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

Kai Du, Andrew Worthington () and Valentin Zelenyuk

No WP122015, CEPA Working Papers Series from University of Queensland, School of Economics

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.

Keywords: Asset diversification; Data envelopment analysis; Truncated regression; Bootstrapping; Chinese banks (search for similar items in EconPapers)
JEL-codes: D21 C13 G21 C44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cna, nep-eff and nep-tra
Date: 2015-12
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