The impact of revenue diversification on bank profitability and risk: evidence from MENA banking industry

The aim of this paper is to investigate the effects of revenue diversification on bank performance while shedding light on the impact of the shift towards non-interest income sources. To this end, we use a sample of 275 banks from fourteen MENA countries over 1990–2011. The model estimation using the GMM system reveals that diversification, when taken as a whole, improves bank profitability. We also split the non-interest income and we find that trading-generating business lines contribute the most to boosting profitability and stability. Engaging in non-interest-related activities worsens the benefit-cost trade-off of diversification, induced by the increased insolvency risk.     

Do the business cycle and revenue diversification matter for banks’ capital buffer and credit risk: Evidence from ASEAN banks

We examine the association of the business cycle and revenue diversification with the banks’ capital buffer and credit risk for a sample of banks from the Association of Southeast Asian Nations (ASEAN) region from 1998 to 2018, using 2847 banking firm–year observations. We find that ASEAN region banks react anticyclically in adjusting their capital buffer levels and credit risk. We find revenue diversification benefits and that banks, through revenue diversification, can reduce their credit risk while achieving capital savings when confronting economic downturns. Our results offer support for the Basel III accord. However, the relations revealed are somewhat moderated by the regulatory quality, competition, and phase of the business cycle encountered by ASEAN region banks.     

Market discipline in international banking regulation: Keeping the playing field level

The focus of this article is the debt market as a powerful disciplinarian source for large and complex banking organizations around the world. We empirically study the interactions between reinforcing banks’ market discipline and preserving a level playing field in international banking. Our approach consists of conducting cross-country comparisons of the secondary market prices sensitivity to market measures of bank risk (traditional and financial strength ratings). The results are generally consistent with the market discipline paradigm. However, much progress still needs to be made (especially in Japan and certain European countries) in order to make the level playing field principle compatible with the reinforcement of market discipline on an international level.     

Geographic versus industry diversification: Constraints matter

This research addresses whether geographic diversification provides benefits over industry diversification in the Eurozone. Our contribution is to show that in the absence of constraints, no empirical evidence is found to support the argument that geographic diversification dominates industry diversification, except in the euro subperiod. With short-selling constraints, however, the tangency portfolio of geographic diversification is not attainable by industry diversification. In out-of-sample geographic minimum variance portfolios outperform industry portfolios in economic terms, although we cannot establish statistical significance.     

International diversification and Microfinance

International commercial banks, institutional investors, and private investors have become increasingly interested in financing microfinance institutions (MFIs). This paper investigates whether adding microfinance funds to a portfolio of risky international assets yields diversification gains. By using mean-variance spanning tests with short-sale constraints, we find that investing in microfinance may be attractive for investors seeking a better risk-return profile. Specifically, the analysis suggests that investing in MFIs from Latin America, or microfinance and rural banks yields more efficient portfolios. In contrast, adding MFIs from Africa or microfinance NGOs to a portfolio of international assets is not beneficial for a mean-variance investor.     

New technology and banking employment in the EEC

Retail banking is traditionally highly labour-intensive and employment in the industry has been rising steadily for many years. However, new technology is now being introduced which is beginning to have an impact on levels of employment. In the European Economic Community it is likely that productivity will increase only slightly faster than demand up to 1990 and that employment will not fall substantially. After that date, it will almost certainly fall faster. Negotiations between management and unions, at a national and international level, should ensure that the introduction of new labour-saving technology be complemented by reductions in working time and the creation of more stimulating, labour-intensive positions.     

What is the major determinant of cross-border banking flows?

This study examines the major determinant of cross-border credit flows through global banks across 70 countries. Employing a Bayesian dynamic latent factor model, we decompose volatilities of banking flows into the contribution of a global common factor, regional common factor, and country-specific factor. The results indicate that the global and regional common factor explains about 40–50 percent of volatility in overall cross-border banking flows. In particular, the contribution of the global common factor increased in the 2000s. Simultaneously, main determinants are largely heterogeneous across countries: this implies that the desirable policy response to credit inflows may differ for each host country.     

Economic stability under alternative banking systems: Theory and policy

In this paper we show in a thought experiment that in an economy where i) investors hold rational expectations, ii) output is generated by a linear homogeneous production function, and iii) real investment is allocated across sectors according to the CAPM, a fractional reserve banking system is not Pareto efficient and amplifies the business cycle. In developing these results we show that these three well known propositions in economics also imply a new view of the business cycle, one where the business cycle is described in terms of the dispersion of an ex-ante probability distribution. The policy implication of this analysis is that bank regulation should go further than the Volcker rule or the Vickers commission proposal by restricting bank investments to currency and deposit accounts on the central bank. Nonbank financial institutions should then carry out the financial intermediation function now carried out by banks. The paper proposes that post office banking perhaps augmented with blockchain technology sometime in the future is one way to implement the transition from fractional reserve banking to full reserve banking. While little academic work has been done on full reserve banking in the aftermath of the Great Crisis, it is interesting to note that it is part of banking reform proposals now (July 2016) before the parliament in Iceland and a special national referendum in Switzerland.     

International portfolio diversification: a synthesis and an update

This paper provides a synthesis of the existing literature on international portfolio diversification and presents some new results on the subject. We address the question of whether international portfolio diversification is always a reasonable method of reducing the risk of an investment portfolio without negatively affecting its return expectations. Unfortunately, there is still not a simple answer to this question. When ex-post data is examined, potential benefits of international diversification can certainly be detected. However, we also argue that it might be difficult for investors to select an optimal investment strategy ex-ante, when the correlation structure among the international equity is unstable over time. While such findings do not completely rule out the potential benefits of international diversification, they certainly make them more difficult to realize in practice.     

Time-varying international diversification and the forward premium

This paper reproduces the slope of the uncovered interest rate parity (UIP) regression for ten country pairs within one standard deviation under rational expectations. We propose an infinite horizon dynamic stochastic general equilibrium model with incomplete markets. Heterogeneous investors experience varying risk aversion as a result of habit formation.The underlying mechanism of the model relies on varying international diversification in the investors' portfolio choice decision. In response to their changing habit levels, investors' hedging desire varies over time. This leads to adjustments in interest rates. The habit-induced investment decisions are negatively correlated with movements in the exchange rate. This results in a negative correlation between interest rates and expected exchange rates, as implied by a negative UIP slope.Depending on the magnitude of habits, the model is capable of reproducing positive as well as negative UIP slopes, as seen empirically in the data.     

When arm's length is too far: Relationship banking over the credit cycle

We conduct face-to-face interviews with bank chief executive officers to classify 397 banks across 21 countries as relationship or transaction lenders. We then use the geographic coordinates of these banks’ branches and of 14,100 businesses to analyze how the lending techniques of banks near firms are related to credit constraints at two contrasting points of the credit cycle. We find that while relationship lending is not associated with credit constraints during a credit boom, it alleviates such constraints during a downturn. This positive role of relationship lending is stronger for small and opaque firms and in regions with a more severe economic downturn. Moreover, relationship lending mitigates the impact of a downturn on firm growth and does not constitute evergreening of loans.     

Cross-country evidence on the value of corporate industrial and international diversification

We provide evidence on the value of industrial and international diversification for more than 3000 firms from Germany, the U.K., and the U.S. Consistent with prior studies, we find that industrial diversification reduces firm value in the U.K. and the U.S. Furthermore, similar to the recent findings of Denis et al. [J. Finance 57 (2002)], we find that U.S. multinationals trade at a discount relative to firms operating only in the domestic market. This result is robust to different benchmarks used to measure the value of diversification. By contrast, we find that international diversification has no effect on the value of firms headquartered in either Germany or the U.K.     

Country and currency diversification of bond investments: do they really make sense for Swiss investors?

The inclusion of hedged or unhedged foreign currency bonds within a strategic asset allocation is a crucial decision which should be analyzed carefully. The goal of this paper is to provide a contribution to this analysis by focusing particularly on the time horizon of the investment. Results are analyzed from the perspective of a Swiss investor. We find that over the last 21 years, investing in bonds denominated in Swiss Francs has been clearly less efficient in terms of risk-adjusted returns than investing in a hedged global bond portfolio. For short-term investors, we find robust evidence against the hypothesis of investing in unhedged foreign currency bonds. The picture changes dramatically, however, when we consider an investment horizon of 6 years and the normal case of balanced portfolios including also equities and domestic bonds. In this case, the optimal strategy for the period we analyzed would have been to hedge only the exposure to US dollar bonds.      

Contagion effect on bond portfolio risk measures in a hybrid credit risk model

This paper illustrates how modelling the contagion effect among assets of a given bond portfolio changes the risk perception associated to it. This empirical work is developed in a hybrid credit risk framework that incorporates recovery rate risk. Dependence structures among firms and between external shocks affecting firms together are considered. The presence of correlations among firm leverage ratios and the interrelation between default probabilities and recovery rates produces clusters of defaults with low recovery rates. This has a major impact on standard risk measures such as Value-at-Risk and conditional tail expectation. Consequently, an appropriate measurement of the contagion has a tremendous effect on the capital requirement of many financial institutions.     

Market segmentation and international diversification across country and industry portfolios

We conjecture that partially segmented stock indexes that are characterized by low correlation with the world market are mainly priced by local factors and should produce abnormal returns relative to a global asset-pricing model. This implies a negative relation between correlation and future index returns in the presence of segmented indexes. Empirical evidence confirms such a relationship for the sample of industry indexes, suggesting a heterogeneous segmentation. However, we do not observe a similar pattern for country indexes. In addition, the international diversification potential of industries does not vanish during volatile periods. The hypothesis that the negative relationship should be stronger for the more segmented subsamples that are characterized by small market size and emerging country origin is verified for the industry sample. Thus, cross-industry diversification is superior to mere cross-country diversification.     

Exploring the benefits of international government bond portfolio diversification strategies

We use the Bayesian approach of Wang (1998) to examine the diversification benefits of investing in international government bonds. We find that no short-selling constraints substantially reduce but do not eliminate the diversification benefits when only investing in G7 government bonds with different maturities. There are significant diversification benefits when using the G7 bonds, an inflation-linked bond index, and emerging market bonds even in the presence of no short-selling constraints. The superior performance is driven by the emerging markets bonds. We also find that the diversification benefits vary across different economic states.     

Systemic risk spillovers in the European banking and sovereign network

We propose a framework for estimating time-varying systemic risk contributions that is applicable to a high-dimensional and interconnected financial system. Tail risk dependencies and systemic risk contributions are estimated using a penalized two-stage fixed-effects quantile approach, which explicitly links time-varying interconnectedness to systemic risk contributions. For the purposes of surveillance and regulation of financial systems, network dependencies in extreme risks are more relevant than simple (mean) correlations. Thus, the framework provides a tool for supervisors, reflecting the market's view of tail dependences and systemic risk contributions. The model is applied to a system of 51 large European banks and 17 sovereigns during the period from 2006 through 2013, utilizing both equity and CDS prices. We provide new evidence on how banking sector fragmentation and sovereign-bank linkages evolved over the European sovereign debt crisis, and how they are reflected in estimated network statistics and systemic risk measures. Finally, our evidence provides an indication that the fragmentation of the European financial system has peaked.     

The effects of revenue diversification and cross border banking on risk and return of banks in Africa

The paper analyses the implications of revenue diversification and cross-border banking for risk and return. We sample 320 banks across 29 African countries and employ System GMM estimator as a methodological approach to shed further light on the diversification-stability nexus by examining the complex interaction between three key variables: cross-border banking, diversification and bank stability. The results suggest that exploration risk reduces diversification as the level of capital increases when banks cross border to diversify across revenue generating activities. Our analyses further show that, banks in Africa derive absolute benefits from diversification if they cross border and diversify their revenue base concurrently. These results are robust to a range of controls including alternative variable specifications, regulatory environment that bank operate and methodology.     

Taxation and international banking

The purpose of this paper is an examination of the relationship between taxation and the working of international banking arrangements. The main task is directed to the ways taxation determinations by national authorities affect the ways international banks go about their business. International coordination through the Organisation for Economic Co-operation and Development (OECD) is a major focus of the analysis. There is no general exposition of principles bearing upon international taxation. Rather, attention is directed to the determination of tax obligations in any one jurisdiction. Thus, there is a close scrutiny of the mechanics of taxation in the international setting bringing out the uncertainties and the imponderables in any application. Much attention is given to structural arrangement in international banking as well as capital arrangements in any one jurisdiction and how this applies to and affects the banking group as a whole. The result is to bring out the complexity of the agenda for tax applications on a common basis across internationally operating groups. Most jurisdictions recognise that they cannot await common agreements because new instruments and arrangements emerge at very frequent intervals and their tax implications have to be addressed. There has to be relief from uncertainty if markets are to develop effectively. Thus, there is in an importance sense of partnership between tax authorities and market participants in many countries. International deliberations have taken too long.     

中国影子银行发展成因实证分析——基于2002~2012年月度数据

综合运用格兰杰因果检验和分位数回归技术对我国影子银行的各种影响因素进行实证分析。结论表明,我国影子银行是在金融二元结构和利率管制格局下,金融活动主体为规避监管、分散风险以及投机套利而进行金融创新的产物。利率管制是促成我国影子银行发展的根本原因,经济结构变迁、经济周期运行及宏观调控政策在总量与结构层面作用于金融资源供求关系,通过扩大或收缩监管套利空间,也对影子银行规模变动产生了重要影响。