The Impact of Non-interest Income on the Efficiency of China’s Banking Sector

Li Li

doi:10.4172/2168-9458.1000135

Abstract

This paper investigates the impact of non-interest income on bank efficiency based on data from China banking sector during the period 1996~2010 by establishing DEA model and Panel-Tobit model. The efficiency levels of China banking sector are estimated by employing traditional DEA model, which only considers loans and investments as the output variables, and alternative DEA model, which considers non-interest income as an additional output variable. The results of parametric and non-parametric univariate tests on the efficiency scores show that there are no significant differences in mean and median efficiency calculated from traditional and alternative DEA models. In other words, the inclusion of non-interest income in output vector does not have a statistically significant influence on the efficiency of China banking sector. Additionally, we normalize each bank’s efficiency score under these two DEA models in order to avoid potential estimation bias due to the fact that the alternative DEA model has one more output variable than the traditional DEA model, and the findings suggest that only a small proportion of banks present an increase in efficiency level with inclusion of non-interest income, while no significant changes are seen on most banks’ efficiency levels. Also, further analysis by establishing Panel-Tobit regression model finds that the relationship between the share of noninterest income to the net operating revenue and the bank efficiency score is not significant, which suggests that the bank efficiency doesn’t increase significantly with the increasing non-interest income share. Furthermore, the bank efficiency also does not present a significant increase with the time. Overall, our findings suggest that the inclusion of non-interest income does not significantly increase the efficiency level of China banking sector.

Highlights

With the gradual deepening of financial reform and opening of financial market, especially the implementation of a more stringent financial supervision policy in recent years, Chinese commercial banks have stepped into a transitional path from extensive operation to intensive one and gradually adjusted revenue structure in order to increase the proportion of non-interest incomes after having established modern corporate governance structure
The parametric method proves more adaptable for single-input and single-output or multi-inputs and single-output but less efficient in dealing with multi- inputs and multi-outputs, and it usually requires a larger number of sample observations because of more strict requirements on the quantity of samples, Considering limited sample data of domestic commercial banks and multi-inputs and multioutputs adopted in the study of this paper, the non-parametric method will be used in this paper to measure the bank efficiency
As to the asset weighted efficiency, we find that technical and pure technical efficiency present an increase with the inclusion of noninterest income and the scale efficiency presents an increase with the inclusion of non-interest income during the observation period except the period from 1999 to 2002

Summary

Introduction

With the gradual deepening of financial reform and opening of financial market, especially the implementation of a more stringent financial supervision policy in recent years, Chinese commercial banks have stepped into a transitional path from extensive operation to intensive one and gradually adjusted revenue structure in order to increase the proportion of non-interest incomes after having established modern corporate governance structure. Traditional interest income is still the main source of revenue till as evidenced by the fact that the net interest income of China’s banking sector accounts for 66% of after-tax profits by the end of 20111, increasing proportion of no-interest income and improving revenue structure has become a common consensus among domestic commercial banks. External pressure and internal motive are dual sources of power that drive the China’s banking sector to pay more and more attention to and promote vigorously the growth of non-interest income. As the nontraditional business generating non-interest income consumes less economic capital than the traditional business generating interest income, it has become an inevitable trend for domestic commercial banks to shift gradually toward non-interest income under the capital constraint

Methods

Results

Conclusion