Non-interest income,profitability, and risk in banking industry: A cross-country analysis

Using bank accounting data for 22 countries in Asia over the period 1995–2009, this article applies the dynamic panel generalized method of moments technique to investigate the impacts of non-interest income on profitability and risk for 967 individual banks. We find that non-interest activities of Asian banks reduce risk, but do not increase profitability on a broad sample basis. Specifically, when considering bank specialization and a country's income level, the results become complicated. Non-interest activities decrease profitability as well as increases risk for savings banks. The impact is also different for commercial, cooperative, and investment banks either by increasing profitability or reducing risk. On the other hand, non-interest activities raise risk for banks in high income countries, while increasing profitability or reducing risk for banks in middle and low income countries. Finally, our results reveal that the persistence of risk is greatly affected by bank specialization and a country's income level, as all risk variables present persistence from one year to the next. Our findings suggest that the type of bank specialization matters for the effect of diversifying revenue sources.     

The impact of bank competition and concentration on bank risk-taking behavior and stability: Evidence from GCC countries

This paper presents a comprehensive assessment of the impact of competition on bank fragility pre and post financial crisis period in the GCC banking market as measured by bank risk-taking behavior and bank stability during the period 1998–2016. Our results indicate that a higher level of bank competition and the greater degree of concentration adds to financial fragility. The findings further shows that during the 2008 crisis, lower bank competition maintain the stability of GCC banks. We also find that lower level of competition and lower concentration in the banking market increases the risk-taking behavior of the low capitalized, low liquid and small banks which add to fragility in the banking system. Our findings suggest that countries with greater capital stringency, greater supervisory power, greater market discipline, and private monitoring, with explicit deposit insurance schemes, higher shareholder protection, and higher legal efficiency decrease banks’ risk-taking and increase their stability. We also find that greater regulatory restrictions and higher creditor protection decrease banks’ stability and increase risk in concerned countries. We find support for both competition-fragility and competition-stability hypotheses in the GCC banking market. The results also confirm that the use of a single measure of competition is insufficient to assess the role of competition in banking stability.     

Deposit insurance and banking system risk: Some empirical evidence

This paper examines the effect of federal deposit insurance on the riskiness of the commercial banking system. It is generally acknowledged that a system affixed rate deposit insurance creates incentives for banks to increase their risk-taking activities. Yet very little empirical evidence exists confirming or refuting this supposition. The coefficient of variation of bank profits and the standard deviation of profits are used as measures of bank risk. How these measures of bank risk are affected by deposit insurance coverage, and other variables thought to affect bank risk, is examined. Deposit insurance is found to have a statistically significant positive effect on bank risk. This result provides empirical support for the FDIC Improvement Act requirement of risk related deposit insurance premiums starting January 1994.     

The impact of prudential toolkits on loan growth in Central and Eastern European banking systems

This paper examines the effects of prudential policy on loan growth in 11 Central and Eastern European banking systems, spanning the period from 2000 to 2015. Based on the measures taken by the authorities of our sample countries, we build several prudential indices. Additionally, we control for the effects of several country-specific factors and bank-specific characteristics. Finally, we test the homogeneity of these effects, accounting for cycle, ownership, and bank effects. Generally, the empirical findings reveal a negative correlation between prudential toolkits and credit growth, with a conspicuous impact for tools targeting lending activity. We see that the effects of a change in the lending framework on loan growth are heterogeneous when we account for crisis and cycle patterns. Furthermore, the interaction between ownership and crisis reveals that, in normal times, foreign banks recorded higher loan growth compared to domestic banks. The opposite is true in turbulent times. The analysis of interactions between credit-based measures and bank-specific variables show that the effects of prudential actions depend on the bank size and leverage.     

The determinants of commercial banking profitability in low-, middle-, and high-income countries

Using a broad bank-level dataset and the GMM estimator technique described by Arellano and Bover (1995), this paper analyses how bank-specific characteristics, macroeconomic variables, and industry-specific factors affect the profitability of 10,165 commercial banks across 118 countries over the period from 1998 to 2012. Grouping the countries according to three income levels, we show that the determinants of bank profitability included in our model can explain existing profitability differences among commercial banks in low-, middle-, and high-income countries. The profitability determinants vary quite widely across the different levels of income in terms of significance, sign and size of the effect. The level of income has thus an important impact on the determinants of bank profitability.     

Commonality,macroeconomic factors and banking profitability

We study banks’ profitability in the US economy by means of dynamic factor models. Our results emphasize the importance of a few common cyclical market factors that greatly determine banking profitability. We conduct exhaustive regressions in a big data set of macroeconomic variables aiming to gain interpretability of our statistical factors. This allows us to identify three main macroeconomic factors underlying banking profitability: the financial burden of households and economic activity; household income and net worth and, in the case of ROA and ROE, stress in financial markets. We also provide an integrated perspective to analyse banks’ profitability dynamically and to inform policymakers concerned with financial stability issues, for which banks’ profitability is fundamental. Our models allow us to provide several rankings of vulnerable financial institutions considering the common market forces that we estimate. We emphasize the usefulness of such an exercise as a market-monitoring tool.     

非利息收入对我国商业银行业绩的影响——基于风险管理视角

近年来,我国商业银行收入结构出现了传统业务比重下降而非利息业务比重上升的趋势.利用我国14家上市商业银行2003年至2010年数据,对银行发展非利息业务的驱动因素进行分析,并对非利息业务和风险调整的银行收益率的相关关系进行检验,研究结果显示:积极开展非利息业务是我国商业银行的主动寻求新利润来源的行为,并不是迫于来自传统存贷业务的竞争压力;非利息业务提高了银行经过风险调整的盈利能力.     

Do contractionary monetary policy shocks expand shadow banking?

Using VAR models for the USA, we find that a contractionary monetary policy shock has a persistent negative impact on the level of commercial bank assets, but increases the assets of shadow banks and securitization activity. To explain this “waterbed” effect, we propose a standard New Keynesian model featuring both commercial and shadow banks, and we show that the model comes close to explaining the empirical results. Our findings cast doubt on the idea that monetary policy can usefully “get in all the cracks” of the financial sector in a uniform way.     

Efficiency,growth and market power in the banking industry: New approach to efficient structure hypothesis

We extend the work of Homma, Tsutsui, and Uchida (2014) to provide empirical evidence on nexus of relationships in efficient structure (ES) hypothesis. In this framework, we test causality from cost efficiency to bank growth and then from bank growth to market concentration. We apply this approach to banking industry in Association of South East Asian (ASEAN) over the period of 1999–2014. The efficiency scores have been estimated by employing Slack Based Measurements Data Envelopment Analysis (SMB DEA). We apply Two-step system Generalized Method of Moments (GMM) and Panel Vector Auto Regression (PVAR) to account for endogeneity in estimation models. The results show that cost efficiency enables the banks to grow and obtain higher market share. The resultant growth then leads to higher market concentration/bank market power. There is also some evidence to support for quiet life (QL) hypothesis. Therefore, both ES and QL hypotheses may coexist in ASEAN banking industry.     

城市商业银行金融服务多样化能否影响城市人口集聚？

本文首先通过理论剖析和文献总结探讨城市商业银行金融服务多样化与城市人口集聚之间的关系,之后使用中国60家城市商业银行2001-2010年数据,实证结果证实城市商业银行金融服务多样化对城市人口集聚起到正面作用;城市商业银行经营规模和绩效均促进城市人口集聚,同时本文验证了宏观经济发展和城市人口集聚具有正相关的关系。加入时间效应后的研究结果与基本模型一致,表外业务、非利息收入均对城市人口集聚产生正相关影响,但非利息收入对城市人口集聚的正相关影响只体现在：2005-2010年时间段;加入地区效应的研究发现：城市商业银行金融服务多样化对东部,西部城市人口集聚的促进作用明显,而且在西部的影响程度大于东部地区。     

Does bond market development enhance the banking sector’s efficiency in resource allocation? Industry-level evidence from Korea

Korea’s financial system used to be bank-based, with banks playing the leading role in financing corporations. As highlighted by Park et al. (2019), however, bond markets have developed rapidly in Korea and other Asian countries. The corporate bond market competes with banks as a source of finance for large borrowers. As such, bond markets may affect banking sector operation, a process known as disintermediation. In this paper, we examine whether bond market development improves the efficiency of resource allocation in Korean bank lending. We propose two channels through which bond market development affects the efficiency of bank lending. Since the two channels have opposing effects on the efficiency of banking, the issue must be settled by empirical analysis. We find that bank loans are much less efficient than bond financing in allocating resources across industries. Furthermore, banks are particularly inefficient in resource allocation in industries that rely more on bond financing. This suggests that competition from bond financing does not improve allocative efficiency of bank loans.     

Structural changes,competition and bank stability in Malaysia’s dual banking system

This paper assesses Malaysia’s competition landscape and its risk implications subsequent to conventional banking consolidation and Islamic banking penetration in the aftermath of the 1997/1998 Asian financial crisis. Employing a panel sample of conventional and Islamic commercial banks, it arrives at the following conclusions. First, the consolidation exercise, which has led to a significant reduction in the number of domestic commercial banks, has not stifled banking competition. Second, the paper provides empirical support for the competition-stability relationship, particularly for the conventional banking sector. Islamic banking sector risk appears to be neutral to market competition or market power, although there is limited evidence that it increases with overall market concentration. Finally, the analysis uncovers the risk-increasing effect of the Islamic banking market structure on the conventional banking sector. By contrast, conventional banking market concentration tends to reduce the credit risk of Islamic banks.     

利率市场化时代下商业银行发展对策研究

利率是国家宏观调控的重要手段。2013年7月20日,中央银行取消了商业银行贷款下限的限制,使贷款利率完全由市场竞争来决定。利率市场化对商业银行的经营风险和经营环境产生了重大的影响,对商业银行未来的发展既是机遇也是挑战。在利率市场化时代下,商业银行必须采取必要的措施来把握机遇和迎接挑战。文中主要围绕利率市场化对商业银行的影响,对其未来可持续发展有针对性地提出对策。     

Income diversification and bank risk in Asia Pacific

This paper investigates the effect of income diversification on bank risk for a large sample of commercial banks in 14 Asia Pacific economies over the period 2011–2016. Using a dynamic panel data model with a system generalized methodof moments estimator, we find that banks with a higher level of income diversification are less risky in general. We further consider both developed and emerging economies according to the International Monetary Fund's classification of the level of economic development. Specifically, for emerging economies, the results indicate that banks with a higher level of income diversification face less risk. However, the diversification of commercial bank income has no significant impact on bank risk in developed Asia Pacific economies.     

Political regimes and bank interest margins

The political determinants of banks' profitability are yet to be fully explored in the political economy of finance literature. This article brings politics to the theoretical discussion and the empirical analysis of bank interest margins, arguing that differences in political regimes are crucial in accounting for variations in banking profits across countries. The paper argues that we should expect lower margins from financial intermediation in autocracies than in democracies because of an inherent credibility problem and a lack of oversight in the former. Limited by state-owned banks or regulations favoring cronies, the room for financial elites to develop independent political power to threaten the government should be lower in autocracies than in democracies. I test this hypothesis with nonparametric (matching) and parametric analyses, where the former is used to estimate the latter to lower model dependence. The results consistently show that banks' interest margins in autocracies are lower by some amount between -0.4 and -1.3. This association is also confirmed indirectly when we analyze the impact of banking competition. The existence of big banks in democracies is positively related to banks' profits from intermediation, while the opposite is true for autocracies.     

Factors influencing bank risk in Europe: Evidence from the financial crisis

We use a dynamic panel data model to analyze bank-specific and macroeconomic determinants of bank risk for a large sample of commercial banks operating in the euro area. The selected time span, from 2001 to 2012, considers the impact of the on-going financial and economic crisis on the Eurozone banking system. Our results indicate that capitalization, profitability, efficiency and liquidity are inversely and significantly related to bank risk. However, the recourse to wholesale funding by banks seems to increase their risk. We also find that less-concentrated markets, lower interest rates, higher inflation rates and a context of economic crisis (with a falling GDP) increase bank risk.     

Bank lending: The bank ownership focus in the pre- and post-global financial crisis periods

The objective of this research is to examine the impact of bank ownership on the composition of working capital, investment, and consumption loan types before and after the global financial crisis (GFC). The data has been grouped into pre-GFC and post-GFC sub-periods. The pre-GFC period encompasses the post-Asian crisis time period until 2006, just before the start of the GFC. The post-GFC period comprises the time period 2009 until 2016. Data were obtained from the Indonesian Banking Directory of the Indonesian Central Bank, commercial bank annual reports provided by Infobank magazine, and the Indonesian Banking Development Institute. The findings reveal the differences and changes in the composition of loan types for the different forms of bank ownership. Government-owned banks tend to focus on consumption loans, whereas foreign-owned banks outpace domestic-owned banks in the financing of working capital loans. After the GFC, government-owned banks increased their consumption loans significantly. This research augments the knowledge about loan portfolio compositions and trends pertaining to different bank types. It can serve as a benchmark and can be applied to enhance decision-making in the banking industry. Furthermore, Indonesian regulating authorities can utilize the information from a strategic and policy perspective to monitor, manage and control financial intermediation from a macroprudential perspective.     

Investor protection,regulation and bank risk-taking behavior

This paper examines whether the influence of investor protection on banks’ risk is channeled through banking regulation, and vice-versa, using panel data from a sample of 567 European and US banks for the 2004–2015 period. As banking regulatory factors, we consider capital stringency, activity restrictions and private monitoring, whereas as investor protection factors, we consider the level of shareholder and creditor protection. We find that banking regulation moderates the positive direct influence of investor protection on banks’ risk, while investor protection reinforces the negative direct influence of banking regulation on risk. Moreover, we show that the negative effect of national regulations on banks’ risk is more pronounced during systemic crisis years. Finally, taking into account market competition, we argue that private monitoring only has a direct effect on banks’ risk, whereas the effects of capital stringency and activity restriction are channeled through market competition.     

资本账户开放缩窄了商业银行利差吗？——来自41个新兴市场经济体的证据

银行利差反映银行业效率,研究资本账户开放对银行利差的影响及作用机理具有重要的现实意义。构建一个包含异质性企业的多部门分析框架,从微观层面剖析资本账户开放影响银行利差的内在机制,并运用41个新兴市场经济体国家1996—2016年的数据进行实证检验,研究结果表明：资本账户开放显著降低了商业银行利差,法定型和事实型开放指数每增加一单位标准差,银行利差分别下降0.68和0.90个百分点。由此可见,加快推进资本账户开放是新常态下提升银行业效率,降低社会融资成本,进而实现经济高质量发展的重要途径。商业银行应大力拓展非利息业务,促进产品和业务升级,创造新的盈利增长点,以弥补利差缩窄带来的不利影响。     

Accounting for financial instruments in the banking industry: conclusions from a simulation model

The paper analyses the effects of three sets of accounting rules for financial instruments – Old IAS before IAS 39 became effective, Current IAS or US GAAP, and the Full Fair Value (FFV) model proposed by the Joint Working Group (JWG) – on the financial statements of banks. We develop a simulation model that captures the essential characteristics of a modern universal bank with investment banking and commercial banking activities. We run simulations for different strategies (fully hedged, partially hedged) using historical data from periods with rising and falling interest rates.

We show that under Old IAS a fully hedged bank can portray its zero economic earnings in its financial statements. As Old IAS offer much discretion, this bank may also present income that is either positive or negative. We further show that because of the restrictive hedge accounting rules, banks cannot adequately portray their best-practice risk management activities under Current IAS or US GAAP. We demonstrate that – contrary to assertions from the banking industry – mandatory FFV accounting adequately reflects the economics of banking activities.

Our detailed analysis identifies, in addition, several critical issues of the accounting models that have not been covered in previous literature.