Determinants of off‐balance sheet usage in private banks

Abstract

PurposeThe purpose of this paper is to analyze the off‐balance sheet (OBS) behavior of a sample of small commercial banks in the USA in 2006. In particular, it aims to study the impact that monitoring intensity has on bank OBS usage.Design/methodology/approachThe paper uses a two‐stage least squares regression methodology and splits the sample by supervisory bank ratings to ascertain the impact that monitoring intensity has on OBS activity.FindingsCertain board characteristics and executive compensation schemes do influence the extent of OBS usage in banks only when the bank is poorly rated. When the bank is strong and monitoring is less extreme, these variables have limited relationship with OBS usage.Research limitations/implicationsFindings are consistent with the idea that monitoring intensity increases when ratings decline and this leads to more risk‐averse behavior on the part of bank managers.Practical implicationsThese results lend support to the argument of stronger regulation in the banking industry since monitoring does impact on bank management behavior and decision making.Originality/valueBecause of the current financial crisis, research on OBS usage is extremely relevant and important. Here, the paper looks at small private commercial banks that engage in OBS activity. This phenomenon is not as well studied or understood.