1: Introduction Defining the Scope of the Project (maximum 100 words) With events such as the accounting irregularities at Enron and the banking collapse experienced in 2007/8, discussions on off balance sheet (OBS) activities has been on the increase. Questions have often arisen on the manner in which such variables have on corporations. Hou, Wang & Li (2014) opined that recent years has seen a paradigm shift in the treatment of OBS items such as loan commitments, securitization, standby letters of credit, and derivative securities. For the case of China, the Bank of China began such operations in October 1979 thus catalyzing a dramatic expansion despite the separate-operation regulation of China s banking sector. As of 2013, the risk-weighted assets of OBS activities exceeded seven trillion RMB. Hence, as newly emerging banking activities, OBS operations have reached an important stage in China s banking industry. Such is the premise behind the conceptualization of the ensuing treatise which seeks to examine the treatment of off balance sheet activities in the China banking industry. 2: Research Questions, aims and objectives (maximum 200 words) Identify research questions, aims and objectives of your research 3: Critical Literature Review (maximum 650 words, no word limit for the references) The dominance of the large state-owned banks implies low competition withinthe banking sector (Allen et al., 2013). In addition, China s banking sector is under strict government intervention as well as regulations on banking market access and range of products. Consequently, bank profits are due primarily to the net interest margin earning from asset liability operations rather than the non-interest income from OBS activities. Compared with on-balance sheet business, the scale of OBS activities of Chinese commercial banks is small that, on average, the ratio of OBS business income to bank s total income is no more than 15% over the years, according to the China Banking Development Report of the China Banking Association. In light of the different sensitivity of bank activities, such as lending, investment, and OBS operations, to the banks total costs so that the scale economies of banks will be affected by output mix both in terms of size and composition, fewer OBS activities have resulted in banks not performing in their optimal size.Studies of economies of scale in banking address the question of whether banks produce the optimal output mix both in size and in composition (Allen and Rai, 1996; Berger and Humphrey, 1997; Cavallo and Rossi, 2001; Goisis et al., 2009; Kim, 1986). Scale economies are measured with respect to costs and refer to how the operation scale, that is size, is related to costs. Although a growing body of research supports the view that significant scale economies are present in banking (Mester, 2010), most studies overlook product-specific scale economies. In particular, empirical evidence, on the product-specific scale economies with respect to OBS items and its impact on the overall scale economies of Chinese commercial banks, remains extremely scarce.To address the lacuna in recent literature on the scale economies of Chinese commercial banks, we examine the product-specific cost economies of scale with respect to OBS operations and other outputs. The cost benefits from the non-separability of outputs available to banks, which derive the role of OBS activities on bank overall scale economies, are also investigated. Further, we investigate whether the role of OBS operations on bank scale economies changes across heterogeneous banks with low profitability, small size, and nonstate-ownership respectively. A Bayesian stochastic cost frontier approach is employed to estimate the empirical models. This method produces more exact small sample estimates, allows for easy incorporation of prior ideas and restrictions, such as regularity conditions, and incorporates formal treatment of parameters as well as model uncertainty. Moreover, policy implications of the empirical results for the diversification and deregulation of China s banking sector are further discussed. Our analysis is important in obtaining new findings concerning the bank scale economies and the effects of OBS operations on bank optimal size in the banking sector of a large emerging market economy. We conclude that the scale economies for loans are almost constant with the volume of loans. The scale economies for other earning assets decrease with the increase in their sizes. However, the scale economies for OBS increase with the rise of OBS items after a temporary drop. Banks realize more scale economies by increasing OBS operations than by increasing other outputs. Furthermore, in view of the positive complementarities between OBS and other earning assets are greater than the negative complementarities between OBS and loans, increases in OBS operations contribute to overall scale economies for Chinese commercial banks. In addition, banks with low profitability, small size, and non-state-ownership can realize more scale economies by increasing OBS operations than by increasing other outputs. On average, the positive scale economies can be reaped particularly for non-state-owned banks. 4: Theoretical underpinning (maximum 200 words) Studies of economies of scale in banking address the question of whether banks produce the optimal output mix both in size and in composition (Allen and Rai, 1996; Berger and Humphrey, 1997; Cavallo and Rossi, 2001; Goisis et al., 2009; Kim, 1986). Scale economies are measured with respect to costs and refer to how the operation scale, that is size, is related to costs. Although a growing body of research supports the view that significant scale economies are present in banking (Mester, 2010), most studies overlook product-specific scale economies. In particular, empirical evidence, on the product-specific scale economies with respect to OBS items and its impact on the overall scale economies of Chinese commercial banks, remains extremely scarce.To address the lacuna in recent literature on the scale economies of Chinese commercial banks, we examine the product-specific cost economies of scale with respect to OBS operations and other outputs. The cost benefits from the non-separability of outputs available to banks, which derive the role of OBS activities on bank overall scale economies, are also investigated. Further, we investigate whether the role of OBS operations on bank scale economies changes across heterogeneous banks with low profitability, small size, and nonstate-ownership respectively. A Bayesian stochastic cost frontier approach is employed to estimate the empirical models. This method produces more exact small sample estimates, allows for easy incorporation of prior ideas and restrictions, such as regularity conditions, and incorporates formal treatment of parameters as well as model uncertainty. Moreover, policy implications of the empirical results for the diversification and deregulation of China s banking sector are further discussed. Our analysis is important in obtaining new findings concerning the bank scale economies and the effects of OBS operations on bank optimal size in the banking sector of a large emerging market economy. We conclude that the scale economies for loans are almost constant with the volume of loans. 5: Research Strategy and Methods (maximum 350 words) Identify as precisely as you can your intended research design, i.e how will you collect the data and how will you analyse it? Identify also possible data and other information requirements and sources. Note any limitations based on the research methods you have chosen. 6: Appendix draft timetable for completion Include, maybe on a spreadsheet or Gantt chart style presentation, a plan of how you intend to complete the research. This will provide you with a good idea of how long elements will take so that you can plan your research spread the work don t try and do it all three weeks hand in date. Also think about potential problems you may encounter. How could you overcome them? 7: Ethics form complete appropriate ethics form for approval The ethics forms are available on the NOW learning room simple guide, secondary data use ethics02, primary data collection use ethics03. You must also submit a completed Research Ethics form, either NBS Ethics02 or NBS Ethics03, with this document Please write or type your name here to confirm the appropriate ethics form has been completed fully and submitted with this document: References Borst, Nicholas. The Role of Trust Companies in China s Recent Credit Growth. Peterson Institute for International Economics China Economic Watch, May 31, 2013. Available at http://blogs.piie.com/china/?p=2658. Borst, Nicholas. Flying Blind. The International Economy. Winter 2014. Claessens, Stijn and Lev Ratnovski. What Is Shadow Banking? IMF Working Paper 14/25 (February 2014). Deloitte. 2012 China Banking Industry Top Ten Trends and Outlook; Enhancing Capital Management, Meeting New Challenges. Deloitte China Financial Services Industry Center of Excellence Report, 2012. Financial Stability Board. Global Shadow Banking Monitoring Report 2014. (November 2014). Elliott, Douglas and Kai Yan. The Chinese Financial System: An Introduction and Overview. John L. Thornton China Center at the Brookings Institution Monograph Series No. 6 (July 2013). Green, Stephen, Wei Li, and Lan Shen. Your map of the expanding credit universe. Standard Chartered Global Research, March 3, 2014. Hou, Wei, Gaye Gao, and Min Zhou. Chinese Banks Initiating coverage; Deleveraging, De-risking and (finally) Diverging? Sanford Bernstein Research, September 16, 2014. Kwan, Chi Hung. Shadow Banking in China: Current situation and challenges. Research Institute of Economy, Trade, and Industry China in Transition, August 6, 2013. Lardy, Nicholas R., Markets Over Mao: The Rise of Private Business in China, Peterson Institute for International Economics, Washington, DC, September 2014. Luo, Jun and Yidi Zhao. Shadow Banks on Trial as China s Rich Sister Faces Death. Bloomberg News, April 11, 2012. Ma, Maria. China: Shadow Banking and the Global Economy. SEI Commentary, September 2013. Martin, Michael. China s Banking System: Issues for Congress. Congressional Research Service Report for Congress 7-5700 (February 20, 2012), p. 2-3. Panigirtzoglou, Nikolaos, Matthew Lehmann, and Jigar Vakharia. How scary are China s shadow banks? JP Morgan Global Asset Allocation Flows and Liquidity, January 31, 2014.
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