The risk-and-return effects of US banking competition and securitization This version : February 2017 (original) (raw)
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Competition and Bank Risk the Role of Securitization and Bank Capital
IMF Working Papers, 2019
We examine how bank competition in the run-up to the 2007–2009 crisis affects banks’ systemic risk during the crisis. We then investigate whether this effect is influenced by two key bank characteristics: securitization and bank capital. Using a sample of the largest listed banks from 15 countries, we find that greater market power at the bank level and higher competition at the industry level lead to higher realized systemic risk. The results suggest that the use of securitization exacerbates the effects of market power on the systemic dimension of bank risk, while capitalization partially mitigates its impact.
Competition and Bank Risk The Effect of Securitization and Bank Capital
We find that the increased use of securitization activity in the banking sector prior to the 2007-2009 crisis augmented the effect of competition on realized bank risk (i.e. more intense competition and greater use of securitization is correlated with higher levels of realized risk) during the crisis. In contrast, higher levels of capital did not buffer the impact of competition on realized risk. It follows that cooperation between supervisory and competition authorities is warranted to account for the stability implications of financial innovation and capital regulation.
Securitization and Bank Performance
2009
Theory suggests that securitization provides financial institutions with an opportunity to lower the cost of funding; improve credit risk management and increase profitability. In practice, however, it might lead to adverse consequences through a number of indirect channels. Therefore, the net impact of securitization on bank performance is ambiguous. This study aims to evaluate whether banks improve their performance through the use of the securitization market by applying a propensity score matching approach. In other words, we build a counterfactual group of banks to assess what would have happened to the securitizing banks had they not securitized. Using US commercial banking data from 2001 to 2008, we first test these hypotheses using univariate analysis and find that securitizing banks are, on average, more profitable institutions, with higher credit risk exposure and higher cost of funding. However, the propensity score matching analysis does not provide evidence of significant causal effects of securitization on the performance of banks. Therefore, securitization does not seem to outperform alternative funding, risk management and profitability improvement techniques used by banks that have ex-ante similar characteristics to those securitizing. Our evidence raises important questions about the motives for banks' increasing securitization activities and consequent implications for the banking system.
A Frontier Measure of U.S. Banking Competition
SSRN Electronic Journal, 2012
The three main measures of competition (HHI, Lerner Index, and H-Statistic) are uncorrelated for U.S. banks. We investigate why this occurs, propose a frontier measure of competition, and apply it to …ve major bank service lines using data only available since 2008. Fee-based banking services comprise 35% of bank revenues so assessing competition by service line is preferred to using a single measure for traditional activities extended to the entire bank. Academic-based competition measures explain only 1% of HHI variation. HHI merger/acquisition guidelines could be raised since current banking concentration seems unrelated to competition.
Does bank competition affect bank stability after the global financial crisis
2016
This paper addresses the dynamic relationship between competition and bank stability in Albanian banking system during the period 2008 - 2015. To this purpose, we construct a proxy for bank competition as referred to the Boone indicator. We also calculated the Lerner index and the efficient adjusted Lerner index, as well as the profit elasticity index and the Herfindahl–Hirschman Index. The main results provide support for the “competition – stability” view – that lower degree of market power sets banks to less overall risk exposure. The results further show that increasing concentration will have a larger impact on bank’s fragility. Similar, bank stability is positively linked with macroeconomic conditions and capital ratio and inverse with operational efficiency. We also used a quadratic term of the competition measures to capture a possible non-linear relationship between competition and stability, but find no supportive evidence.
Bank Competition and Financial Stability
Journal of Financial Services Research, 2008
Under the traditional "competition-fragility" view, more bank competition erodes market power, decreases profit margins, and results in reduced franchise value that encourages bank risk taking. Under the alternative "competition-stability" view, more market power in the loan market may result in higher bank risk as the higher interest rates charged to loan customers make it harder to repay loans, and exacerbate moral hazard and adverse selection problems. The two strands of the literature need not necessarily yield opposing predictions regarding the effects of competition and market power on stability in banking. Even if market power in the loan market results in riskier loan portfolios, the overall risks of banks need not increase if banks protect their franchise values by increasing their equity capital or engaging in other risk-mitigating techniques. We test these theories by regressing measures of loan risk, bank risk, and bank equity capital on several measures of market power, as well as indicators of the business environment, using data for 8,235 banks in 23 developed nations. Our results suggest that-consistent with the traditional "competition-fragility" view-banks with a higher degree of market power also have less overall risk exposure. The data also provides some support for one element of the "competitionstability" view-that market power increases loan portfolio risk. We show that this risk may be offset in part by higher equity capital ratios.
Bank Competition, Concentration and Credit Risk
Intellectual economics, 2020
The purpose of this study is to investigate the nexus between the banking sector structure and credit risk. Unlike many other studies that address internal and external factors affecting credit risk, the study addresses banking competition, as the banking sector structure has an impact on banks’ loan portfolios. It also employs macro-level data which provides important implications for regulatory authorities. The study utilizes a fixed-effects model to explore the impact of banking competition on credit risk using a panel dataset comprising 52 countries during the period of 1998-2016. In the study, non-performing loans to total gross loans ratio (NPL) is employed as a proxy of credit risk. Lerner index, Boone indicator, and five-bank asset concentration are used for the measurement of banking competition. The empirical findings show that competition and concentration have different impacts on credit risk. Consistent with the relationship lending literature, increased market power al...
International Journal of Economics and Finance, 2012
This study investigates the impact of securitization on risk behavior and banking stability. Based on a sample of 174 US commercial banks from 2001 to 2008, we find that a greater recourse to securitization is associated with a deterioration in the quality of American banks' loan portfolios and an increase of the credit risk in their balance sheets. In the other hand, we observe a positive and significant impact of securitization on banking stability. We think that this paradox is due to the fact that different classes of securitized assets lead to heterogeneous effects on American banks' stabilities. Particularly, our results show that mortgage securitization has a positive and significant impact on banking stability, providing thus a support to the implicit recourse hypothesis. Inversely, non mortgage securitization has a negative effect on banking stability because of the reduction of banks' monitoring incentives related to this particular form of securitization.
The effects of bank regulations, competition, and financial reforms on banks' performance
Emerging Markets Review, 2011
In this paper, we examine the influence of bank regulation, concentration, and financial and institutional development on commercial bank margins and profitability across a broad selection of Middle East and North Africa (MENA) countries. The empirical results suggest that bank-specific characteristics, in particular bank capitalization and credit risk, have a positive and significant impact on banks' net interest margin, cost efficiency, and profitability. Also we find that macroeconomic and financial development indicators have no significant impact on net interest margins, except for inflation. Regulatory and institutional variables seem to have an impact on bank performance.
Journal of International Money and Finance
Based on a sample of U.S. commercial banks from 2002 to 2012, this paper shows that bank loan securitization has a significant and positive impact on both Z-scores and the likelihood of bank failure, indicating a short-term risk reduction and a long-term risk increase effect. We also find disparate impacts between mortgage and non-mortgage securitization. Loan sale activities are found to have a similar impact to securitization.