Shadow price of equity and political connectedness: A study of Chinese commercial banks

This study estimates the shadow price of equity capital applying a directional distance function for Chinese commercial banks. Using an unbalanced panel of 746 observations from 2013 to 2019, we find that the average shadow price of equity in the Chinese banking system is 2.94%. Moreover, in our sample, the price of equity of most banks is lower than that of deposits, suggesting that the majority of sampled banks are underleveraged during the study period. We also find that politically connected banks have higher prices of equity than their non-politically connected counterparts, and that the price of equity is positively related to ownership concentration. Furthermore, large politically related banks tend to have lower shadow prices of equity than large non-politically related banks, although large banks usually have higher prices of equity than small banks.     

State-Owned Banks as Competition Enhancers, or the Grand Illusion

We analyze the role of state ownership in the banking sector from the perspective of competition. That is, do state-owned banks play a special role as competition enhancers? Focusing on the market for mortgage loans in Switzerland, we test four hypotheses which are consistent with this view. First, are state-owned banks’ interest rates relatively cost sensitive? Second, are state-owned banks charging relatively low mark-ups? Third, are the state-owned banks’ interest rates particularly borrower friendly? And fourth, do state-owned banks exert a disciplinary effect on competitors’ prices? Based on a comprehensive database containing information at the individual bank level over the 1996–2002 period, our answer is ‘No.’     

Trademarking status and economic efficiency among commercial banks: Some evidence for the UK

As competition in the banking sector has intensified over the last two decades, commercial banks have started to use trademarks to differentiate their products and services from those offered by their competitors. Less clear are the implications of the trademarking activities on the commercial banks’ performance. In this paper, we compare the cost and profit efficiency of trademarking and non-trademarking banks in the UK, over the period 2001–2013 using stochastic frontier methods. We use Propensity Score Matching techniques to identify a sample of non-trademarking banks which share the same characteristics as the trademarking banks to ensure that variations in the efficiency between the commercial banks in our sample can be attributed to their trademarking status only. We then explicitly test the hypothesis that trademarking and non-trademarking banks share the same cost and profit frontiers. We cannot reject the hypothesis of a common cost and profit frontier. We also find that trademarking banks tend to be more profit efficient than non-trademarking banks while there is no significant difference between the cost efficiency scores of trademarking and non-trademarking banks.     

改进的效率测算模型、影子银行与中国商业银行效率

商业银行及其效率的高低是金融供给侧结构性改革的关键环节,而可以压缩的“坏”投入和影子银行对商业银行效率产生重要影响。本文首次建立理论模型并分析影子银行影响商业银行效率的路径;方法上,同时区分投入和产出的“好”或“坏”,拓展只区分产出的“好”或“坏”的效率测算模型;实证上,首次测算并分析“坏”投入、影子银行业务对商业银行利润、风险和效率的影响。结果表明:理论上,影子银行会同时增加风险承担和利润,但无法确定经风险调整后的利润增加能否提升效率;只区分产出的模型高估了效率,尤其是显著高估四大行和股份制商业银行第一阶段的效率,大型商业银行依靠网点的扩张不利于效率的提升;影子银行业务提升了四大国有银行尤其是股份制银行的效率,但对中小型商业银行效率影响较小。总的来看,压缩“坏”投入和规范影子银行是增加有效金融供给、优化金融供给结构和提升银行效率的重要途径。     

Shadow banking shadowed in banks’ balance sheets: Evidence from China’s commercial banks

Using hand‐collected data, we creatively construct an ‘on‐balance‐sheet shadow banking business’ (OBS‐SBB) measure to precisely quantify commercial banks’ shadow banking activity concealed on their balance sheets. We show that OBS‐SBB activities could both increase individual and systemic risks. To further test the underlying mechanisms, we use China’s implementation of Basel III as an exogenous shock and employ the difference‐in‐differences approach. We find that banks demand OBS‐SBB in order to bypass capital requirements, previously less‐capitalised banks significantly increase their OBS‐SBB ex‐post, and greater impact is found among small and medium‐sized banks and during loose monetary policy periods.     

资产价格波动与银行系统稳定

有关金融危机的理论研究表明,资产价格波动与银行脆弱性之间存在很强的相关性。资产价格波动主要通过信贷风险渠道、市场风险渠道、经纪业务收入渠道、为附属机构注资的风险渠道及“第二回合”渠道等传导渠道影响到银行系统的稳定。发生在斯堪的纳维亚和日本的银行危机证明,资产价格剧烈波动确实会造成严重的银行问题,所以为维持银行系统的稳定,监管当局应该密切关注资产价格可能出现的剧烈下跌对银行部门可能产生的风险并采取应对方法。     

Systemic Risk in the Chinese Shadow Banking System: A Sector-Level Perspective

We propose to measure the systemic risk in the shadow banking sector. Instead of testing how many institutions will fail due to the initial breakdown of one institution as extant network models do, we associate the systemic risk of one shadow banking sector with the total amount of unexpected losses it might generate both directly and indirectly. Our model focuses on balance sheet contagion and applies a loop algorithm to risk transfer. The result shows that trust companies were the main culprit of financial instability and commercial banks assumed the main risks over 2007–12 in the Chinese shadow banking system.     

Schumpeterian competition and efficiency among commercial banks

In this paper, we aim to fill the gap in the banking literature by quantifying the impact that the Schumpeterian competition mode – i.e. competition through the launch of new products (or new varieties of products) – has on the cost and profit efficiency of a sample of commercial banks based in the United Kingdom. We estimate both a cost and an alternative profit frontier on an unbalanced panel of UK commercial banks over the period 2001–2012. The intensity of competition through product innovation is proxied by the trademark intensity (i.e. the ratio between the number of trademarks registered in a given year by all the commercial banks – net of the trademarks registered by the bank under observation – and the employment in the sector) in the commercial banking sector. Our results show that the (lagged) trademark intensity in the commercial banking sector does affect negatively the mean cost and profit efficiency in the sector but there is evidence that as trademark intensity increases in the sector, commercial banks react by improving their cost and profit efficiency.     

Ethics,capital and talent competition in banking

We model optimal ethical standards, capital requirements and talent allocation in banking. Banks with varying safety-net protections, including depositories and shadow banks, innovate products and compete for talent. Managers dislike unethical behavior, but banks heed it only because detection imposes costs. We find: (i) higher capital induces higher ethical standards, but socially optimal capital requirements may tolerate some unethical behavior; (ii) managerial ethics fails to raise banks’ ethical standards; (iii) banks with lower ethical standards attract better talent and innovate more; and (iv) it is socially optimal to allocate better talent to shadow banks instead of depositories, and this allocation results in higher capital requirements and ethical standards for depositories. Consequently, with capital capacity constraints, the shadow banking sector is larger than the depository sector; talent competition induces a race to the bottom in ethical standards, and the regulator responds by setting capital requirements to magnify this size difference.     

Cost and Profit Efficiency of the Turkish Banking Industry: An Empirical Investigation

By employing a stochastic frontier approach, we examine the effect of bank size, corporate control, and governance, as well as ownership, on the cost (input) and alternative profit (input-output) efficiencies of Turkish banks. We find that the average profit efficiency is 84% for Turkish banks. The oligopolistic nature of the Turkish banking industry has contributed to less than optimal competition in the loan market and deposit markets. Our results indicate that the degree of linkage between cost and profit efficiency is significantly low. This suggests that high profit efficiency does not require greater cost efficiency in Turkey, and that cost in efficient banks can continue to survive in this imperfect market, where profit opportunities are abundant for all types and sizes of banks. Accordingly, our results indicate that the different sizes of banks have capitalized these opportunities equivalently.     

Turkish bank efficiency: Bayesian estimation with undesirable outputs

This paper analyzes the productivity and efficiency of Turkish banks from 2002 to 2010. We obtained estimates of efficiency, productivity growth and efficiency growth using a Bayesian stochastic frontier approach and focused on accounting for Non-Performing Loans (NPLs) for use in our model. Specifically, we introduce NPLs as a bad output in an input distance function, and estimate a system of non-linear equations subject to endogeneity. We confirm that the productivity growth of Turkish banks was positive over the period of this study, which was mainly due to the improvement in technology, while efficiency growth continued to be negative over the same period. Methodologically, we also prove that not accounting for NPLs in estimating the frontier model might seriously distort the efficiency and productivity results. The study also provides measures of shadow prices for NPL and discusses the results in terms of several interesting trends in Turkish banking. Finally, the paper provides efficiency and productivity comparisons between domestic and foreign banks.     

The persistence of profits of banks in Africa

This paper analyses the profit persistence of African banking sector, focusing on the role of the level of competition and banks earnings management. We apply Markov chain to analyse the extent and mobility of profit persistence, dynamic auto regressive model to assess the speed of convergence and the quantile regression technique to examine the determinants of profit persistence of banks in Africa. The results show a high level of profit persistence and relatively low speed of convergence. There is also evidence that regulation and banks earnings management affect both the level and persistence of banks profitability. We also find that competition as well as 2007/2008 financial crisis reduce the level and the speed of profit persistence.     

An Empirical Analysis of the Risk-Taking Channel of Monetary Policy in Turkey

This article investigates the bank-specific characteristics of risk-taking behavior of the Turkish banking sector as well as the existence of risk-taking channel of monetary policy in Turkey. Using bank-level quarterly data over the period 2002–2012 a dynamic panel model is estimated. We find evidence that low short-term interest rates reduce the risk of outstanding loans; however short-term interest rates below a theoretical benchmark increase risk-taking of banks. This result holds for macroeconomic controls and external factors as well. Furthermore, in terms of bank-specific characteristics, our analysis suggests that large, liquid, and well-capitalized banks are less prone to risk-taking.     

Shadow Banking,Risk Transfer,and Financial Stability

Shadow banking is the process by which banks raise funds from and transfer risks to entities outside the traditional commercial banking system. Many observers blamed the sudden expansion in 2007 of U.S. sub‐prime mortgage market disruptions into a global financial crisis on a “liquidity run” that originated in the shadow banking system and spread to commercial banks. In response, national and international regulators have called for tighter and new regulations on shadow banking products and participants. Preferring the term “market‐based finance” to the term “shadow banking,” the authors explore the primary financial instruments and participants that comprise the shadow banking system. The authors review the 2007–2009 period and explain how runs on shadow banks resulted in a liquidity crisis that spilled over to commercial banks, but also emphasize that the economic purpose of shadow banking is to enable commercial banks to raise funds from and transfer risks to non‐bank institutions. In that sense, the shadow banking system is a shock absorber for risks that arise within the commercial banking system and are transferred to a more diverse pool of non‐bank capital instead of remaining concentrated among commercial banks. The article also reviews post‐crisis regulatory initiatives aimed at shadow banking and concludes that most such regulations could result in a less stable financial system to the extent that higher regulatory costs on shadow banks like insurance companies and asset managers could discourage them from participating in shadow banking. And the net effect of this regulation, by limiting the amount of market‐based capital available for non‐bank risk transfer, may well be to increase the concentrations of risk in the banking and overall financial system.     

Bank efficiency,productivity, and convergence in EU countries: a weighted Russell directional distance model

The objective of this study is three-fold. First we estimate and analyse bank efficiency and productivity changes in the EU28 countries with the application of a novel approach, a weighted Russell directional distance model. Second, we take a disaggregated approach and analyse the contribution of the individual bank inputs on bank efficiency and productivity growth. Third, we test for convergence in EU28 bank productivity as well as in the inefficiency of individual bank inputs. We find that bank efficiency has been undermined by the financial crisis in banks notably from the EU15 countries. We also argue that bank efficiency and productivity in EU countries vary across the banking sector with banks from the ‘old’ EU showing higher efficiency levels. Nonetheless, a noticeable catching up process is observed for banks from the ‘new’ EU countries. Consequently, we do not find evidence of group convergence for bank productivity but there is evidence of convergence in bank efficiency change and technical change among the EU28 countries throughout the period 2005–2014. The driving force seems to be convergent technical change from the old EU member states’ banks. On the other hand, almost no convergence is detected for the banks’ individual inputs while the transition paths show heightened diversity during the crisis years.     

International banking: Current issues in perspective

Recent developments in international banking have raised new problems and policy issues as well as new opportunities for banks. To put these developments in perspective and analyze a number of policy issues of current concern is the purpose of the paper. In particular it sets out to explain three important aspects: the dollar's pre-eminence in spite of the ‘multinationalization’ of international banking, the more rapid growth of the international compared with the domestic banking sector, and the dominant role of banks in the expansion of international finance rather than other financial intermediaries or direct lending.     

Bank efficiency: The role of bank strategy and local market conditions

In this paper we focus on the assumption of a common efficient frontier when performing an efficiency study for the banking sector. The fact that environmental factors that are not appropriately controlled may easily bias efficiency estimates. First, we estimate a common cost and profit frontier. In this first stage, as an innovation to the literature, we use exogenously computed input prices rather than the normally used endogenous input prices. Second, we regress the estimated inefficiencies on a set of a bank’s strategic choices, local banking market variables, and local (regional) macro variables. For the analysis, we use a unique dataset of 401 largely independent cooperative local banks in the Netherlands for the years 1998 and 1999. Our results show that the use of exogenous input prices rather than endogenous input prices is particularly important for the cost frontier as the spread in cost inefficiencies becomes larger and more plausible. Our second stage results suggest that most of the estimated inefficiency indeed is managerial (X-) inefficiency. Environmental factors do play a role, but only to a limited extent.     

Back to the basics in banking? A micro-analysis of banking system stability

This paper analyzes the relationship between banks’ divergent strategies toward specialization and diversification of financial activities and their ability to withstand a banking sector crash. We first generate market-based measures of banks’ systemic risk exposures using extreme value analysis. Systemic banking risk is measured as the tail beta, which equals the probability of a sharp decline in a bank’s stock price conditional on a crash in a banking index. Subsequently, the impact of (the correlation between) interest income and the components of non-interest income on this risk measure is assessed. The heterogeneity in extreme bank risk is attributed to differences in the scope of non-traditional banking activities: non-interest generating activities increase banks’ tail beta. In addition, smaller banks and better-capitalized banks are better able to withstand extremely adverse conditions. These relationships are stronger during turbulent times compared to normal economic conditions. Overall, diversifying financial activities under one umbrella institution does not improve banking system stability, which may explain why financial conglomerates trade at a discount.     

The Effect of Bank Debt Downgrades on Stock Prices of Other Banks

We find that debt downgrades of money center banks elicit negative stock price responses in nondowngraded money center banks. Stock prices of larger regional banks also react to these downgrades. Although downgrades of regional banks evoke negative stock price responses for regional banks in the same geographic region, the importance of geographic region as a factor determining the extent of intra‐industry reactions has diminished since 1989. Our results indicate that the merger and expansion activities triggered by interstate banking have blurred differences between regional and money center banks as interstate banking activity has moved towards nationwide banking     

The influence of oil prices on the banking sector in oil-exporting economies: Is there a psychological barrier?

This paper examines the relationship between crude oil prices and banking sector market indices in the oil-exporting economies of the Gulf Cooperation Council (GCC), using daily frequency data over 2010–2017. Controlling for global banking impacts (S&P500 Banking Index) and interest rates (T-bills), dynamic ordinary least squared (DOLS) and fully modified ordinary least squared (FM-OLS) analysis indicates that oil prices positively affect bank indices until the $95 per barrel mark, after which the impact becomes negative, close to the psychological barrier found in the US equity market. The S&P500 Banking Index positively affects the GCC banking sector, whereas the interest rate affects it negatively. The validity of an inverse U-shaped relationship between crude oil price and banking sector indices is demonstrated. Causality analysis reveals the existence of bidirectional causalities between the prices of crude oil, GCC banking sectors, and the US banking sector. This paper demonstrates a vital non-linear relationship for oil-banking portfolio management and hedging strategies with oil price risk.