Digital Finance, Digital Transformation, and the Development of Off-Balance Sheet Activities by Commercial Banks

The development of digital finance represents a new paradigm for the delivery of financial services that has exerted an external shock on the off-balance sheet (OBS) activities of traditional commercial banks. In response, commercial banks have embarked on a digital transformation to mitigate the challenges posed by digital finance. However, the impact of external shocks and internal responses on banks’ OBS activities, especially the effect of internal responses, needs to be further clarified in order to inform commercial banks’ decision-making. Using a dataset consisting of 42 Chinese commercial banks’ operating data from 2013 to 2022, this paper employs a two-way fixed effects model and a moderation analysis to conduct an empirical analysis. The results show that digital finance has a significant inhibitory effect on OBS activities; furthermore, digital transformation of commercial banks strengthens this inhibitory effect, indicating that its benefits are outweighed by costs of investment and competitive losses. Additionally, the net interest margin significantly amplifies the inhibitory effect, suggesting a trade-off between income from core business activities and OBS activities under external competitive pressure. Based on these research findings, it is recommended that commercial banks seek differentiated competitive strategies and optimize the product structure of their OBS activities. Furthermore, digital transformation strategies should take into account the overall interests of the bank and strike a balance between long-term and short-term benefits.