Non-interest Income, Profit, and Risk Efficiencies: Evidence from Commercial Banks in China

Abstract

Chinese commercial banks are transforming their activities into more non-interest income businesses under a highly regulated financial system. This paper investigates the effects of this transformation on profit and risk efficiencies. We find that commission and fee income significantly reduce risk efficiency due to the circumvention of the regulation on deposit interest rate and the assumption of risk that should have been borne by customers. In terms of trading income, it significantly reduces profit efficiency due to the upper limit of the loan-deposit ratio, the lack of investment channels and low returns of bond markets. The regulatory authorities are supposed to further liberalize the banking industry and grant banks more rights.