Bank business models, managerial

Transcription

1 Bank business models, managerial discretion and risk efficiency Baele Lieven, Tilburg University, CentER, Netspar De Bruyckere Valerie, Ghent University De Jonghe Olivier, Ghent University Vander Vennet Rudi, Ghent University

2 Objective of the paper Three questions: 1. Are bank business models monitored by the stock market? 2. Are some banks more risk efficient in the implementation of their business model? 3. What explains the cross sectional variation in risk inefficiency? Management discretion?

3 Objective of the paper This paper uses a stochastic frontier model to investigate whether banks with different business modelshave different risk profiles and whether managerial discretion makes banks less efficient in the implementation of their business model.

4 Sample US bank holding companies CRSP stock returns (weekly) FRY9C call report data (one year lag) 695 bank holding companies

5 Identifying risk measures Extract structural shocks from a VAR Estimate a factor model with market risk, interest risk, term spread risk and credit risk (Stiroh, 2006). Q1 Q2 Q3 Q4 Q5 Q6 1. Systematic market risk (market beta) 2. Systematic default risk (default risk beta) 3. Total volatility 4. Idiosyncratic volatility 5. Risk adjusted return

6 Monitoring business models 1. Bank funding structure Interest Bearing Core Deposits Share Large Time Deposits Share Non interest bearing deposits (omitted) Deposits to Total Assets Share 2. Loan portfolio composition Consumer Loan Share Agricultural Loan Share Commercial and Industrial Loan Share Real Estate Loan Share (omitted) Other Loan Share Loans to Total Assets 3. Revenue sources Interest Income Share (omitted) Fiduciary Activities Income Share Service Charges on Deposit Accounts Share Trading Revenue Share Other Non-Interest Income Share + Control variables: bank size & CAMELs

7 Market exposure Default exposure Idiosyncratic volatility Total Volatility Risk Adjusted Return CONTROL VARIABLES BANK FUNDING STRUCTURE Interest Bearing Core Deposits Share * Large Time Deposits Share ** ** Deposits to Total Assets Share *** *** *** ** BANK ASSET STRUCTURE Consumer Loan Share 0.290** ** Agricultural Loan Share *** *** *** ** Commercial and Industrial Loan Share Other Loan Share 0.779*** Loans to Total Assets * * * BANK REVENUE STRUCTURE Fiduciary Activities Income Share 0.715*** ** Service Charges on Deposit Accounts Share 1.350*** *** *** Trading Revenue Share 0.593* Other Non-Interest Income Share 0.689*** ** *** *** ** R-squared 33.90% 8.70% 40.70% 37.40% 47.00%

8 Linear model (OLS) Risk Business model characteristics Risk = c + β X + ε ε ~ i, t i, t 1 i, t iid N(0, σ 2 i, t ε )

9 Stochastic Frontier Analysis Risk Business model characteristics Risk = c + β X + s u + v i, t i, t 1 i, t i, t ν ~ iid 2 N(0, σ ) i, t ν u ~ iid N 2 (0, σ ) + i, t u inefficiency component noise component

10 Stochastic Frontier Analysis Risk Risk inefficiency Business model characteristics Risk = c + β X + s u + v i, t i, t 1 i, t i, t ν ~ iid 2 N(0, σ ) i, t ν u ~ iid N 2 (0, σ ) + i, t u inefficiency component noise component

11 Stochastic Frontier Analysis Market exposure Default exposure Idiosyncratic volatility Total Volatility Risk Adjusted Return σ v *** *** *** *** *** σ u *** *** *** *** *** u γ 60.92% 52.01% 79.70% 78.88% 64.49% σ total P value of likelihoodratio test σ u =0: 0.00% 0.00% 0.00% 0.00% 0.10%

12 Stochastic Frontier Analysis Risk Risk inefficiency Business model characteristics

13 Risk and RAR inefficiency Cross sectional disperion in inefficiency 1. Disclosure (pillar III, Basel II) Management discretion Opaqueness: Morgan (2002) and Iannotta (2006) Beatty et al. (2002): loan loss provisions, realized security gains and losses 2. Diversification vs specialization Hirschman Herfindahl (HH) indices

14 Managerial discretion? Market Risk Inefficiency Idiosyncratic Volatility Inefficiency Total Volatility Inefficiency Default Risk Efficiency Risk-adjusted Return Efficiency Discretion in loan loss provisionng * *** Discretion in realizing securities gains and losses *** *** ** Volatility of accounting profits 3.723*** 0.120*** 0.137*** *** Return on Equity 5.562*** ** *** *** Cost Income ratio 0.337** ** ** Net Interest Margin tototal Assets Loan Growth * ** Funding Specialization Loan Portfolio Specialization Income Specialization *** *** ** ** Specialization in non-traditional, noninterest income generating activities *** Constant 0.939*** 0.988*** 0.988*** 0.995*** 0.957*** R-squared 9.90% 13.40% 13.70% 4.20% 15.50% Number of banks

15 Answers 1. Are bank business models monitored by the stock market? YES 2. Are some banks more efficient in the implementation of their business model? YES 3. What explains the cross sectional variation in inefficiency? Management discretion 4. What explains the time variation in inefficiency (market influence)? Bliss and Flannery (2002) Future work