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Impact of Bank Regulatory Change and Bank Specific Factors Upon Off-Balance-Sheet Activities Across Commercial Banks in South Asia

Muhammad Farhan Basheer, Mohamad Helmi Hidthiir and Waeibrorheem Waemustafa
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Muhammad Farhan Basheer: School of Economics, Finance & Banking (SEFB), College of Business (COB), University Utara Malaysia (UUM), Malaysia
Mohamad Helmi Hidthiir: School of Economics, Finance & Banking (SEFB), College of Business (COB), University Utara Malaysia (UUM), Malaysia
Waeibrorheem Waemustafa: School of Economics, Finance & Banking (SEFB), College of Business (COB), University Utara Malaysia (UUM), Malaysia

Asian Economic and Financial Review, 2019, vol. 9, issue 4, 419-431

Abstract: In recent decades, off-balance sheet activities have emerged as an innovation in banking and finance as it is the easiest source of additional fee income that is beyond a bank?s balance sheet activities that avoids regulatory costs, and so they are increasingly popular in banking industries around the world. This paper presents a discussion of the determinants of using off-balance sheet activity in commercial banks in South Asia. The paper also presents an in-depth insight of different theoretical justifications, and empirical literature answers the whys and wherefores of off-balance sheet usage in commercial banks of south Asia. The conceptual model considers the impact of capital size, profitability, loan, credit risk, market concentration, capital adequacy, reserve requirement, real GDP, interest rate spread and inflation on off-balance sheet activities of banks. The Fixed effect and Arellano-Bond GMM method are used on the balance panel of 81 banks to achieve the research objectives of the current study. The results of the bank-specific factors on the off-balance sheet activities (OBSA) support the Market Power Theory. However, the positive and significant relationship between loan ratio and OBSA also supports the market portfolio theory, which argues that the increasing loans offer a continuous risk and can enhance credit risk. Therefore, banks must diversify their portfolios. The positive relationship between the reserve ratio and OBSA provides support for the regulatory and tax hypothesis.

Keywords: Off-balance sheet activities; Commercial banks; South Asia; Arellano-bond GMM. (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:asi:aeafrj:2019:p:419-431