Laurie Prather

Bank risk and return: the impact of bank non‐interest income

Purpose - The purpose of this paper is to consider the impact on bank risk of portfolio diversification between traditional margin income and fee-based income for banks operating in Australia. Design/methodology/approach - Considering several performance variables, this analysis compares the benefits of diversification across different bank types relative to margin income and fee income. Further, regression analysis considers bank risk and revenue concentration. Findings - This paper documents that fee-based income is riskier than margin income but offers diversification benefits to bank shareholders. While improving bank risk-return tradeoff, these benefits are of second order importance compared to the large negative impact of poor asset quality on shareholder returns. Practical implications - These results have implications for all stakeholders in Australian banks. The results suggest that shareholders of banks will benefit from increased bank exposure to non-interest income via diversification. From a regulatory perspective, diversification reduces the possibility of systemic risk, but caution must be offered with respect to banks pursuing absolute returns rather than monitoring risk-return trade-offs, and so exploiting the benefits of the implied guarantee offered by “too big to fail” However, shareholders should also monitor bank exposure to non interest income to ensure that they do not become over-exposed to the point where the volatility effect outweighs the diversification benefits. Originality/value - The results of this study suggest that Australian regulators should consider requiring increased disclosure of the composition of bank non-interest income. Such disclosure would aid in understanding the changing nature of banking in Australia. Given the recent sub-prime crisis in the USA and the role played by fee based income sourced from securitization, increased disclosure of the nature of bank non interest income is now of global importance. This disclosure is particularly germane within the context of the implementation of Basle II, with its increased emphasis upon market discipline, given that Stiroh found increased disclosure in this area is accompanied by improved market pricing for risk.

The Impact of Product Warranties on the Capital Structure of Australian Firms

This paper examines the impact of Australian firms’ warranty policies on capital structure. The sample consists of 378 firms and 1727 firm-years for Australian public firms for the period 2006–2010. The results suggest that warranty policies impact on Australian firms’ capital structures. Firms offering product warranties to customers have less leverage than those firms that do not. Firms commit to honour warranty contracts, whether explicit or implicit, by selecting lower leverage levels.

The Intraday Price Behavior of Australian Exchange Traded Options and Warrants

This study focuses on the price discovery process in Australian option and warrant markets. Characterizing these two markets in terms of their cost structures and institutional features, we formally test competing price discovery hypotheses. The general findings indicate that the warrants market is the dominant market suggesting that their lower trading cost outweigh their less attractive institutional features. Additionally, we find that idiosyncratic differences among firms may result in a clientele effect thus providing justification for the coexistence of these seemingly redundant markets.