Post on 28-Dec-2015
Ownership Structure, Supervisory Regulation and the Diversification Effects on Bank Performance
Ownership Structure, Supervisory Regulation and the Diversification Effects on Bank Performance
Hsiangping TsaiHsiangping TsaiDepartment of Finance, Yuan Ze University
Yuanchen ChangYuanchen ChangDepartment of Finance, National Chengchi University
Kuanyu LaiKuanyu LaiDepartment of Finance, National Chengchi University
2
Effects of diversification on bank performance
• Possible benefits¤ Risk reduction, information sharing, internal
capital market Ross(1989); Saunders and Walter(1994); Houston et al.
(1997)
• Recent empirical evidence¤ Lower market valuation, poorer risk-adjusted
performance, higher level of risk taking Laeven and Levine(2007a), Stiroh(2004a, 2004b); Stiroh
and Rumble(2006); Demsetz and Strahan(1997); Acharya et al.(2006)
3
Agency cost explanation
• Managers engage in diversification¤ To reduce their own risk (Amihud and lev,
1981; May, 1995)
¤ To obtain better compensation packages or to protect their own positions (Jensen, 1989, Shelifer and Vishny, 1989)
¤ To be able to pursue riskier activities (Demsetz and Strahan, 1997)
4
Objective
• To document diversification effects on the performance of banks around the world
• What might help limit agency costs and thus constrain poor performance of diversification?¤ dominant shareholder monitor
¤ the ability of bank supervisors to identify and restrict high risk activities
5
The role of dominant owner
• Ownership structure of banks: Government, foreign and domestic private owners.¤ State-owned banks may suffer from political
pressures La Porta et al. (2002), Sapienza (2004),Dinc ( 2005),
Micco et al. (2007)¤ Foreign and domestic private owners: Global
advantage vs. Home country advantage Berger et al. (2001), Bonin et al. (2005), Lensink and
Naaborg (2007)
6
Supervisory restrictions on bank activities
• Debatable policy issue: restricted or diverse activities?
• We address this issue by asking ¤ whether restrictions on bank activities are
able to constrain the negative performance from diversification?
7
Diversification measures
• Income diversity
• Asset diversity
incomeoperatingTotal
incomeoperatingOtherincomerestinteNet diversityIncome
- 1
assetsearningTotal
assetsearningOtherloanstotalNetdiversityAsset
- 1
8
Diversification performance
• Activity adjusted performance
¤ αi and 1-αi: the share of each activity ¤ P: the average performance for specialized banks
in each activity
• Excess performance from diversification
21 )1( _ PPPadjAct iii
iii PadjActPPExcess _
9
Sample selection and data sources
• Annual bank accounting data from 1995~2006¤ Bankscope (July 2007 DVD-ROM edition)¤ Banks excluded
total assets less than US$100 million Islamic banks, central banks & multi-lateral
government banks obs. with missing data or with extreme outliers those in countries with less than 100 obs.
¤ The remaining sample: 67,108 bank-year obs. from 70 countries.
10
Sample selection and data sources
• Ownership¤ Source: Bankscope (July 2007 DVD-ROM edition)¤ Dominant owner: the largest owner who has more
than 25.01% voting shares¤ Ownership classification
Banks that are widely-owned Banks that are owned by a dominant owner: local
government, foreign or domestic private shareholder.
11
Sample selection and data sources
• Supervisory restrictions on bank activities¤ Source: bank regulation and supervision
database provided by the World Bank¤ Activity restrictions
(1) Securities activities (SEC) (2) Insurance activities (INS) (3) Real estate activities (RES)
¤ Four level of restrictions (1) Unrestricted (2) Permitted (3) Restricted (4)
Prohibited
12
Sample bank characteristics
#
OBS TA (M)
Equity Ratio
Listed Bank
INC DVSF
AST DVSF
ROA (%)
All Banks 67,108 4,166 0.09 0.16 0.46 0.58 0.78 LS LS_G LS_F LS_D SEC INS RES
All Banks 0.21 0.02 0.10 0.09 0.58 1.42 1.73
#
OBS TA (M)
Equity Ratio
Listed Bank
ROA (%) DVSF
DVSF_INC 56,771 4,220 0.09 0.16 0.78 0.52 SPEC_INC 10,337 3,867 0.11 0.11 0.79 0.10 DVSF_AST 59,563 4,213 0.09 0.16 0.75 0.63 SPEC_AST 7,545 3,790 0.12 0.10 1.05 0.10
LS LS_G LS_F LS_D SEC INS RES DVSF_INC 0.22 0.02 0.10 0.09 0.55 1.45 1.66 SPEC_INC 0.18 0.02 0.08 0.08 0.72 1.29 2.11 DVSF_AST 0.19 0.02 0.09 0.08 0.58 1.44 1.75 SPEC_AST 0.33 0.02 0.16 0.16 0.55 1.30 1.57
13
Sample bank characteristics
#
OBS TA (M)
Equity Ratio
Listed Bank
ROA (%)
INC DVSF
AST DVSF
All Banks 67,108 4,166 0.09 0.16 0.78 0.46 0.57 Non-LS 53,054 3,522 0.09 0.16 0.72 0.44 0.59 LS 14,054 6,596 0.10 0.16 1.01 0.51 0.52 LS_G 1,305 11,530 0.11 0.42 0.99 0.52 0.60 LS_F 6,635 5,243 0.11 0.19 1.02 0.54 0.54 LS_D 6,114 7,012 0.09 0.08 1.00 0.48 0.49 SEC=0 (Unrestricted) 29,284 3,456 0.08 0.06 0.62 0.47 0.58 SEC=1 (Permitted) 35,302 4,788 0.10 0.23 0.88 0.44 0.57 SEC=2 (Restricted) 1,349 5,659 0.10 0.38 1.26 0.53 0.64 INS=0 (Unrestricted) 1,472 4,324 0.09 0.07 0.81 0.59 0.43 INS=1 (Permitted) 36,419 4,729 0.10 0.19 0.88 0.44 0.55 INS=2 (Restricted) 26,872 3,436 0.08 0.10 0.62 0.47 0.61 INS=3 (Prohibited) 1,172 5,911 0.12 0.32 0.98 0.48 0.54 RES=0 (Unrestricted) 24,553 3,576 0.08 0.04 0.55 0.47 0.56 RES=1 (Permitted) 2,763 2,470 0.12 0.26 1.46 0.53 0.60 RES=2 (Restricted) 4,683 5,369 0.11 0.30 1.03 0.56 0.59 RES=3 (Prohibited) 33,936 4,659 0.10 0.21 0.85 0.43 0.58
14
Baseline results: bank diversification performance
Panel 1: ExROA (ROA adjusted for income diversity) Model 1 Model 2 Model 3
Coeff S.E. Coeff S.E. Coeff S.E. Intercept 1.718a 0.081 1.897a 0.082 -0.750 a 0.094 Income diversity -0.529a 0.020 -1.415a 0.071 -0.554 a 0.067 Income diversity 2 0.902a 0.069 0.334 a 0.064 Total Equity to Total Asset 5.375 a 0.051 Net Interest Revenue to Total Operating Income 0.663 a 0.026 Ln (Asset) 0.048 a 0.003 Listed bank 0.108 a 0.015 Adj R-sq 0.122 0.125 0.249 # obs 67,108 67,108 67,108
itYEARDCTRYDBKD
itcititit
DDD
sticsCharacteriBankMeasureDiversityMeasureDiversityExcess ROA
YEARCTRYBK
2
210
15
Baseline results: bank diversification performance
Panel 2: ExROA (ROA adjusted for asset diversity) Model 1 Model 2 Model 3
Coeff S.E. Coeff S.E. Coeff S.E. Intercept 1.528a 0.082 1.671a 0.084 -0.733 a 0.092 Asset diversity -0.256a 0.018 -0.840a 0.071 -0.372 a 0.066 Asset diversity 2 0.549a 0.064 0.281 a 0.060 Total Equity to Total Asset 5.641 a 0.051 Total Customer Loans to Total Earnings Assets 0.360 a 0.021 Ln (Asset) 0.053 a 0.003 Listed bank 0.095 a 0.015 Adj R-sq 0.133 0.134 0.268 # obs 67,108 67,108 67,108
itYEARDCTRYDBKD
itcititit
DDD
sticsCharacteriBankMeasureDiversityMeasureDiversityExcess ROA
YEARCTRYBK
2
210
16
Effects of dominant owner on diversification performance
Panel 1: ExROA (ROA adjusted for income diversity) Model 1 Model 2 Model 3
Coeff S.E. Coeff S.E. Coeff S.E. Intercept -0.729 a 0.094 -0.655 a 0.094 -0.522 c 0.273 Income diversity -0.562 a 0.067 -0.569 a 0.067 -0.746 a 0.167 Income diversity 2 0.319 a 0.064 0.326 a 0.064 0.457 a 0.154 LS * Income diversity 0.093 a 0.020 LS_G * Income diversity -0.196 a 0.057 LS_F * Income diversity 0.014 0.026 LS_D * Income diversity 0.243 a 0.028 0.271 a 0.045 Total Equity to Total Asset 5.372 a 0.051 5.381 a 0.051 5.036 a 0.121 Net Interest Revenue to Total Operating Income 0.664 a 0.026 0.666 a 0.026 0.765 a 0.053 Ln (Asset) 0.045 a 0.003 0.045 a 0.003 0.040 a 0.008 Listed bank 0.112 a 0.015 0.119 a 0.015 0.032 0.040 Adj R-Sq 0.249 0.250 0.246 # obs 67,108 67,108 12,749
itYEARDCTRYDBKDitc
itLSLSititit
DDDsticsCharacteriBank
MeasureDiversityDMeasureDiversityMeasureDiversityExcess ROA
YEARCTRYBK
2
210
17
Effects of dominant owner on diversification performance
Panel 2: ExROA (ROA adjusted for asset diversity) Model 1 Model 2 Model 3
Coeff S.E. Coeff S.E. Coeff S.E. Intercept -0.700 a 0.092 -0.656 a 0.093 -0.470 c 0.270 Asset diversity -0.398 a 0.066 -0.407 a 0.066 -0.423 a 0.148 Asset diversity 2 0.287 a 0.060 0.295 a 0.060 0.145 0.141 LS * Asset diversity 0.084 a 0.019 LS_G * Asset diversity -0.106 b 0.050 LS_F * Asset diversity 0.069 a 0.025 LS_D * Asset diversity 0.146 a 0.027 0.104 b 0.043 Total Equity to Total Asset 5.632 a 0.051 5.633 a 0.051 5.204 a 0.121 Total Customer Loans to Total Earnings Assets 0.358 a 0.021 0.356 a 0.021 0.520 a 0.046 Ln (Asset) 0.050 a 0.003 0.051 a 0.003 0.052 a 0.008 Listed bank 0.098 a 0.015 0.102 a 0.015 0.010 0.040 Adj R-Sq 0.269 0.268 0.235 # obs 67,108 67,108 12,749
itYEARDCTRYDBKDitc
itLSLSititit
DDDsticsCharacteriBank
MeasureDiversityDMeasureDiversityMeasureDiversityExcess ROA
YEARCTRYBK
2
210
18
Effects of dominant owner and activity restrictions on diversification performance
Panel 1: ExROA (ROA adjusted for income diversity)
Model 1 Model 2 Coeff S.E. Coeff S.E.
Intercept -1.608a 0.058 -0.492a 0.097 Income diversity -0.588a 0.079 -0.574a 0.091 Income diversity 2 0.429a 0.065 0.346a 0.065 LS_G * Income diversity -0.170a 0.059 LS_F * Income diversity 0.028 0.027 LS_D * Income diversity 0.250a 0.028 SEC * Income diversity 0.531a 0.035 0.350a 0.049 INS * Income diversity -0.201a 0.023 -0.141a 0.035 RES * Income diversity -0.065a 0.017 -0.026 0.019 Total Equity to Total Asset 5.523a 0.052 5.365a 0.052 Net Interest Revenue to Total Operating Income 0.672a 0.026 0.673a 0.026 Ln (Asset) 0.038a 0.003 0.044a 0.003 Listed bank 0.177a 0.015 0.118a 0.015 Adj R-Sq 0.229 0.248 #obs 65,935 65,935
itYEARDCTRYDBKDitc
itLSLSitSUPititit
DDDsticsCharacteriBank
MeasureDiversityDMeasureDiversityRIDXMeasureDiversityMeasureDiversityExcess ROA
YEARCTRYBK
2
210
19
Effects of dominant owner and activity restrictions on diversification performance
Panel 2: ExROA (ROA adjusted for asset diversity)
Model 1 Model 2 Coeff S.E. Coeff S.E.
Intercept -1.642a 0.055 -0.740a 0.094 Asset diversity -0.238a 0.076 -0.456a 0.084 Asset diversity 2 0.273a 0.061 0.268a 0.061 LS_G * Asset diversity -0.094c 0.051 LS_F * Asset diversity 0.065b 0.026 LS_D * Asset diversity 0.150a 0.027 SEC * Asset diversity 0.355a 0.033 0.036 0.048 INS * Asset diversity -0.096a 0.022 0.105a 0.033 RES * Asset diversity -0.107a 0.016 -0.050a 0.017 Total Equity to Total Asset 5.840a 0.052 5.626a 0.052 Total Customer Loans to Total Earnings Assets 0.391a 0.021 0.355a 0.021 Ln (Asset) 0.041a 0.003 0.050a 0.003 Listed bank 0.164a 0.015 0.100a 0.015 Adj R-Sq 0.246 0.267 #obs 65,935 65,935
itYEARDCTRYDBKDitc
itLSLSitSUPititit
DDDsticsCharacteriBank
MeasureDiversityDMeasureDiversityRIDXMeasureDiversityMeasureDiversityExcess ROA
YEARCTRYBK
2
210
20
Conclusion
• Diversified banks perform worse than their specialized peers.
• Dominant owner functions as a monitor¤ Banks with a dominant owner suffer less¤ Who the dominant owner is matters
Home country advantage: domestic owner function better than foreign owner
Government owner tends to reinforce negative diversification performance
21
Conclusion
• Supervisory restrictions¤ Restrictions on securities work to limit
negative diversification performance¤ Restrictions on insurance and real estate
activities further strengthen negative diversification performance.