Off-balance sheet business development and bank efficiency: A financial innovation matching perspective

Abstract

Increased competition has forced banks to undertake off-balance sheet business (OBS), but the contribution of OBS to bank efficiency remains controversial. Therefore, using panel data collected from 57 Chinese commercial banks for 2013-19, this paper takes a step and investigates the relationship between OBS and bank efficiency at various levels of financial innovation matching. Results reveal that OBS generally has a negative effect on bank efficiency and that the effect wanes when local financial innovation matching levels increase. Scale heterogeneity is also found in the link as in small-sized banks OBS bring about more profits than risks. Besides, opening a direct bank mitigates the negative impact of off-balance sheet business, especially in regions with lower financial innovation matching levels. Findings suggest that conducting OBS is most beneficial in small-sized banks and that local governments should improve regional financial innovation matching levels as ways to harness the development of banks.