A different view of the banking sector worldwide:
Why some of the banks did perform better during the
recent financial crisis?
Petko Stoyanov Bachvarov
MSc Finance with Banking
University of Bath
pbs24@bath.ac.uk
petkobachvarov@gmail.com
Empirical Analysis of the performance of Systematically
Important Financial Institutions
Banks & The Recent Financial Crisis
• Think about the following questions:
– What does it mean “Systematically Important Financial Institutions”?
– A different prospective of the situation in 2007. What is the main
function of banks and how they have changed for the last years?
– What actually happened in 2007?
– How the bank performance affected the financial sector globally?
– Did regulatory institutions managed to control the majority of banks?
• Data set and methodology
•
The empirical work involves 29 systematically important banks from twelve different
countries.
•
The performance of the banks is computed throughout the use of accounting data
(i.e. balance sheet information, available on Bankscope, Datastream and etc.). The
following econometrics and quantitative methods are used in the study.
–
Ratios and Finance and Accounting formulas
–
Econometric models such as FE/RE specifications
–
Robustness check (e.g. Hausman test (1978))
What is the purpose of our study? In other words, what is
the main hypothesis?
•
What do you think was the main cause of the financial crisis and why the
vast majority of banks nearly collapsed?
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Banks started participating in more profitable business different from the original one called
originate-to-hold.
-
We distinguish our work by considering sufficient amount of empirical measures.
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Exposure to securitization, however, is not available as it is considered as OTC.
-
Limited Data (OTC, off-balance sheet)
What actually happened in 2007. What is commercial bank’s business model?
• The system is ultimately just too complicated. Therefore, it is almost
impossible to foresee these things.
• Such a system will generate very complicated phenomenon, hence
it will be very difficult to interpret them.
-
The regulatory was asleep at the switch
-
The treasury was asleep at the moment of the crisis
According to many practitioners and journalists the drowsiness was induced by the
opium called market Fundamentalism.
The structure of the empirical part of the study
1. We included one table that provides an economic and global view of the banks in
our study.
Table 1: Country characteristics
2. We included one table that shows the statistical performance of the banks in our study. As it
can be seen, the table reflect the minimum, maximum and standard deviation of the
statistics.
Note that this is a part of the table,
due to space limitation.
3. We also built a table, which consist of characteristics of Poor- and BetterPerforming Financial Institutions
4. Multivariate Regressions
•
Taking into account the statistics provided in the above pointed tables, it should be indicated the
following:
I.
We divided our model in 5 sections
- the first section includes the dependent variables (i.e. stock return from 2007-2008 and also for
2006, in order to make comparisons). We used HPR to compute the stock return.
-the second section consist of bank measures (i.e. bank characteristics). This includes, for
example, measures for risk, capital and liquidity exposure. In addition, we include measures such as
Altman Z-score (i.e. measure for default), in order to have a view of the distance to default for the
banks in our sample.
- In the third section we put regulatory indices (e.g. official, restrict and etc.). Just to have a grasp
of the whole idea, restrict is the “indicator of overall restrictions on bank activities compute the volume
to which banks experience regulatory restrictions on their activities in "(a) securities markets, (b)
insurance, (c) real-estate, and (d) owning shares in non-financial firms”. All of the data is based on a
survey
-Fourth section, unfortunately, consist of only one variable, which is part of the corporate
governance measures. Due to data limitation, we were not able to extend our work in this section.
- Fifth and last section includes the macroeconomic indicators (e.g. GDP per capita,
concentration ration etc.)
•
This way we construct our three econometric models.
4. Multivariate Regressions (continue)
•
Firstly, mention should go towards the construction of the model.
-
We built a model that includes multiple linear regressions.
The model consist of three types of regressions:
*Table 1: Panel regressions with corporate governance effects (return regressions, 2007-2008)
*Table 2: Panel regressions with regulatory and macroeconomic variables (return regressions, 2007-2008)
*Table 3: Panel regressions with numerous estimators of ex ante risk (risk regressions, 2007-2008)
Note that the first two table have the same dependent variable (i.e. bank stock return for 2007 and
2008), whereas Table 3 use different dependent variables.
-
In order to test the model significance we use Hausman test (1978)
We indicated two abbreviations:
*Fixed effect and Random effect (i.e. The null hypothesis for the Hausman test is that the difference in
coefficients between fixed effects and random effects specifications is not systematic. Thus a small p-value
(<0.05) suggests the rejection of the random effects specification)
Results
•
Overall, the results showed that the bank excessive risk taking had an impact on their
performance.
•
On the other hand, we find weak evidences related to the assumption that corporate governance
was the first-cause of the poor bank performance.
•
Same could be said for the regulation.
Note that both measures such as corporate governance (or ownership structure) and regulatory
indices required further development and dispute. Thinking logically, it is extremely difficult to
evaluate any corporate governance or regulation effects.
•
Perhaps not surprisingly, we came with the idea that traditional banking performed better, due to
their slight exposure to the innovative and complex products.
•
However, some banks indicated better performance due to their income diversity.
Conclusion
•
With our empirical work, we prove that further research are required to be done, in
order to prevent future financial catastrophe.
-
Capital adequacy played a crucial role during the crisis
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The excessive amount of risk had a major role in making the crisis as severe as it was
Empirical Conclusion
– We came with the conclusion that risk measures have negative significant coefficient. In other
words, the bank stock returns generated losses due to the unplanned risk. As mentioned
previously we concluded that capital position indicate positive significant coefficients. This in turn
implies that banks perform better due to their large capital reserves.
– Unfortunately, however, we find weak evidences that regulation was the major cause of the poor
performance, inasmuch regulatory indices are not significantly proven.
–- We also failed to prove that corporate governance as a whole had impact on the performance
of the financial institutions in our sample. The reason for that is because none of the variables
were significant.
Recommendations
•
Regulatory institutions should strengthen their methods, in order to reduce the risk taking that
emerged from financial innovation, which led to the complexity in banking services.
•
Banks should reduce their appetite of taking risky positions.
•
Capital position should be taken into account very serious, especially by the vast majority of large
banks.
•
Regulators should pay more attention to the causality of banks. There are some strong evidences,
provided by academics, that interconnectedness caused serious problems, notably in the U.S.
Future Research
•
Future research is needed in order to amend the regulatory indices, as they appear to be
controversial.
•
OTC derivatives and off-balance sheet activities, need to be evaluated and considered in a future
research, as they reflect most of the banks’ business nowadays.
• The Crisis of Credit Visualized:
Source: http://vimeo.com/3261363
https://www.youtube.com/watch?v=Q-zp5Mb7FV0
Additional Useful Sources Related to the Financial
Meltdown
1. https://www.youtube.com/watch?feature=player_detailpage&v=VQzEWeGJ
LP0
2.Inside Job
http://www.imdb.com/title/tt1645089/
Additional Reading:
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Beltratti, A. and Stulz, R.M., 2012. The credit crisis around the globe: Why did some
banks perform better? Journal of Financial Economics, 105, pp.1-17.
Demirgüç-Kunt, A., Kane, E.J. and Caprio, G. Jr., 2010. "The 2007 Meltdown in
Structured Securitization: Searching for Lessons not Scapegoats." The World Bank
Research Observer. 25(1), pp. 125-155.
Demirgüc-Kunt, A. and Huizinga, H., 2010. "Bank activity and funding strategies: the
impact on risk and return." Journal of Financial Economics, 98, pp. 626-650.
Demirguüc-Kunt, A., Detragiache, E. and Merrouche, O., 2013. "Bank Capital:
Lessons from the Financial Crisis." Journal of Money, Credit and Banking, 45(5), pp.
1147-1164.
Laeven, L. and Levine, R., 2009. "Bank governance, regulation and risk taking."
Journal of Financial Economics, 93, pp. 259-275.
Kirkpatrick, G., 2008. The Corporate Governance Lessons from the Financial Crisis.
OECD. Paris, France.
Huizinga, H. and Laeven, L., 2012. "Bank valuation and accounting discretion during
a financial crisis." Journal of Financial Economics, 106, pp. 614-634.