Bank underwriting of debt securities: modern evidence

This article examines debt securities underwritten by Section20 subsidiaries of bank holding companies relative to thoseunderwritten by investment houses. Consistent with a net certificationeffect for banks, bank underwriting of lower credit rated firmsto whom the bank lends results in relatively higher prices (loweryields). We find no evidence of conflicts of interest even whenan issue is used to repay bank debt. Further, banks bring arelatively larger proportion of small issues to the market.Contrary to the contention that universal banking stunts availabilityof finance to small firms, bank underwritings appear to benefitsmall firms.     

Geographic diversification in banking,market share changes,and the viability of small independent banks

The prospect of unlimited nationwide banking raises a question about the viability of small independent banks in competition with large, geographically diversified banking organizations. This study addresses the issue of small bank viability by focusing on the relative performance of independent banks and bank holding company subsidiaries in a regime of intrastate banking, where performance is measured by the cumulative change in a bank's local market share over time. Two regression equations of the same general form are estimated using the same sample of independent and affiliated banks, albeit for different time periods to distinguish between the short-term and long-term effects of affiliation. Regression results indicate that affiliation with a geographically diversified bank holding company generally provides no significant long-term competitive advantage (in terms of market share accumulation) for holding company subsidiaries over independent banks. The only exception is a modest benefit afforded to banks with relatively small pre-acquisition market shares that are acquired by larger bank holding companies as initial entry vehicles into new markets.An earlier version of this article was presented at the 1988 meetings of the Southern Economic Association, San Antonio, Texas.     

我国村镇银行控股公司的发展与规制

村镇银行控股公司是以符合条件的金融机构子公司身份设立的银行业金融机构,可由境内金融机构在绝对控股基础上与外资或民资共同发起设立．通过新设、并购、股权转换方式建立或整合其下的村镇银行子公司。村镇银行控股公司将来可以用营业让与方式脱壳设立为纯粹型农村金融控股公司,前者可比照银行业金融机构监管,后者需采用机构与功能监管相结合的类伞形牵头监管模式,并应从市场准入、运营监管、市场退出等多方面完善法制建设。     

Consolidation and universal banking

Banks in the US have been competing with investment banks through newly created “Section 20” subsidiaries. The evidence to date suggests that banks entry into securities activities via these subsidiaries has been pro-competitive. Recently, however, banks have been allowed to enter securities activities via acquisitions. This may not result in the same competitive effects as “new bank” entry.     

U.S. banking regulations and foreign banks' entry into the United States

This study provides a review of foreign banking activities in the U.S. over the past decade. Foreign banking entry into the United States has occurred through representative offices, branches, agencies, subsidiary banks, Edge Act offices, and investment companies. The total assets of foreign offices, branches, and subsidiaries in the U.S. increased 310 percent, while total assets of domestically owned commercial banks increased 99 percent. Foreign interests are not currently dominating U.S. banking activities. The shares of balance sheet accounts for foreign entrants are growing more rapidly than domestic institutions in six states, but not in New York and California. To eliminate any disadvantages U.S. institutions may face in competing with foreign banks, American state and federal banking laws need to be liberalized.     

Bank mergers: Integration and profitability

The Treasury Department's 1991 recommendations for financial service reform would have allowed interstate branching by banks, eliminating the requirement that banking companies form a separate subsidiary for each state in which they do business. Supporters of the proposal argue that allowing bank holding companies to merge their subsidiary banks would improve performance. We tested this proposition by studying the before- and-after performance of all bank mergers in the New England states between 1982 and 1987. In the aggregate, merging banks did not achieve significant improvements in operating profits relative to other banks during the first two years after a merger. It is important to distinguish, however, between mergers of newly acquired banks and mergers of banks acquired earlier by the holding company. Mergers of previously acquired banks performed significantly better than mergers of newly acquired banks and, measured by operating return on assets, achieved significant performance improvements relative to the industry.This article may not be reproduced in any form without permission of the authors, who hold the copyright.     

Capital Constraints,Asymmetric Information,and Internal Capital Markets in Banking: New Evidence

A growing literature investigates the role of internal capital markets in mitigating financial constraints faced by the subsidiaries of a conglomerate. Most studies have relied on indirect tests based on correlations between the cash flows and the investment of the subsidiaries. In contrast, we avoid the widespread criticisms of such specifications by providing direct tests that focus on the mechanisms through which internal reallocations of funds occur. We find that internal capital markets are used by multibank holding companies to mitigate capital constraints faced by individual bank subsidiaries. In addition, we show that internal capital management within a multibank holding company involves not only the movement of capital to those subsidiaries with a relatively greater need for capital but also the movement of assets (loans) from less well capitalized to better capitalized subsidiaries by means of loan sales and purchases among the subsidiaries. Furthermore, net loan sales are used to allow efficiency‐enhancing specialization among bank subsidiaries, insofar as those subsidiaries with the best loan origination opportunities are able to focus on loan originations even if they do not have sufficient capital to hold the loans. Our evidence is consistent with banks affiliated with holding companies more actively participating in loan sales and purchases because, by using their internal secondary loan market, they are able to avoid the “lemons” problem faced by stand‐alone banks.     

Will TLAC regulations fix the G-SIB too-big-to-fail problem?

The efficacy of the Financial Stability Board's proposed requirement for minimum “total loss absorbing capacity” (TLAC) at global systemically important banks (G-SIBs) is assessed using a stylized model of a bank holding company and an equilibrium asset pricing model to value financial claims. I identify a number of G-SIB strategies that satisfy minimum TLAC requirements but fail to reduce implicit safety net subsidies that accrue to G-SIB shareholders or increase the resources available to recapitalize a failing G-SIB subsidiary. To meet the FSB's stated goals, TLAC requirements must impose minimum TLAC at all subsidiaries and restrict how TLAC funds can be invested. An equivalent, but much simpler solution is to significantly increase regulatory capital requirements on systemically important bank subsidiaries.     

Multinational Banks and the Global Financial Crisis: Weathering the Perfect Storm?

We use data on the 48 largest multinational banking groups to compare the lending of their 199 foreign subsidiaries during the Great Recession with lending by a benchmark of 202 domestic banks. Contrary to earlier and more contained crises, parent banks were not a significant source of strength to their subsidiaries during 2008–09. When controlling for other bank characteristics, multinational bank subsidiaries had to slow down credit growth almost three times as fast as domestic banks. This was in particular the case for subsidiaries of banking groups that relied more on wholesale funding.     

The multinational bank: A financial MNC?

The theory of non-financial multinational corporations is applied to the multinational commercial bank. The incentives toward multinationality that characterize the expansion of non-financial firms have their counterparts in multinational banks. The theory of the MNC provides a useful basis for the development of a theory of the multinational bank when the subsidiary offices operate in foreign financial markets. When banks' foreign subsidiaries operate in supranational markets (such as the Eurocurrency markets), there is little or no equivalence because the multinational banks compete only among themselves: there is no competition with indigenous firms. The supranational markets give rise to a distinct type of subsidiary. These banking offices and the markets in which they operate serve to integrate national capital and money markets with some possible endangerment to the stability of the international financial system.     

FINANCIAL TRANSACTIONS WITHIN BANK HOLDING COMPANIES

This study explores financial transactions within bank holding companies in both a theoretical and an empirical context. Empirical analysis focuses on two major types of interaffiliate financial transactions—extensions of credit and transfers of assets—between holding company banks and their nonbank affiliates (defined to include the parent company and nonbank subsidiaries of the parent) over the period 1976–1980. The data generally point to a net downstream flow of funds from the nonbank sector to the bank sector of a holding company, with the downstream fund flows particularly strong in the case of extensions of credit. In part, this result may reflect the statutory restrictions on bank lending to affiliates, particularly the collateral requirements.     

Moral Hazard and Optimal Subsidiary Structure for Financial Institutions

Banks and related financial institutions often have two separate subsidiaries that make loans of similar type but differing risk, for example, a bank and a finance company, or a “good bank/bad bank” structure. Such “bipartite” structures may prevent risk shifting, in which banks misuse their flexibility in choosing and monitoring loans to exploit their debt holders. By “insulating” safer loans from riskier loans, a bipartite structure reduces risk‐shifting incentives in the safer subsidiary. Bipartite structures are more likely to dominate unitary structures as the downside from riskier loans is higher or as expected profits from the efficient loan mix are lower.     

Effect of Internationalization on the Cost Efficiency of Taiwan’s Banks

Abstract:

We focus on the effect of internationalization on the cost efficiency of banks by studying Taiwan as a sample for developing countries. We find that (1) increasing overseas businesses and foreign exchange deposits increases cost efficiency; (2) expanding offshore banking units increases bank efficiency; and (3) the profitability of a bank’s overseas branch is not a critical factor behind the differences in cost efficiency across both financial holding company (FHC) banks and non-financial holding company (non-FHC) banks. Finally, our metafrontier empirical results illustrate that FHC banks in Taiwan show better technical performance in cost control than non-FHC banks.     

Economic policy uncertainty,agency problem,and funding structure: Evidence from U.S. banking industry

We empirically examine the impact of economic policy uncertainty (EPU) on banks’ funding structure (FUD). Using an extensive dataset of U.S. bank holding companies, we find that high policy uncertainty strengthens banks’ FUD. For banks with a pre-existing low FUD, an increase in EPU raises FUD. However, for banks with a pre-existing high FUD, the relationship between EPU and FUD becomes negative and economically significant. Considering the lack of relevant studies, our paper contributes to the literature and provides implications for policymakers and practitioners in the banking industry.     

Firm balance sheets and monetary policy transmission

The functioning of internal capital markets in financial conglomerates facilitates a novel identification strategy of the balance sheet channel of monetary policy. We look at small subsidiary banks that are affiliated with the same holding company but operate in different geographical areas. These banks face the same marginal cost of funds due to internal capital markets, but face different borrowers as they concentrate their lending with small local businesses. Exploring cross-sectional variation in local economic conditions across these subsidiaries, we investigate whether borrower creditworthiness influences the response of bank lending to monetary policy. Our results are consistent with a demand-driven transmission mechanism that works through firm balance sheets and is independent from the bank lending channel.     

SOME EVIDENCE THAT BANKS USE INTERNAL CAPITAL MARKETS TO LOWER CAPITAL COSTS

To the extent raising external capital is especially costly for banks (as the preceding article suggests), bank managers have incentives to manage their internal cash flow in ways that minimize their need to raise external equity. One way to accomplish this is to establish bank holding companies that set up internal capital markets for the purpose of allocating scarce capital across their various subsidiaries. By “internal capital market” the authors mean a capital budgeting process in which all the lending and investment opportunities of the different subsidiaries are ranked according to their risk-adjusted returns; and all internal capital available for investment is then allocated to the highestranked opportunities until either the capital is exhausted or returns fall below the cost of capital, whichever comes first. As evidence of the operation of internal capital markets in bank holding companies, the authors report the following set of findings from their own recent studies:

• ? For large publicly traded bank holding companies, growth rates in lending are closely tied to the banks' internal cash flow and regulatory capital position.
• ? For the subsidiaries of bank holding companies, what matters most is the capital position and earnings of the holding companies and not of the subsidiaries themselves.
• ? The lending activity of banks affiliated with multiple bank holding companies appears to be less dependent on their own earnings and capital than the lending of unaffiliated banks.

The authors also report that, after being acquired, previously unaffiliated banks increase their lending in local markets. This finding suggests that, contrary to the concerns of critics of bank consolidation, geographic consolidation may make banks more responsive to local lending opportunities.     

CEO Bonus Compensation and Bank Default Risk: Evidence from the U.S. and Europe

We investigate the link between the incentive mechanisms embedded in CEO cash bonuses and the riskiness of banks. For a sample of U.S. and European banks, we employ the Merton distance to default model to show that increases in CEO cash bonuses lower the default risk of a bank. However, we find no evidence of cash bonuses exerting a risk‐reducing effect when banks are financially distressed or when banks operate under weak bank regulatory regimes. Our results link bonus compensation in banking to financial stability and caution that attempts to regulate bonus pay need to tailor CEO incentives to the riskiness of banks and to regulatory regimes.     

The performance of foreign owned,minority owned,and holding company owned banks in the U.S.

The regulatory and legal environment shaping the constantly evolving U.S. bank structure is pervasive, making it necessary for regulators to simultaneously consider interrelated aspects of that structure. This paper investigates the simultaneous effects of foreign, minority and holding company ownership upon bank performance with both aggregated and disaggregated models. The aggregated results suggest that foreign owned bank performance is similar to non-attribute banks, but that the performance of minority and holding company owned banks provides some cause for concern. The disaggregated results provide additional insights particularly with respect to U.S. banks owned by foreign banks and black owned banks. Policy implications are discussed.     

Financial structure change and banking income: A Canada–U.S. comparison

Data suggest that the Canadian financial structure, and particularly indirect finance (e.g., banking), have become more market-oriented. We associate this financial trend in part with the regulatory changes that have occurred in Canada since the 1980s. Financial intermediaries are increasingly involved with financial market activities—e.g. off-balance sheet (OBS) activities such as underwriting securities. In this article we analyze the noninterest income attributable to these financial market activities. We find that the variance of Canadian banks’ aggregate operating-income growth is rising because of the increased contribution of noninterest income. Overall, our analysis corroborates the U.S. findings of Stiroh and Rumble (Stiroh, K., 2006. A portfolio view of banking with interest and noninterest assets. Jounal of Money, Credit, and Banking 38, 1351–1361; Stiroh, K., Rumble, A., 2006. The darkside of diversification: the case of U.S. financial holding companies. Journal of Banking and Finance 30, 2131–2161): by contributing to banking income volatility, market-oriented activities do not necessarily yield straightforward diversification benefits to Canadian banks.     

Nontraditional banking activities and bank failures during the financial crisis

We test whether income from nontraditional banking activities contributed to the failures of hundreds of U.S. commercial banks during the financial crisis. Estimates from a multi-period logit model indicate that the probability of distressed bank failure declined with pure fee-based nontraditional activities such as securities brokerage and insurance sales, but increased with asset-based nontraditional activities such as venture capital, investment banking and asset securitization. Banks that engaged in risky nontraditional activities also tended to take risk in their traditional lines of business, suggesting that deregulation was neither a necessary nor a sufficient condition for bank failure during the crisis.