Deregulation and the relationship between bank CEO compensation and risk taking

The deregulation of the banking industry during the 1990s provides a natural (public policy) experiment for investigating how firms adjust their executive compensation contracts as the environment in which they operate becomes relatively more competitive. Using the Riegle-Neal Act of 1994 as a focal point, we investigate how banks changed the equity-based component of bank CEO compensation contracts. We also examine the relationships between equity- based compensation and risk, capital structure, and investment opportunity set. Consistent with theoretical predictions, we find that after deregulation, the equity- based component of bank CEO compensation increases significantly on average for the industry. Additionally, we find that more risky banks have significantly higher levels of equity-based compensation, as do banks with more investment opportunities. But, more levered banks do not have higher levels of equity-based CEO compensation. Finally, we observe that most of these relationships become more powerful in our post- deregulation period.Corporate governance ; Bank supervision

The Impact of Noninterest Income on the Performance of Vietnamese Commercial Banks

This paper uses the generalized method of moments (GMM) to analyze the impact of noninterest income on the performance of 28 Vietnamese commercial banks in the period from 2010 to 2018. GMM modeling uses techniques to deal with endogeneity, variance, and autocorrelation in the research model. This study provides evidence of nonlinear links between noninterest income and the profitability of bank. The regression shows an inverse relationship between noninterest income and the performance of Vietnamese commercial banks. Many studies have found that the development of noncredit services by U.S. banks and the banks of some developing countries increase bank income and significantly improve performance. This difference between banks in Vietnam and banks elsewhere stems from differences in the income structure of the Vietnamese banking system and those of developed countries in which noninterest income accounts for a high proportion of income, even surpassing net interest income. Banks can maximize the benefit of traditional noninterest income when they increase the proportion of noninterest income, especially when net interest income is lower than gross income. Noninterest income can significantly improve profitability. The larger the size of a bank’s assets, the more likely it is to increase revenue and profit, expand its assets, and use capital more efficiently than small banks. At the same time, the faster the growth of a bank’s assets, the more stable is its profit growth. The more liquid banks are, the more profitable credit institutions are, even as credit risk increases. Credit risk is adjusted to reduce the profit of a bank. The ratio of  equity to total assets increases, reducing dependence on funding flows and enabling banks to become more profitable. This trend in modern banking seems to be suitable only for banking operations in developed economies . In developing countries that still face many challenges, anxieties require banks to strengthen their urgent solutions promptly in order to increase their competitiveness in the marketplace

Learning by observing: information spillovers in the execution and valuation of commercial bank M&As

We hypothesize that banks become better able to manage acquisitions, and investors become better able to value those acquisitions, as these parties ‘learn-by-observing’ information that spills-over from previous bank M&As. We find evidence consistent with these hypotheses for 216 M&As of large, publicly traded U.S. commercial banks between 1987 and 1999. Our theory and our results are predicated on the idea that acquisitions of large and increasingly complex commercial banks were a relatively new phenomenon in the late-1980s, with no best practices to inform bank managers and little information upon which investors could base their valuations. Our findings provide a new explanation for why academic studies have found little evidence that bank mergers create value. Furthermore, our finding that investors become more accurate pricers of new phenomena as they observe greater quantities of those phenomena is consistent with the theory of semi-strong stock market efficiency.Bank mergers ; Financial institutions

Bank performance and noninterest income: evidence from countries in the Asian region

Noninterest income (NII) is income generated by banks from sources other than interest payments. Studies conducted on the relationship between NII and bank risk for the USA and Europe have found that emphasis on income diversification lowers risk in European banks but exacerbates it in American banks. Current research on Asian banks has not led to a coherent view of the relationship between NII and bank risk. We employ data over 25 years for 24 Asian countries to examine this relationship. Using the GMM estimation approach we estimate equations for two time-periods, 1996–2007 and 2008–2018, to examine the NII-bank risk relationship in the presence of some controlling financial, macroeconomic and policy variables. Our results show that non-interest income worsens bank risk for all 24 countries as well as for sub-groups of countries. We also find that, by and large, economic growth improves bank risk while inflation above a threshold worsens it. Finally, our proxy measure for monetary policy improves bank risk though fiscal policy seems to have no effect

Income mix and liquidity of Nigerian deposit money banks : evidence from dynamic panel models

Liquidity crunch is one of the greatest challenges that deposit money banks are confronted with which negatively affect their strength and stability and ultimately leading to collapse of some. Arising from this, the study focused on the “effect of income mix on liquidity of Nigerian deposit money banks.”The study adopted an ex post facto research design, while ten out of all the listed banks were purposefully selected. The study obtained secondary data from the annual reports and accounts of the sampled banks from 2008 to 2017. Series of preliminary analyses involving descriptive and correlation analyses were conducted while generalized method of moment was employed in testing the hypotheses. The study found that all the variables of interest on income mix individually exhibit no significant effect on liquidity (P > 0.05), in effect, ratio of interest income, fee and commission income, foreign exchange income and other income were found to influence liquidity negatively while investment income was found to exert positive effect on liquidity. The study’s conclusion arising from the findings is that income mix has significant positive joint effect on liquidity management. Arising from the conclusion, the study recommends that bank should keep diversifying their income base as such strategy significantly improves liquidity, while also improving on the interest income, fee and commission income, foreign exchange income and other income.peer-reviewe

Bank Efficiency And Financial Ratios: Rating The Performance Of The Four Largest South African Banks

Data Envelopment Analysis (DEA) in conjunction with financial ratios is used to estimate and compare the performance of the four largest South African banks over the period 2001 to 2011.  DEA is used to estimate the relative technical, allocative, cost and scale efficiencies and compare these estimates to certain financial ratios published by the banks in their financial statements.  These ratios include return on equity (ROE), return on assets (ROA), net interest margin (NIM), impairment losses, etc.  The results obtained from the efficiency estimates and the financial ratios are used to rate the banks according to these performances.  The rating differs depending on which performance measure is applied.  A combination of these measures was necessary to determine the best and the worst performing bank.  From the results obtained it appears that profitability and efficiency are two sides of the same coin

Profits and balance sheet developments at U.S. commercial banks in 2008

Bank profits ; Banks and banking

"The Global Financial Crisis and the Shift to Shadow Banking"

While most economists agree that the world is facing the worst economic crisis since the Great Depression, there is little agreement as to what caused it. Some have argued that the financial instability we are witnessing is due to irrational exuberance of market participants, fraud, greed, too much regulation, et cetera. However, some Post Keynesian economists following Hyman P. Minsky have argued that this is a systemic problem, a result of internal market processes that allowed fragility to build over time. In this paper we focus on the shift to the "shadow banking system" and the creation of what Minsky called the money manager phase of capitalism. In this system, rapid growth of leverage and financial layering allowed the financial sector to claim an ever-rising proportion of national income—what is sometimes called "financialization"—as the financial system evolved from hedge to speculative and, finally, to a Ponzi scheme. The policy response to the financial crisis in the United States and elsewhere has largely been an attempt to rescue money manager capitalism. Moreover, in the case of the United States. the bailout policy has contributed to further concentration of the financial sector, increasing dangers. We believe that the policies directed at saving the system are doomed to fail—and that alternative policies should be adopted. The effective solution should come in the way of downsizing the financial sector by two-thirds or more, and effecting fundamental modifications.Institutional Investors; Financial Crisis; Financialization; Money Managers; Financial Concentration; Shadow Banking; Subprime Mortgages; Securitized Mortgages

Profits and balance sheet developments at U.S. commercial banks in 1997

U.S. commercial banks had another excellent year in 1997. Their return on equity remained in the elevated range that it has occupied for five consecutive years, and their return on assets reached a new high. Banks maintained their profitability while also adding significantly to assets. The year's strong economic growth increased the demand for credit; banks more than met that demand, gaining market share. In addition, banks departed from the pattern of recent years by sharply increasing their holdings of securities. Compared with 1996, banks earned a somewhat lower average rate on their interest-earning assets and paid a bit more on their liabilities, but these developments were more than offset by higher fee income and increased efficiency. Loan losses remained low relative to loans.Banks and banking - Accounting ; Bank assets

Essays on Non-Traditional Activities in the Banking Industry

Starting in the 1980s, financial innovations and technology improvements led to important changes in corporate financing, primarily a significant decrease in the share of bank loans and an increased share of bonds and stocks. This change challenged the traditional banking business. The Gramm–Leach–Bliley (GLB) Act of 1999 allowed banks to engage more freely in non-traditional activities such as investment banking, venture capital, security brokerage, insurance underwriting, and asset securitization. Further, GLB encouraged changes in banks\u27 business models and income mix that were already underway. Chapter I shows an introduction of non-traditional activities. Chapter II examines the relationship between non-traditional activities, systemic risk, profitability and institutional ownership in the BHCs in the U.S.. The results show that the expansion of banking business scope does have significant impacts on bank\u27s systemic risk and profitability. The results also show that bank\u27s institutional ownership do have significant impacts on bank\u27s contribution on financial system. TARP was one of the most aggressive U.S government coordinated fiscal and monetary policy responses to a financial crisis since the Great Recession in the 1930s. Chapter III addresses the impacts of TARP injection on recipients\u27 non-traditional activities, performance, and insolvency risk between public and private, deadbeat repayment, and full repayment recipients. The results show that participating in TARP significantly, both statistically and economically, reduced the recipient\u27s ROA, suggesting that the TARP program is associated with lower performance as measured by ROA. While, the results also shows that the TARP program significantly, statistically and economically, reduces risk as measured by Z-Score, suggesting the TARP injection reduces the risk of a bank. From this perspective, TARP program achieves its objective to improve the capital adequacy. Finally, the analysis shows that the TARP program leads to a positive increase in stock returns of public banks, suggesting the positive impact of the TARP program on stabilizing the market and restoring investor\u27s market confidence, a major TARP objective as well