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The dynamic relationship between bank asset diversification and efficiency: Evidence from the Chinese banking sector

Author

Listed:
  • Kai Du

    (Entrepreneurship, Commercialization & Innovation Centre, University of Adelaide)

  • Andrew C. Worthington

    (Department of Accounting, Finance and Economics, Griffith University)

  • Valentin Zelenyuk

    (School of Economics, The University of Queensland)

Abstract

In this paper, we investigate the impact of earning asset diversification on Chinese bank efficiency from 2006 to 2011. To do so, we adapt the Simar and Wilson (2007) Journal of Econometrics approach to allow for technology change over time. Regression results reveal that increasing the asset share of other earning assets (including securities and derivatives) is positively associated with bank efficiency. Decreasing the share of nonearning assets in total assets or increasing total equity has a similar impact. Our results also suggest that financial reforms currently being undertaken in China, including removing the regulatory requirement concerning the ratio of loans to deposits (a new draft amendment to the existing commercial banking law) and interest rate liberalization (a proposed draft amendment), are likely to induce a significant positive effect on bank efficiency.

Suggested Citation

  • Kai Du & Andrew C. Worthington & Valentin Zelenyuk, 2015. "The dynamic relationship between bank asset diversification and efficiency: Evidence from the Chinese banking sector," CEPA Working Papers Series WP122015, School of Economics, University of Queensland, Australia.
    • Handle: RePEc:qld:uqcepa:110
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    File URL: https://economics.uq.edu.au/files/5082/WP122015.pdf
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    References listed on IDEAS

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    Cited by:

    1. Manh D. Pham & Valentin Zelenyuk, 2018. "Slack-based directional distance function in the presence of bad outputs: theory and application to Vietnamese banking," Empirical Economics, Springer, vol. 54(1), pages 153-187, February.
    2. Muhammad Farhan Basheer & Waeibrorheem Waemustafa & Mohamad Helmi Bin Hidthiir & Saira Ghulam Hassan, 2021. "Explaining the endogeneity between the credit risk, liquidity risk, and off-balance sheet activities in commercial banks: a case of South Asian economies," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 14(2), pages 166-187.
    3. Muhammad Farhan Basheer & Mohamad Helmi Hidthiir & Waeibrorheem Waemustafa, 2019. "Impact of Bank Regulatory Change and Bank Specific Factors Upon Off-Balance-Sheet Activities Across Commercial Banks in South Asia," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(4), pages 419-431, April.

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    More about this item

    Keywords

    Asset diversification; Data envelopment analysis; Truncated regression; Bootstrapping; Chinese banks;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory

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