Banks’ non-traditional activities under regulatory changes: impact on risk,performance and capital adequacy

Using the big six Canadian chartered banks quarterly financial statements and daily stock market data from 1982 to 2018, we examine the impact of non-interest income on Canadian banks’ risk, performance and capital under the different major regulatory changes made to the Bank Act of Canada. Our results show that Canadian banks’ expansion into non-traditional activities had slightly decreased their risks and significantly improved their performance benefitting from income diversification. Moreover, while adhering to capital adequacy regulation, reshuffling banks’ portfolio towards non-traditional activities did not reduce Canadian banks’ capital ratio. In spite of the re-regulation towards universal banking against ring-fencing, this feature buttresses the effectiveness of capital adequacy regulation in Canada in linking banks capital allocation with their risk taking.     

Reconsidering bank capital regulation: a new combination of rules,regulators, and market discipline

Despite revisions to bank capital standards, fundamental shortcomings remain: the rules for setting capital requirements need to be simpler, and resolution should be an essential part of the capital requirement framework.We propose a revised system of capital regulation that addresses these needs by making changes to all three pillars of bank regulation: only common equity should be recognized as regulatory capital, and risk weighting of assets should be abandoned; capital requirements should be assigned on an institution-by-institution basis according to a regulatory (s, S) approach developed in the paper; a standard for prompt, corrective action is incorporated into the (s, S) approach.     

Market timing and corporate capital structure: a transatlantic comparison

This article provides comparative international evidence on the effect of market timing on corporate capital structures using panel data for US, UK and continental European firms. We document that the empirical regularity found for US firms, that historical market-to-book ratios and corporate leverage correlate negatively does not extend to UK and continental European firms. The latter tend to raise debt rather than equity when stock prices are high, thus sticking more closely to a pecking order in which debt is preferred over external equity.     

The impact of foreign capital on the Chinese banking market

In China, the foreign capital share of banks was restricted to 25% until 2006. Does such a relatively low share of foreign capital have any impact on the banking sector? In this paper, we use panel data on 19 major banks during 1996–2004 to shed light on the impact of foreign capital participation on the Chinese banking industry. We find that although the operating performance of foreign-owned banks is basically worse than that of domestic banks, as the market share of foreign-owned banks rises, they improve. For domestic banks, non-interest income decreases, while interest income increases. Therefore, the net effect of the foreign-owned banks' share on the profitability of domestic banks is small.     

Performance of Thailand banks after the 1997 East Asian financial crisis

The performance of commercial banks and government-owned specialized banks in Thailand is estimated after the 1997 East Asian financial crisis. Commercial banks exhibit increasing returns to scale, whereas government-owned specialized banks exhibit decreasing returns to scale, implying further increases in bank size and market concentration in the commercial bank sector but not for government specialized banks. Cost inefficiency varies by bank and is a function of the ratio of nonperforming loans (NPLs) to total loans, equity to total assets and liquid assets to total assets, as well as the number of branches. On average, banks with fewer NPLs, that are well capitalized and with adequate liquidity are efficient. Thus, stricter rules to regulate credit risk management and ensure capital and liquidity adequacy would enhance efficiency in the banking sector. Although estimated input substitutability appears to be low, labour and loanable fund are substitutes. However, labour and physical capital as well as physical and loanable funds are complements in commercial banks. All the three inputs of labour, physical capital and loanable funds are substitutes for the government specialized banks.     

The transmission of bank capital requirements and monetary policy to bank lending in Germany

We investigate the transmission of changes in bank capital requirements and monetary policy, and their interaction, on German banks’ corporate loan growth and lending rates. Our results show that increases in capital requirements are associated with an immediate decrease in total domestic and cross‐border bank lending. Changes in the euro area's monetary policy stance are positively related to corporate loan interest rates in general. Regarding the interacting effect of national bank capital requirements and euro area monetary policy, we observe that the transmission of accommodative euro area monetary policy to corporate lending rates can be attenuated by contemporaneous increases in bank capital requirements. Moreover, more strongly capitalized banks increase their loan growth in response to accommodative monetary policy whereas, for weaker banks, increasing capital requirements implies a decrease in their corporate loan growth. Our results confirm a tradeoff between higher capital requirements and accommodating monetary policy originating from banks’ capital constraints.     

Do bank bondholders price banks’ ability to manage risk/return?

In this paper, we empirically investigate whether bank bondholders value risk management, measured as risk-return efficiency (RRE), when pricing bond spreads. Based on a sample of 2,452 bonds issued by 78 European listed banks, for the period 2001–2015, we find evidence that the ability of banks to manage risk affects bond spreads: banks with more capable managers obtain a lower cost of debt. In particular our results show that bank bondholders are even more sensitive to RRE during the crisis period, for relatively poorly rated bonds, for unsecured/subordinated debt, and for long maturity debt. Our findings highlight that bondholders’ monitoring of banks is effective and takes into account the efficiency of risk management during financial and economic downturns, but during sound periods bank bondholders should strengthen their monitoring of risk management.     

Rating Agency Actions and the Pricing of Debt and Equity of European Banks: What Can we Infer About Private Sector Monitoring of Bank Soundness?

The recent consultative papers by the Basel Committee on Banking Supervision has raised the possibility of an explicit role for external rating agencies in the assessment of the credit risk of banks' assets, including interbank claims. Any judgement on the merits of this proposal calls for an assessment of the information contained in credit ratings and its relationship to other publicly available information on the financial health of banks and borrowers. We assess this issue via an event study of rating change announcements by leading international rating agencies, focusing on rating changes for European banks for which data on bond and equity prices are available. We find little evidence of announcement effects on bond prices, which may reflect the lack of liquidity in bond markets in Europe during much of our sample period. For equity prices, we find strong effects of ratings changes, although some of our results may suffer from contamination by contemporaneous news events. We also test for pre-announcement and post-announcement effects, but find little evidence of either. Overall, our results suggest that ratings agencies may perform a useful role in summarizing and obtaining non-public information on banks and that monitoring of banks' risk through bond holders appears to be relatively limited in Europe. The relatively weak monitoring by bondholders casts some doubt on the effectiveness of a subordinated debt requirement as a supervisory tool in the European context, at least until bond markets are more developed.
(J.E.L.: E53, G21, G33)     

Bank capital,the state contingency of banks’ assets and its role for the transmission of shocks

I show how the evolution of bank capital depends on the share of non-state-contingent assets in banks’ balance sheets and present the implications for macroeconomic dynamics. State-contingent securities impact on banks’ balance sheets through changes in their returns (and their prices), both of which depend on the current state of the economy. Non-state-contingent assets are signed before shocks are realized and their repayment is guaranteed. For this reason, they insulate banks’ balance sheets from recent economic activity in the absence of defaults. Non-state-contingent assets in banks’ balance sheets attenuate the amplification of shocks resulting from financial frictions. The same effect can be achieved if more weight is placed on the state-contingent assets in the equity related constraint against the costs of long-run output losses.     

Bank ownership type and temporal evolution of long‐term bank funding in the period 2005–2017

This study uses a large panel dataset of Western European banks to examine the determinants of bank funding stability. Banks are divided into three categories by bank ownership type; the ownership types in this study are commercial banks, cooperative banks and savings banks. Three sources of stable bank funding are investigated: customer deposits, equity, and long‐term liabilities. Furthermore, the sum of these funding components is used as a proxy variable for a bank's total available stable funding (ASF). A special focus is on the temporal evolution of these funding types. The regression results show that commercial banks’ funding became much more stable in the period 2005–2017. However, that funding remains, on average, less stable than does cooperative and savings banks’ funding. In addition, funding stability has remained at the pre‐crisis level in cooperative and savings banks, despite a steep dip in cooperative banks’ ASF during the sovereign debt crisis. Furthermore, banks substantially decreased financing from long‐term liabilities after the financial crisis, replacing it with customer deposits and equity.     

Regulatory quality,financial integration and equity cost of capital

We study the impact of international financial integration on firm‐level equity cost of capital in the presence of regulatory differences. International financial integration reduces the domestic cost of capital in the presence of well‐defined regulations that make it easier for foreign firms to overcome information asymmetry. We study this relationship for 55 countries for the period 2002 to 2014. Using multilevel mixed estimations, we find a negative relationship between cost of capital and both financial openness and regulatory quality. However, economies with better regulatory quality have a positive relationship between financial openness and cost of capital. Our results inform policy on the cost of higher level of regulations on firms’ equity cost of capital, especially when an economy has a high level of financial openness.     

我国商业银行外资参股效应再研究——基于DEA模型的银行稳定性分析

文章基于我国13家商业银行2002-2009年面板数据和DEA-Malmquist生产率指数,测算了银行业全要素生产效率变动情况,揭示了外资参股对我国商业银行稳定性的影响。研究发现:(1)研究组样本银行年度效率指数总体呈上升趋势,而对照组"明星"银行则无明显变化;(2)研究组银行与对照组银行年度效率指数差值由负转正,说明外资参股比例较高的银行生产效率有明显提升;(3)对照组银行是我国的"明星"银行,其整体生产效率均值最高,其次为股份制银行组,最后为国有银行组;(4)商业银行生产效率在外资参股磨合期内出现普遍下降,但磨合期结束后有明显提升;(5)美国金融危机对我国银行业生产效率产生了显著的负面影响。     

Financial Crisis and the Lost Decade*

Japanese banks incurred heavy losses in the early 1990s due to the bursting of the bubble economy of the 1980s. Japanese regulators allowed undercapitalized banks to operate under a very lenient application of capital requirement rules. At first, the regulators did not have strong institutional mechanisms and budgetary funds to take care of weakened banks. Even after obtaining strong power and money in 1988 to tackle the banking problem, the regulators would not nationalize a large number of banks because they could not manage nationalized banks themselves. The recent recovery of the Japanese economy gives the Financial Services Agency a chance to make up for the lost decade of regulatory discipline.     

The impacts of bank-specific and macroeconomic variables on the capital adequacy ratio: evidence from Islamic banks

The study investigates the relationship between the capital adequacy ratio (CAR) and different bank-specific and macroeconomic variables for 28 Islamic banks. We document that there is a statistically significant positive relationship between the CAR and the bank-specific and macroeconomic variables. In particular, bank-specific variables such as ROA, ROE, leverage, credit risk and size show a strong association with the CAR, while on the macroeconomic side, inflation, market capitalization and exchange rate have an impact on the average Islamic bank in our sample study. Furthermore, we run another model (equity to assets ratio) as dependent, with similar control variables, and the results reveal that, except for inflation, all the variables that have a significant effect on the CAR also influence the equity to assets ratio.     

债权与股权的转换比率:市场原则与方法

在我国目前情况下，债转股是银行剥离不良资产、企业减轻债务负担的重要举措，受到银行、企业以及各级政府的多方关注。然而，撇开我国目前的特殊情况不论，在企业正常的资本运营中、债转股、股转债也属于常见的操作。本认为，在正常情况下，应该依据市场的原则与方法来确定转换比率。为此，本引入期权方法评估企业债权和股权的价值。由于期权模型以有效市场假设为前提，并且直接考虑了债权和股权的收益与风险，这种方法更为有效地体现了等价交换的市场原则。     

The Role of Foreign Capital in the Banking Sector of Korea and Its Implications for Developing Countries

The entry of foreign capital marked a significant change in the Korean banking sector. It played a critical role in transforming insolvent banks into profit-making banks. The acquisition of domestic banks by foreign private equity funds restructured the management by changing the corporate governance and pursuing result-oriented policies, while it had a negative impact on the national economy in general. Korea’s experience shows that the role of foreign private equity funds in the domestic banking sector needs to be evaluated from the perspective of both the performance of each bank and its effect on the national economy.     

Size,Non-Performing Loan,Capital and Productivity Change: Evidence From Indian State-Owned Banks

While the relationship between portfolio risk and capital and its interrelationship with operating efficiency has been extensively studied, little work has been forthcoming on the interrelationships among credit risk, capital and productivity change. The paper makes an attempt to examine the same in the Indian context. Using data on state-owned banks (SOBs) for the period 1995–96 through 2000–2001, the paper finds capital, risk and productivity change to be intertwined, with each reinforcing and to a degree, complementing the other. The results imply that inadequately capitalized banks have lower productivity and are subject to a higher degree of regulatory pressure than adequately capitalized ones. Finally, the results lend support, especially for medium-sized banks, to the belief that lowering Government ownership tends to improve productivity.

     

Intellectual capital and firm performance: evidence from Indian banking sector

In the aftermath of the 2008 financial crisis, the entire Indian banking industry was paralysed and their performance was shattered by the unfolding of enormous cases of Non-performing Assets (NPA). The study estimates the operating efficiency of 40 Indian banks for 5 years (2011–15) as a proxy of performance measure using the output-oriented DEA-BCC model. We find that nearly 62% of the state-owned banks and 47% of the private banks are inefficient indicating that the inefficient banks need to reduce their inputs or improve their output to become efficient. The study further investigates the relationship between intellectual capital (IC) and bank performance using a truncated regression model. The regression results show that out of the three components of intellectual capital, only human capital efficiency is positively and significantly associated with operational efficiency while structural capital and finance capital have a negative impact on the efficiency of banks. The study concludes that to achieve competitive edge banks should invest in their human capital. The results are robust in the case of financial variables taken as a proxy for performance.     

Financial capital and banks in Hilferding and Sraffa: lessons for today

Rudolf Hilferding’s Das Finanzkapital dealt with the increasing role of finance in the German economy and the resulting structural transformations. The young Sraffa shared with Hilferding an interest on the role played by the banks in the transformation of capitalism. The relationship among banking and industrial capital implied different business models of the German and UK banks and determined the resulting domination of financial capital on the economy. We deepen the methodological and practical similarities and differences of the two scholars, discussing the aspects that are still relevant today to understand financialisation and instability of capitalism.     

Charter value,risk-taking and systemic risk in banking before and after the global financial crisis of 2007-2008

ABSTRACT

We investigate how bank charter value affects risk for a sample of OECD banks by using standalone and systemic risk measures before, during, and after the global financial crisis of 2007–2008. Prior to the crisis, bank charter value is positively associated with risk-taking and systemic risk for very large ‘too-big-too-fail’ banks and large U.S. and European banks but such a relationship is inverted during and after the crisis. A deeper investigation shows that such a behaviour before the crisis is mostly relevant for very large banks and large banks with high growth strategies. Banks’ business models also influence this relationship. We find that for banks following a focus strategy, higher charter value amplifies both standalone and systemic risk for large U.S. and European banks. Our findings have important policy implications and cast doubts on the relevance of the uniform more stringent capital requirements introduced by Basel III.