Role of off-balance sheet operations on bank scale economies: Evidence from China's banking sector

Article history: Received 18 September 2014 Received in revised form 24 September 2014 Accepted 15 October 2014 Available online 20 October 2014 This paper investigates product-specific scale economies of banks with respect to off-balance sheet operations. The cost benefits from the non-separability of outputs available to banks that imply the role of OBS activities on bank scale economies are also examined. We further test whether the role of OBS operations on bank scale economies changes across heterogeneous banks. Results suggest that banks can realize more scale economies by increasing OBS operations and that scale economies can be reaped particularly for non-state-owned banks. Therefore, diversification and deregulation should be included in the policy agenda for the subsequentmarketization reformof China's banking sector. © 2014 Elsevier B.V. All rights reserved. JEL classification: G21 G28 D24