Amine Tarazi

Bank competition, crisis and risk taking: Evidence from emerging markets in Asia

This paper investigates the impact on financial stability of bank competition in emerging markets by taking into account crisis periods. Based on a broad set of commercial banks in Asia over the 1994-2009 period, the empirical results indicate that a higher degree of market power in the banking market is associated with higher capital ratios, higher income volatility and higher insolvency risk of banks. In general, although banks in less competitive markets hold more capital, the levels of capitalization are not high enough to offset the impact on default risk of higher risk taking. Nevertheless, during crisis periods, specifically the 1997 Asian crisis that has directly affected Asian banks, market power in banking has a stabilizing impact. A closer investigation however shows that such findings only hold for countries with a smaller size of the largest banks, suggesting that the impact of bank competition is conditional on the extent to which the banking industry may benefit from too-big-to-fail subsidies. Overall, this paper has policy implications for bank consolidation policies and the role of the lender of last resort.

Islamic Banking and Finance: Recent Empirical Literature and Directions for Future Research

This paper examines the recent empirical literature in Islamic banking and finance, highlights the main findings and provides a guide for future research. Early studies focus on the efficiency, production technology and general performance features of Islamic versus conventional banks, whereas more recent work looks at profit and loss-sharing (PLS) behaviour, competition, risks as well as other dimensions such as small business lending and financial inclusion. Apart from key exceptions, the empirical literature suggests no major differences between Islamic and conventional banks in terms of their efficiency, competition and risk features (although small Islamic banks are found to be less risky than their conventional counterparts). There is some evidence that Islamic finance aids inclusion and financial sector development. Results from the empirical finance literature, dominated by studies that focus on the risk/return features of mutual funds, finds that Islamic funds perform as well, if not better, than conventional funds - there is little evidence that they perform worse than standard industry benchmarks. Some recent evidence, however, suggests that Islamic bond (Sukuk) issuance destroys value for shareholders.

Is Bank Income Diversification Beneficial? Evidence from an Emerging Economy

This paper examines the impact of bank revenue diversification on the performance of banks in an emerging economy. Using a unique dataset with detailed information on non-interest income, our findings show that, conversely to studies on Western economies, a shift toward non-interest activities increases bank profits and risk-adjusted profits particularly when banks are more involved in trading in government securities. Our results also indicate that foreign banks benefit more from such a shift than their domestic counterparts. Moreover, we account for the institutional and regulatory environment advocating loans to SMEs and find that higher involvement in non-interest activities is only beneficial for banks with low exposures to SMEs. Our findings have important policy implications in terms of achieving optimal diversification and lower risk exposure, which might conflict with policies aiming to promote SME lending.This paper addresses the issue of bank revenue diversification for an emerging country with a specific regulation to encourage lending to small and medium enterprises, which constrains the structure of bank assets. Using data with a detailed breakdown for a sample of Philippine universal and commercial banks, we find that increased involvement in noninterest activities is associated with higher profitability without affecting the volatility of bank returns. For a specific type of Philippine banks, universal banks, increased diversification in non-interest activities tends to lower risk. A closer investigation shows that the positive effect on profitability is mainly driven by the expansion of trading activities and more specifically by government securities that banks can purchase instead of directly granting loans to small and medium enterprises. Moreover, our findings indicate that these activities tend to reduce risk. Conversely, a higher involvement in underwriting activities in universal banks is associated with higher risk. Our results are robust to various factors, model specifications, and alternative diversification measures. Our findings highlight that regulation aiming to promote lending to small and medium enterprises that banks can circumvent by acquiring specific government securities, might have lowered their risk exposure. JEL Classification: G21, G28

Competition, Financial Intermediation and Riskiness of Banks: Evidence from the Asia-Pacific Region

ABSTRACT From a sample of commercial banks in the Asia-Pacific region over the 1994–2009 period, this study highlights that banks in less competitive markets exhibit lower loan growth and higher instability. Such instability is further followed by a decline in deposit growth, suggesting that Asian banks are also subject to indirect market discipline mechanisms through bank competition. This study therefore sheds light on the importance of enhancing bank competition to overcome bank risk and strengthen financial intermediation. Likewise, this study advocates the importance of strengthening market discipline to reduce bank riskiness regardless of the degree of competition in the banking industry.

Ownership Structure and Bank Efficiency in the asia pacific region

This paper focuses on efficiency measures of banks from six countries in Southeast and East Asia. We use a two-stage approach to study the post-crisis period 1999-2004. We first estimate technical efficiencies using Data Envelopment Analysis and test for cross-country differences. Efficiency scores are relatively high for South Korea and relatively low for the Philippines. We then investigate the link between ownership structure and efficiency controlling for various factors such as size, risk and the economic environment. We find that efficiency scores are higher for banks which are held by minority private shareholders and banks that are foreign-owned.

Does Diversity of Bank Board Members Affect Performance and Risk? Evidence from an Emerging Market

This study investigates the influence of background diversity of bank board members on performance and risk. Using data from Indonesian banks from 2001 to 2011 covering 4200 individual year observations and 21 ethnic groups, we estimate the degree of diversity by considering various aspects (gender, citizenship, age, experience, tenure, ethnicity, nationality, education level and type) and find significant impacts on bank performance. On the whole, diversity is in general positively associated with performance except when it relates to ethnicity. It not only reduces performance per se but also increases risk. Female presence and professional diversity reduce risk but nationality and ethnicity diversities are associated with higher risk. Education diversity generally leads to higher income volatility and leverage risk. Our results are generally robust to various alternative performance measures, including risk adjusted returns, and estimation methods.

Bank Regulatory Capital Adjustment and Ultimate Ownership Structure: Evidence from European Commercial Banks

We empirically investigate whether a banks decision to recapitalize is influenced by its ownership characteristics, particularly the separation between voting and cash-flow rights of the banks ultimate owner. We use a novel hand-collected dataset on bank ultimate control and ownership structure of 442 European commercial banks to estimate an ownership- augmented capital adjustment model. We find that when the ultimate owners voting and cash-flow rights are identical, banks actively (as opposed to passively shifting earnings to capital stock) and equally adjust their capital upwards (i.e. raise equity) and downwards (i.e. repurchase equity) to reach their target level. However, a gap between voting and cash-flow rights of the ultimate owner makes banks reluctant to actively adjust their capital position upwards, presumably because they fear control dilution. Further investigation shows that such a behavior is more pronounced if the ultimate owner is a family or a state, or if the bank is headquartered in a country with weak shareholder protection. Our findings have several policy implications on the road to the final stage of Basel III in 2019.

The Determinants of Domestic and Cross Border Bank Contagion Risk in South East Asia

This paper addresses the issue of both domestic and cross border systemic risk for 8 countries in Southeast Asia (Hong Kong, Indonesia, Korea, Malaysia, The Philippines, Singapore, Taiwan and Thailand). We use weekly data on individual bank stock prices from 2000 to 2005 to construct bank contagion measures based on the exponential weighted average correlations of the residuals of the market model. Our results show that average pair-wise correlations significantly differ among countries and that the probability that a specific shock extends to other banks is better predicted by asset risk indicators and market based risk measures, such as systematic risk, for cross country contagion. In contrast, for domestic contagion, liquidity risk indicators and bank opaqueness proxies perform better. Our findings suggest that whereas illiquidity, but not insolvency, is a major concern at the domestic level the opposite result holds for cross country contagion.

Product Diversification in the European Banking Industry: Risk and Loan Pricing Implications

The purpose of this paper is to investigate the relationship between bank risk and product diversification in the changing structure of the European banking industry. Based on a broad set of European banks for the period 1996-2002, our study shows that banks expanding into non-interest income activities present higher risk than banks which mainly supply loans. Whereas previous studies (mainly on U.S. banks) focused on portfolio diversification effects we explore risk implications of cross-selling determinants of loan pricing as an alternative explanation. Our results show that higher income from other activities is associated with lower lending rates which suggests that banks may actually use loans as a loss leader altering default screening and monitoring activities and consequently risk pricing.

Bank Deposit Insurance, Moral Hazard and Market Discipline: Evidence from Central and Eastern Europe

There is a considerable debate on the role played by deposit insurance on market discipline in the banking industry. Using data for 203 banks across 10 Central and Eastern European countries, this paper empirically analyzes the implications of the implementation of explicit deposit insurance schemes for bank risk taking and market discipline. We show that the introduction of explicit deposit insurance in the 90’s has lead to higher risk-taking incentives. However, we also show that explicit deposit insurance has strengthened market discipline. Moreover, we find that bank ownership (foreign vs. domestic), institutional and legal factors, and resolution strategies adopted when the country has experienced banking crises impact bank risk and the effectiveness of market discipline.