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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

Reducing agency conflicts through bank dividend payout decisions: the role of opacity and ownership structure

ABSTRACT We empirically examine whether banks’ dividend decisions are influenced by their degree of opacity and ownership structure. We find that banks with concentrated ownership structure pay lower dividends when they have high degrees of opacity, in line with the hypothesis that majority shareholders pay lower dividends to extract higher levels of private benefits. We do not observe such expropriation behaviour from managers in widely held banks. Further analysis shows that higher levels of shareholder protection and stronger supervisory regimes help to constrain opportunistic behaviour of majority shareholders. Our findings have critical policy implications for the Basel 3 implementation of restrictions on dividend payouts.

Banking in France

The French banking system has experienced major changes since the mid-1980s, with the deregulation process triggered by the Banking Act of 1984 and the broader reform of capital markets in 1985. The aim of these actions was to improve the performance and the efficiency of the entire banking industry and enhance competition between financial institutions and markets by allowing various types of agents, and specifically non-financial firms, to directly borrow from the market by issuing short-term debt. This chapter offers a comprehensive discussion of the French banking system, its architecture, regulatory system and current issues facing the industry.

Philippine Rural Banks and Regional Economic Development

This paper examines the link between financial and economic development at the regional level in the Philippines and focuses on the role played by rural banks in regional economic activity. We apply cointegration panel data analysis on regional banking and economic data for the period 1993 to 2005. We ranked the sixteen regions in three different groups depending on their average economic development. The wealthiest the region is the more important financial depth is. Our results do not support a strong evident relationship between regional financial and economic development in the Philippines. However, our findings highlight a positive effect of the presence of rural banks on economic development which is stronger for the intermediate developed regions than for the less developed regions, suggesting the existence of a threshold effect.