Laetitia Lepetit

Bank Income Smoothing, Ownership Concentration and the Regulatory Environment

We empirically examine whether the way a bank might use loan loss provisions to smooth its income is influenced by its ownership concentration and the regulatory environment. Using a panel of European commercial banks, we find evidence that banks with more concentrated ownership use discretionary loan loss provisions to smooth their income. This behavior is less pronounced in countries with stronger supervisory regimes or higher external audit quality. Banks with low levels of ownership concentration do not display such discretionary income smoothing behavior. This suggests the need to improve existing or implement new corporate governance mechanisms.

Provisioning rules and bank lending: A theoretical model

This paper develops a partial equilibrium model of a banking …rm to analyze how provisioning rules inuence loan market uctuations. We show that a backward-looking provisioning system ampli…es the pro-cyclicality of loan market uctuations. We demonstrate that, in a forward-looking provisioning system where statistical provisions are used to smooth the evolution of total loan loss provisions, the issue of pro-cyclicality of loan market uctuations does not exist. Our results support the recent call of the Basel Committee for the implementation of a forward-looking provisioning system to address procyclicality. JEL classi…cation: G21 anonymous referees for their helpful comments. The usual disclaimer applies.

Effects of Loan Loss Provisions on Growth in Bank Lending: Some International Comparisons

A dynamic provisioning system is one of the instruments that regulators could use for introducing counter-cyclicality into prudential regulation. The potential e¤ective-ness of such instrument depends on how far actual provisioning practices exacerbate growth in bank lending. We therefore investigate the e¤ects of loan loss provisions on growth in bank lending, making a di¤erence between non discretionary and dis-cretionary loan loss provisions. International comparisons are made between …ve ge-ographical areas : Europe, Japan, the United-States, Central & South American and South & East Asia. Except for Japanese banks, we …nd a negative and signi…cant ef-fect of non discretionary loan loss provisions on growth in bank lending. This common feature lead us to conclude that banking regulators could reach a consensus concerning the bene…cial aspects of a dynamic provisioning system.

HOW DID THE ASIAN STOCK MARKETS REACT TO BANK MERGERS AFTER THE 1997 FINANCIAL CRISIS

The objective of this paper is to empirically assess the stock market reaction to the announcement of bank mergers and acquisitions (M&As) in eight East Asian countries over the 1997-2003 period. M&As are classified according to the status of entity, the time period of the deal and the maturity of the banking system. A bivariate GARCH model is used to estimate abnormal returns taking beta conditional variability into account. We find that the market reacted negatively to M&As during the crisis period (1997-2000) and also in the less mature banking systems (Indonesia, Malaysia, the Philippines, South Korea and Thailand).

Bank Equity Involvement in Industrial Firms and Bank Risk

The regulatory framework in Europe does not prevent banks from taking large or controlling equity stakes in non-financial firms, potentially contributing to higher levels of bank risk and financial instability. Using a panel of European commercial banks for the period 2004-2008, we find that higher levels of equity positions in industrial firms and higher proportions of industrial firms where the bank is the majority shareholder lead to higher bank activity and insolvency risk. At low levels of shareholder protection, these risk measures are reduced when equity investments are held for longer, an effect attenuated at higher levels of shareholder protection.

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.

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.

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 Ownership Structure, Market Discipline and Risk: Evidence from a Sample of Privately Owned and Publicly Held European Banks

The objective of this paper is to analyze the influence of ownership structure on the risk taking behavior of European commercial banks. We consider five categories of shareholders (managers/directors, institutional investors, non financial companies, individuals and families, and banks). Controlling for various factors, we find that asset risk is lower for banks where a higher proportion of total stocks is held by families and individuals who have less diversified portfolios. We also find that the probability of default of banks is higher when non financial companies or institutional investors hold a higher proportion of total equity. However, these results do not hold for listed banks in which non financial companies hold higher stakes suggesting that the market might be limiting the risk-taking incentives of such shareholders. We further show that market forces might be more effective in influencing risk in banks with a higher involvement of non financial companies than in banks with a higher portion of stock held by institutional investors.

Bank ownership structure, lending corruption and the regulatory environment

We empirically examine whether bank lending corruption is influenced by the ownership structure of banks, a country’s regulatory environment and its level of economic development. We find that corruption in lending is higher when state-owned banks or family-owned banks provide a higher proportion of credit to the economy, in both developed and developing countries. A stronger regulatory environment, either through a stronger supervisory regime or a higher quality of external audits, helps to curtail bank lending corruption if induced by family-controlled ownership, but not if induced by state-controlled ownership. We further find that controlled-ownership of banks by other banks contributes to reduce corruption in lending; the same applies to widely-held ownership of banks, but only for developed countries.