Role of Di in Capital Market

Document Sample
Role of Di in Capital Market Powered By Docstoc
					  5th Annual Banking Research
       Conference - FDIC
Competition, efficiency and agency
   costs in European banking
      An analysis of charter values


            Olivier De Jonghe
           Rudi Vander Vennet


            Ghent University
                    Motivation

   Deregulation
   Second banking directive
                                    Market structure
   Mergers & acquisitions          Competition
   Banks versus financial          Efficiency
    markets                         Capital
                                    Profitability
   Economic and monetary           Risk
    integration
   Capital adequacy rules
                                                Motivation
                                                                                 Tier 1
                                                                                 Capital
                                                  Equity    Interest     Cost/    Ratio
                                                (december    Margin    Income     (end       LLP/       ROE     Long-term
Bank                              Country          2004)     (2004)     (2004)   2004)     Loans (%)   (2004)     Rating    Outlook

HSBC Holdings plc                 UK             73,282      2.74      53.93       8.9       1.04        14.2     AA        Stable
Crédit Agricole                   France         49,561      1.03      64.25       7.9       0.36        8.47     AA        Stable
Royal Bank of Scotland Group      UK             45,133      1.79      63.33        7        0.47         16      AA        Stable
Santander Central Hispano         Spain          40,923      2.41       53.9       7.5       0.63       11.28     AA-       Stable
BNP Paribas                       France         35,763      0.76      61.58       8.1       0.27       14.28     AA        Stable
Deutsche Bank                     Germany        26,227      0.63      79.48       8.6       0.37       10.17     AA-       Stable
UBS                               Switzerland    26,153      0.72       73.3      11.8       -0.12      21.43     AA+       Stable
Barclays                          UK             25,870      1.44      59.89       7.6       0.45       18.95     AA+       Stable
HBOS plc                          UK             25,254      1.57      44.57       8.1       0.43       19.57     AA        Stable
Rabobank Group                    Netherlands    24,518      1.42      70.32      11.4        n.a.       8.07     AA+       Stable
Credit Suisse                     Switzerland    23,467      1.14      77.05      12.3       0.04       15.48     AA-       Stable
Société Générale                  France         23,014      1.12      66.96      8.54       0.24       15.92     AA-       Stable
Groupe Caisses d’Epargne          France         20,402      0.87      73.94       9.7       0.15       10.72     AA        Stable
ABN Amro Bank                     Netherlands    20,400      1.65      75.32      8.57       0.22       22.87     AA-       Stable
Banco Bilbao Vizcaya Argentaria   Spain          20,379      2.33      50.87       8.1       0.57       16.52     AA-       Stable
Fortis                            Benelux        18,020      1.02      63.52       8.3       0.14       20.38      A+       Stable
Bayerische Hypo-und Vereinsbank   Germany        17,665      1.18      65.74       6.6       0.72      -14.87      A-       Stable
Banca Intesa                      Italy          17,285      2.05      61.45       8.5       0.59       11.21      A+       Stable
ING Bank                          Netherlands    16,438      1.53      72.24      7.71       0.15        15.5     AA-       Stable
Lloyds TSB Group                  UK             14,902      2.3       54.28       8.9       0.59        25.3     AA        Stable

Source: Fitch
                             Motivation
          Market structure
          Competition
          Efficiency
          Capital
          Profitability / Risk



Effect on bank charter value
 charter value = the present value of the stream of profits that a firm is
         expected to earn as a going concern
 franchise or charter value: return and risk in the long run
 construction of a market-based performance measure: Tobin’s Q, noise adjusted
                   Performance measure: QNA
   Concept: QNA (based on Market Value Efficiency)
     Definition: Market value inefficiency measures
      the shortfall of a bank’s market value from its highest potential market value
       as a proportion of the bank’s book-value investment in its assets

   Parametric (Stochastic Frontier Analysis), translog
    ln( MVAi ,t )   0  1  ln( BVAi ,t )   2  ln( BVAi ,t ) 2   i ,t ( time dummies)
            i ,t  vi ,t  ui  exp(  (t  T ))
           
            vi ,t ~ iid N (0, v2 )
           u i ~ N (  , u2 ), truncation at zero
           
                       MVAi ,t             
           Qi ,t 
              NA

                    BVAi ,t  exp( i ,t )   Q  exp    u   dum( j )  I ( j  t ) 
                                                                                  2003

                                                                                        
                                                         NA

                                                       i ,t         0     i ,t
                                                                                          
                                           
                                                                                  j 1996

                  ˆ
           and   1 and   0 ˆ
                    1              2



    (Hughes, Lang, Mester, Moon and Pagano, 2003 and 2004)
                   Some summary statistics
                                       EU15+Norway+Switzerland            US
                                  1996       1998       2000       2002     1994
Market Value of Assets    mean   40415      58968      68839      80139    12081
(MVA)(million USD)        std    91549     129674    159734      176329    27680

Market Value Efficiency   mean   0.859       0.867      0.868     0.873
=exp(-U)                  std    0.046       0.048      0.046     0.044
                          min    0.756       0.720      0.730     0.740

Q                         mean   1.000       1.039      1.027     1.000    1.036
(Market-To-Book)          std    0.053       0.101      0.094     0.051    0.033
                          min    0.920       0.854      0.850     0.859
                          max    1.358       1.688      1.933     1.281

Q-noise adjusted          mean   1.021       1.049      1.030     1.002    1.032
(Market-To-Book Noise     std    0.045       0.050      0.050     0.047    0.020
Adjusted)                 min    0.917       0.900      0.887     0.862
                          max    1.182       1.205      1.182     1.150
correlations                     1996        1998       2000      2002
corr(MTBNA,U)                    -0.98       -0.98      -0.98     -0.99
corr(MTBNA,MTB)                   0.80        0.86       0.78      0.84
number of observations             177         209        220       207     169
            Hypotheses: Competition and Efficiency

       1.      Structure-Conduct-Performance: concentration
       2.      Relative Market Power: market share
       3.      X-Efficiency: management skills or production technologies
       4.      Scale-Efficiency: scale-related cost/revenue advantages

       •       Implications for merger and antitrust policy
       •       Hypotheses are interrelated
                 Solution: reduced form (Berger,1995)
Profitabil ity i , j ,t   0  1  MSi , j ,t   2  Conc j ,t   3  CI i , j ,t   4  Sizei , j ,t   i , j ,t



 Stigler (1964), Demsetz (1973), Berger (1995), Vander Vennet (2002)
     Hypotheses: Competition and Efficiency

Bank profitabilityAccounting profits (ROA, ROE)
   Subject to noise (tax distortions, accounting
    practices,earnings management)
   Short-run performance (versus long-run equilibrium)
   Backward looking >< sustainable rents


Solution: use market value of a listed bank QNA
   Test Structure-Conduct-Performance, Relative Market Power,
   Efficiency paradigms simultaneously in a coherent forward-
   looking framework based on stock market values
                      The role of capital

Bank capital serves different purposes

1)    Capital structure is regulated to reduce risk-taking
2)    Capital may reduce funding costs (depositor discipline)
3)    Capital as a signal of private information about future cash flows
        =>Capital affects bank charter value positively

4)    Capital is inversely related to Leverage
      Separation of ownership and control (principal-agent problem)
      Value maximization  Utility maximization
      Choice of capital structure may mitigate agency costs, due to alignment
         of interests (Berger and Bonaccorsi di Patti, 2003)
        =>Leverage affects bank charter value positively
                        The Dataset

   255 listed banks
    Large and medium-sized
    All types: retail banks, commercial banks, savings banks,
               financial conglomerates
   EU15 + Norway+ Switzerland
   1995-2003 (unbalanced)
   Balance Sheet and Income StatementBankscope
   Stock market data Datastream
                                                                           0




                                   equation: of superior future
                  Baseline long-term generatorresults profits
                Market share is a
                                                                       -0.005




                                                                        -0.01




                Concentration plays no significant role               -0.015




             0  1  MSi , j ,t   2  Concj ,t   3  CIi , j ,t   4  Sizei , j ,t   5  Sizei2, j ,t
                                                                        -0.02
 NA
Q
i , j ,t                                                               -0.025




                6Levi , j ,t   7  Levi2, j ,t   i , j ,t        -0.03




                                                                       -0.035
                                                                                0   0.02   0.04   0.06      0.08       0.1      0.12      0.14   0.16   0.18   0.2
                                                                                                     Equity to Total Assets (~ 1/ leverage)
Baseline regression with time dummies
Constant          Leverage       (Leverage)^2           Market Share   HHI                  X-Inefficiency                  Size      Size^2
   1.1300***         -0.6239***       2.9007***           0.0378***      0.0226                -0.0304***                   -0.9704*** 2.329
    [56.577]           [6.184]         [6.974]             [2.926]      [0.343]                  [3.792]                      [2.867]  [1.260]

                         
                      dum97                an
                            Leverage playsdum99important role in mitigating agency costs
                                 dum98             dum00   dum01      dum02
                        0.0230***        0.0303***         0.0325***    0.0141***                 -0.0015                   -0.0118***
                         [6.390]          [8.573]           [9.302]      [3.993]                   [0.422]                    [3.360]

Observations              1210
Nr. of Countries            15
R-squared within          0.293

Absolute value of t statistics in brackets
* significant at 10%; ** significant at 5%; *** significant at 1%
Country fixed-effects are included


             Operational efficiency is strongly valued by stock market investors
             Diseconomies of scale
                                   Robustness
   Competition
          Interaction between Market Share and HHI
                negative and significant
          Contestability: Foreign presence and importance
                negative and insignificant
          Concentration Ratio 5 in stead of HHI
          Size classes
   Leverage
          Tier 1 Capital ratio
          Charter value and capital ratio: endogeneity issue
          Capital ratio classes

     All conclusions remain valid:           RMP
                                              X-Efficiency
                                              Leverage
             Robustness: Control variables

   Diversification
      Diversification benefit
   Profitability
      Accounting -and market-based variables
                                                              Bank-level
      Positive effect
   Risk
      Accounting -and market-based variables
      Negative effect
   Regulation and supervision
      Worldbank, KKZ, Heritage data
      Low variation in sample
      Not significant                                        Country-level
   Macro-environment
      GDP, Inflation, LT-Interest rate, Stock Market index
      Significant (if no time dummies)


             All conclusions from baseline remain valid
                              Conclusions
   Using a market-based forward looking measure of bank performance, we
    find that:
           Market share is a long-term generator of superior future profits
           Concentration has no significant effect
              Relative market power dominates structure!
          Operational efficiency in banking is strongly valued by stock market
           investors
          Market value diseconomies of scale
              X-Efficiency is far more important than Scale-Efficiency
          Capital plays a role in mitigating agency costs
             Leverage/Creditworthiness trade-off
   Basel 2, Pillar 3: use market mechanisms for prudential supervision
          QNA (market values) are a useful indicator
   Insight into building blocks of charter value  financial stability
   Lack of bank market integration in EU even among the largest (listed) banks

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:3
posted:7/22/2011
language:English
pages:14
Description: Role of Di in Capital Market document sample