the risk of off-balance sheet business,so that the commercial banks in China should have a comprehensive knowledge of the off-balance-sheet business.The fourth chapter focuses on the empirical study. First of all, the sample selection of the commercial banks should be based on the principles of the comprehensive types and reliable data. So we generate the operating data from 34 commercial banks from 2008 to 2016 . This thesis constructs the multiple regression model on banks’ operating performance and bankruptcy risk, exploring whether there is a non-linear relationship between the development of off-balance sheet business and the profitability as well as the risk level of the banks. Then, from the perspectives of the off-balance sheet business scale and the income structure of the off-balance sheet business, three indicators, such as the logarithm value of the off-balance-sheet assets,the proportion of non-interest income,and the proportion of the service charge and commission fee, are selected as the explanatory variables of the regression model;ROAA (return on average asset), ROAE (average return on equity) and the bankruptcy risk index Z-score are used as the explained variables of the regression model to construct the most reasonable model for the empirical study. The empirical results show that the development of off-balance sheet business has a significant effect on the performance of China’s commercial banks. The regression result is the most significant in the quadratic model with the explanatory variable of the logarithm value of the off-balance-sheet assets. The effect of the off-balance-sheet assets on ROAA and ROAE is distinctively U-shaped. On the contrary, the effect of non-interest income on ROAA is distinctively inverted U-shaped, and significantly positive on ROAE without U-type characteristics, and the effect of the off-balance-sheet business development of China’s commercial banks is not significant to the bankruptcy risk.Finally,this thesis proposes that the laws and regulations related to off-balance sheet business should be further completed,the off-balance sheet business should be carried out reasonably and the off-balance sheet risk control mechanism should be strengthened. Cooperation between the supervisory authorities and commercial banks should be encouraged to ensure a stable and healthy development of the banking market.