Is cloud computing the digital solution to the future of banking?

This study investigates the impact of banks’ strategic move to cloud computing on bank performance and risk-taking. Based on a novel index of banks’ exposure to cloud computing, we find that banks’ adoption of cloud computing is associated with lower cost efficiency, higher profit efficiency, and greater operational risk using data on Chinese banks over the period 2008–2019. We also find that cloud computing interacts with other newly emerging technologies, leading to synergy gains in cost efficiency and operational risk control but with a substitutive effect on profit efficiency from blockchain. The findings are of timely policy importance and practical relevance for regulators, policy-makers, and bank managers.     

The conditioning role of performance on the bank risk-taking channel of monetary policy: Evidence from a multiple-tool regime

The study investigates how monetary policy affects bank risk-taking under a multiple-tool regime of Vietnam during 2007–2018. Particularly, we also consider the conditioning role of bank performance, broken down by bank profitability and cost efficiency, in this nexus. Using both dynamic and static panel models, we show that the liquidity injection initiated by the central bank’s asset purchases induces banks to take more risks, captured by the traditional Z-score and two alternative measures of credit risk. However, monetary policy easing through decreased interest rates is beneficial to the credit portfolio and financial stability of banks, which therefore challenges the functioning of the bank risk-taking channel. This startling result is robust across three different interest rate measures, including lending rates, refinance rates and rediscount rates. Further analysis reveals that our observed effects are alleviated for banks with higher performance — i.e., more profitable and efficient banks. This in-depth finding offers more insights into the “search for yield” incentive, based on the theory of information asymmetry and the two competing hypotheses of “bad management” and “cost skimping”.     

Are there any cost and profit efficiency gains in financial conglomeration? Evidence from the accession countries

Diversified banks should benefit from an efficient allocation of resources, debt coinsurance and scope economies. At the same time, critics of diversification question these advantages pointing to agency problems such as managerial entrenchment and empire building that could also lead to diversification but for the ‘wrong’ reasons. This paper sheds further light on the issue of bank diversification by taking a direct look into how efficiently financial conglomerates operate and by measuring to what extent size and other bank- and market-specific factors matter in evaluating the relationship between diversification and efficiency. We focus on banks operating in the accession countries over the period 2001–2007 and estimate their cost and alternative profit efficiencies using a data envelopment analysis estimator. The results indicate that banks suffer from relatively high cost and profit inefficiencies and that there are noticeable differences in the efficiency levels across countries. Concerning banks’ degree of diversification, we find strong evidence to suggest that more diversified institutions are more likely to be cost- and profit-efficient and that size is a key factor in explaining best practice, particularly on the profit side.     

基于超越对数函数的商业银行成本、利润效率实证研究

通过随机前沿模型(SFA)和超越对数函数,本文建立了计算商业银行成本、利润效率的随机前沿模型。基于1994-2010年间我国14家商业银行相应数据的计算结果我们发现:1994-2010年间商业银行成本、利润效率经历了明显的改进趋势,且国有控股大型商业银行的成本、利润效率要显著低于股份制商业银行。无效率函数的分解结果中,资本充足率的提高和不良贷款率的降低将会对商业银行的成本、利润效率产生明显的积极影响,而外资持股比例的增加也会显著地提升商业银行的成本、利润效率。最后,本文得出了相应的结论和政策建议。     

Governance,efficiency and risk taking in Chinese banking

We employ a hand-collected unique dataset on banks operating in China between 2003 and 2011 to investigate the impact of board governance features (size, composition and functioning) on bank efficiency and risk taking. Our evidence suggests that board characteristics tend to have a greater influence on banks' profit and cost efficiency than on loan quality. We find that the proportion of female directors on the board appears not only to be linked to higher profit and cost efficiency but also to lower traditional banking risk. Similarly, board independence is associated with higher profit efficiency of banks; while the opposite is found for executive directors and in the presence of dual leadership of the CEO/chairperson. Among the control variables, we found that liquidity negatively affects profit and cost efficiency, while positively affecting risk. Interestingly, we find some evidence of an incremental effect of specific board characteristics on efficiency for banks with more concentrated ownership structures and state-owned institutions; while for banks with CEO performance-related pay schemes the effect on efficiency when significant is usually negative. Our results offer useful insights to policy makers in China charged with the task of improving the governance mechanisms in banking institutions.     

Accounting for banks,capital regulation and risk-taking

This paper examines risk-taking incentives in banks under different accounting regimes in presence of capital regulation. In the model the bank jointly determines the capital issuance and investment policy. Given an exogenous minimum capital requirement, lower-of-cost-or-market accounting is the most effective regime that induces the bank to issue more excess equity capital above the minimum required level and implement less risky investment policy. However, the disciplining role of lower-of-cost-or-market accounting may discourage the bank from exerting project discovery effort ex-ante. From the regulator’s perspective, the accounting regime that maximizes the social welfare is determined by a tradeoff between the social cost of capital regulation and the efficiency of the bank’s project discovery efforts. When the former effect dominates, the regulator prefers lower-of-cost-or-market accounting; when the latter effect dominates, the regulator may prefer other regimes.     

Efficiency and risk in commercial banking: empirical evidence from East Asian countries

This paper analyses the effects of off-balance sheet (OBS) activities and various types of risks on the cost and profit efficiencies of banks in seven East Asian countries between 2001 and 2008. Cost and profit efficiency scores are estimated using the data envelopment analysis approach. The results of this analysis are then used to identify the impact of OBS activities and risk exposures on cost and profit efficiencies using a Tobit regression. Bank insolvency risk (as measured by z-scores) is positively related to profit efficiency, while interest sensitivity, size, equity to total assets and OBS exposures all impact on cost efficiency. The analysis of the impact of input and output slacks illustrates that in around 1 in 5 cases banks’ cost efficiency can be improved by adjusting the former variables, whereas in only around 1 in 100 cases a similar outcome is possible for profit efficiency.     

Bank profitability,leverage constraints,and risk-taking

Traditional theory suggests that higher bank profitability (or franchise value) dissuades bank risk-taking. We highlight an opposite effect: higher profitability loosens bank borrowing constraints. This enables profitable banks to take risk on a larger scale, inducing risk-taking. This effect is more pronounced when bank leverage constraints are looser, or when new investments can be financed with senior funding (such as repos). The model’s predictions are consistent with some notable cross-sectional patterns of bank risk-taking in the run-up to the 2008 crisis.     

The impact of banking regulations on banks' cost and profit efficiency: Cross-country evidence

This paper uses stochastic frontier analysis to provide international evidence on the impact of the regulatory and supervision framework on bank efficiency. Our dataset consists of 2853 observations from 615 publicly quoted commercial banks operating in 74 countries during the period 2000-2004. We investigate the impact of regulations related to the three pillars of Basel II (i.e. capital adequacy requirements, official supervisory power, and market discipline mechanisms), as well as restrictions on bank activities, on cost and profit efficiency of banks, while controlling for other country-specific characteristics. Our results suggest that banking regulations that enhance market discipline and empower the supervisory power of the authorities increase both cost and profit efficiency of banks. In contrast, stricter capital requirements improve cost efficiency but reduce profit efficiency, while restrictions on bank activities have the opposite effect, reducing cost efficiency but improving profit efficiency.     

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.     

The impact of non-traditional activities on the estimation of bank efficiency: International evidence

This paper investigates the relevance of non-traditional activities in the estimation of bank efficiency levels using a sample of 752 publicly quoted commercial banks from 87 countries around the world, allowing comparison of the impact of such activities under different levels of economic development, geographical regions and other country characteristics. We estimate both cost and profit efficiency of banks using a traditional function that considers loans and other earnings assets as the only outputs, and two additional functions to account for non-traditional activities, one with off-balance sheet (OBS) items and the other with non-interest income as an additional output. Controlling for cross-country differences in regulatory and environmental conditions, we find that, on average, cost efficiency increases irrespective of whether we use OBS or non-interest income, although the results for profit efficiency are mixed. Our results also reveal that while the inclusion of non-traditional outputs does not alter the directional impact of environmental variables on bank inefficiency, regulations that restrict bank activities and enhance monitoring and supervision provisions improve both cost and profit efficiency.     

Does IT investment improve bank performance? Evidence from Europe

This paper investigates whether investment in information technology (IT) – hardware, software and other IT services – influences the performance of banks. Using a sample of 737 European banks over the period 1995–2000 we analyse whether IT investment is reflected in improved performance (measured using both standard accounting ratios and cost and alternative profit efficiency measures). Despite banks being major investors in IT we find little relationship between total IT investment and improved bank profitability or efficiency indicating the existence of a profitability paradox. However, the impact of different types of IT investment (hardware, software and services) on banks’ performance is heterogeneous. Investment in IT services from external providers (consulting services, implementation services, training and education, support services) appears to have a positive influence on accounting profits and profit efficiency, while the acquisition of hardware and software seems to reduce banks’ performance.     

Banking efficiency in Gulf Cooperation Council (GCC) countries: A comparative study

We measure cost and profit efficiencies of banks operating in six GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) using heteroskedastic stochastic frontier (HSF) models. Our results show that measures of cost and profit efficiencies of banks vary widely across the six gulf countries over the same period. We examine whether cost and profit efficiencies of Islamic banks are significantly different from that of conventional banks. After allowing for bank risk, asset quality, environmental influences such as the level of interest rate, and country effect, we find that cost and profit efficiencies of Islamic banks are similar to that of conventional banks. Our results suggest that the country-specific variables have significant impact on cost and profit efficiencies of banks operating in GCC countries. Our findings indicate that cost and profit efficiencies of Islamic banks are more volatile than that of conventional banks.     

The Impact of Mergers and Acquisitions on the Efficiency of the US Banking Industry: Further Evidence

Abstract:  Using the Stochastic Frontier Approach (SFA), this study investigates the cost and profit efficiency effects of bank mergers on the US banking industry. We also use the non-parametric technique of Data Envelopment Analysis (DEA) to evaluate the production structure of merged and non-merged banks. The empirical results indicate that mergers have improved the cost and profit efficiencies of banks. Further, evidence shows that merged banks have lower costs than non-merged banks because they are using the most efficient technology available (technical efficiency) as well as a cost minimizing input mix (allocative efficiency). The results suggest that there is an economic rational for future mergers in the banking industry. Finally, mergers may allow the banking industry to take advantage of the opportunities created by improved technology.     

差别化存款保险费率与银行风险承担——基于我国农村银行的经验证据

本文拓展了Freixas and Rochet(2008)的理论模型,证明存款保险差别化费率机制对银行风险承担具有抑制作用,在此基础上选取我国农村银行为研究对象,运用2015—2019年某省119家法人投保机构进行实证检验。研究发现:引入差别化费率设计显著降低了农村银行的风险承担;这一作用存在异质性,对于自身风险承担水平较低、资产规模较大的农村银行来说,抑制作用更为明显。进一步研究发现,差别化费率机制在一定程度上缓和了农信社改制短期内对农商行风险可能造成的不利影响。本文结论对加强存款保险制度的早期纠正功能、防范化解金融风险以及深化农村金融机构改革具有一定的理论意义和参考价值。     

Are scale economies in banking elusive or illusive?: Evidence obtained by incorporating capital structure and risk-taking into models of bank production

This paper explores how to incorporate banks' capital structure and risk-taking into models of production. In doing so, the paper bridges the gulf between (1) the banking literature that studies moral hazard effects of bank regulation without considering the underlying microeconomics of production and (2) the literature that uses dual profit and cost functions to study the microeconomics of bank production without explicitly considering how banks' production decisions influence their riskiness.Various production models that differ in how they account for capital structure and in the objectives they impute to bank managers – cost minimization versus value maximization – are estimated using U.S. data on highest-level bank holding companies. Modeling the bank's objective as value maximization conveniently incorporates both market-priced risk and expected cash flow into managers' ranking and choice of production plans.Estimated scale economies are found to depend critically on how banks' capital structure and risk-taking are modeled. In particular, when equity capital, in addition to debt, is included in the production model and cost is computed from the value-maximizing expansion path rather than the cost-minimizing path, banks are found to have large scale economies that increase with size. Moreover, better diversification is associated with larger scale economies while increased risk-taking and inefficient risk-taking are associated with smaller scale economies.     

The evidence on efficiency gains: The role of mergers and the benefits to the public

Operating efficiencies, employee productivity, profit performance and average relative efficiency (using Data Envelopment Analysis) were measured for Australian trading banks from 1986 to 1995. Changes in a bank’s market share of deposits is explored as a means of determining the extent to which efficiency gains are passed on to the public. In general, efficiencies rose in the post-deregulation period. Evidence from the merger cases studied supports the reports of others that acquiring banks are more efficient than target banks. However, the acquiring bank does not always maintain its pre-merger efficiency. Decision-makers ought to be more cautious in promoting mergers as a means to enjoying efficiency gains. There is mixed evidence on the extent to which the benefits of efficiency gains are passed on to the public.     

Government guarantees of loans to small businesses: Effects on banks’ risk-taking and non-guaranteed lending

We analyzed the loan guarantees that the Japanese government provided for banks’ loans to small and medium-sized enterprises (SMEs). We modeled and estimated how much and under what conditions loan guarantees affected banks’ risk-taking and banks’ non-guaranteed lending.In the presence of controls for bank capital and other factors that might affect supplies of bank credit, our estimates supported our model's implications that loan guarantees increased banks’ risk-taking.Consistent with our model, our estimates imply that, when banks initially had fewer guaranteed loans and then got more guaranteed loans, guaranteed loans were complements to, rather than substitutes for, non-guaranteed loans. As complements, loan guarantees could be “high-powered” in that they generated increases not only in guaranteed loans, but also increases in non-guaranteed loans that were a multiple of the increases in guaranteed loans. In addition, banks’ having more capital was associated with doing more non-guaranteed lending.     

互联网金融、存款竞争与银行风险承担

本文通过构建纳入互联网金融的银行环形城市模型,推演了“互联网金融→存款结构/付息成本→银行风险承担”的传导机制。在此基础上,以2003-2016年我国83家商业银行为样本,建立多重中介效应模型进行实证检验。研究结果表明:(1)互联网金融发展经由恶化存款结构和抬高付息成本两种渠道显著加重了银行风险承担水平,其中,恶化存款结构效应的相对贡献为50%左右,抬高付息成本效应的相对贡献为35%左右;(2)相较于互联网渠道构筑业态,互联网支付结算、互联网资源配置和互联网财富管理业态对银行存款结构和付息成本的不利影响更为强烈;(3)相对于国有、大规模、低流动性和低资本充足率商业银行,面对互联网金融的冲击,非国有、小规模、高流动性和高资本充足率商业银行的客户存款流失更快,平均付息成本上涨更多。     

Does banks’ dual holding affect bank lending and firms’ investment decisions? Evidence from China

This study investigates the effect of banks’ dual holding on bank lending and firms’ investment decisions using a sample of listed firms in China. We find that dual holding leads to easier access to bank loans, a result that is more pronounced for non-state-owned enterprises (non-SOEs) than SOEs. We also find that dual holding distorts banks’ lending decisions and harms the investment efficiency for SOEs, while resulting in optimal lending decisions and enhanced investment efficiency for non-SOEs. For non-SOEs, further analysis suggests that optimal lending decisions and efficient investment can be achieved for firms with higher ownership concentration, and firms in which the family and foreign investors are the controlling shareholders. We argue that, in emerging markets, whether a bank plays a monitoring role by directly holding the debt and equity claims of companies relies heavily on whether the potential collusion between firm executives and bank managers can be averted, which in turn is determined by the firms’ governance framework and ownership structure.