Bank Control, Capital Allocation, and Economic Performance Randall Morck University of Alberta M. Deniz Yavuz Oblin, Washington University in St Louis Bernard Yeung NUS Is the control structure of the banking system related to capital allocation efficiency and economic outcomes?
Bank Control, Capital Allocation, and Economic PerformanceRandall MorckUniversity of AlbertaM. Deniz YavuzOblin, Washington University in St LouisBernard YeungNUS
Is the control structure of the banking system related to capital allocation efficiency and economic outcomes?
family, state, and independent control of banks
Fraction of banks control by business families is correlated with
less efficient allocation of capital,
more non-performing loans,
more bank crisis,
more macro volatility, and
Opposite is true for independent bank control
State control is correlated only with less efficient allocation of capital and more NPLFinancial System Efficiency
The Cross-Country Relationship Between Growth in Real Per Capita GDP and Capital Ownership, Controlling for Current per Capita Income, Capital Investment Rate, and Level of Education (from Morck, Stangeland, and Yeung, 2000)
H1 includes only the wealth of billionaires known positively to be heirs, politicians or politicians= relations. H2 also includes the wealth of billionaires who are probably heirs. H3 includes H1 plus fortunes jointly controlled by a founder and his heirs. H4 includes all the above. H5 through H8 are analogous to H, H2, H3 and H4 but do not include politician billionaires and their relations.
a large fraction of these dominant owners are wealthy families.
Via pyramids, etc., these wealthy families gain control of a large fraction of corporations and corporate assets
+ more micro efficiency among family controlled set of firms
Overcome inefficiency in using the market – due to information asymmetry and regulatory/bureaucratic burdens
– what is good for a set of firms can be bad for the economy
Intrinsic results due to biased resources allocations
Economic entrench – rent seeking
Lobby for entry barriers (Fogel 2006)
Capture the capital marketWhy such results?
Developed financial markets encourage “creative destruction” and promote competition. (Schumpeter, 1942)
Not always in the best interest of elite/powerful-families to promote efficient financial systems.
Capture the institutional development – save capitalism from capitalist
Morck, Stangeland, Yeung, 2000, 2002, 2005; Rajan and Zingales 2003, 2004;….Perotti and Vorage 2008 etc
Morck et al 2002, Rajan and Zingales 2003
An economy may have no stock markets, but, cannot do without banks
Capturing the banking system
Family bank ownership was first looked at Caprio et al JEI 2007Why capture the financial market?
Efficiency view (mostly applies at the micro level):
Interest alignment and mitigating information asymmetry (Diamond 1984; Hoshi et al. 1991; Khanna et al. 2000; Fisman & Khanna 2004; Almeida & Wolfenzon 2006, Caprio et al 2007, etc)
Entrenchment view (has macro level implications):
Family banks may favor related firms (see, e.g., La Porta et al. 2003), limit capital to potential competitors,
ATM – Engage in risk shifting, government bails out (see, e.g., La Porta et al. 2003, Haber 2002).
Add state ownership
LLSV, “Government Ownership of Banks,” JFE, 2002Let us not presume
Efficiency in capital allocation
NPL, Bank Crisis
Efficiency vs. economic entrenchment?Empirical investigation of ….
Starting sample is the 10 largest banks in 44 countries (Banker 2001).
Caprio et al. (2007) provide control structure of 244 public banks.
We add the ownership structure of private banks (total 318 banks).
Most of the data come from Bankscope 2001.
Controlling shareholder = largest ultimate shareholder with stake ≥ 10%.
Controlling classifications: State, family, independent.
Bank Control variables: Fraction of the banking system controlled by state, family and independent banks weighted by total loans.
Same if weighted by assetsDataset and Ownership Variables
Elasticity of capital spending with respect to the value added, by industry.
Version 1: UNIDO (UN General Industrial Statistics) Data for 1993 through 2003.
Version 2: UNIDO (UN General Industrial Statistics) Data for 1963 through 2003.Capital Allocation Efficiency Measure 1
as in Wurgler (2000)
Please hold your questions on added, by industry.
Data timing (contemporary data on ownership (2001-2003) and target dependent variables (1993 – 2003)
Will deal with them after providing a snap shot of the resultsData and econometric problems
Nonperforming loans /Total loans outstanding. added, by industry.
WDI site – World Development Indicators (World Bank)
Average between 1993 and 2003.
Do a logistical transformation
Bank crisis Dell’ Ariccia et al 2008
Deposit runs, bank holidays or nationalization, fiscal cost of bank rescues > 2% GDP, NPL > 10% bank assets
1993 – 2003
Add 2008 – IMF, direct government rescue attempt 2008Other Critical variables
Macro variables – Beck et al 2003, Beck et al 2000, Penn world Tables,
Real per capita GDP growth
1993 through 2003 and 1963 to 2003
Estimate as the time trend
TFP Growth – 1993-2003
using logarithms of first differences for Y, K, and L to estimate the rate of change of the parameter A = TFP growth
Capital accumulation – Beck et al (2000), 1993 - 2003
d = 7%
1964 as the starting points
Forward iteration to get capital stocks
Calculate the rate of change
Economic stability, 1993 - 2003
the standard deviation of log first differences in real per capita GDPOther Critical variables
Family ownership of banks is associated with world Tables,
Less allocation efficiency
more NPL and bank crisis,
more macro volatility
Opposite result for independently owned banks
State ownership is associated with
Less allocation efficiency
Economic entrenchment, not efficiency argument
Previous results on the effect of state owned bank may need refinementSo …
Contemporary data – ownership and the target variables world Tables,
Should use lagged bank control variables
Cannot get them
May not be that important if control structure changes slowly.
Only 14 banks (4.4% of the total 318) switch category between 2001-2007.
Still, many bank privatizations between 1993-2001 from Megginson (2004).
14 (out of 324) banks change control from 2001 to 2007
2 family banks state controlled, 4 becomes widely held
4 state controlled widely held
2 widely held family owned, and 2 become state controlled
Beware of the “Chen” factor –
incompetent and corrupt government passes the control of state owned banks to rich families
Result = corrupt and incompetent government
Do the data both way
Move all family owned back to state owned
Or, like we did before, keep them as family owned
Or, take a weighted average for each
So, the mis-classification not a factorRobustness – Bank control data
Alternative Regressions: world Tables,
Regression robust to outliers.
Weighted least squares regressions.
Correcting for arbitrary heteroscedasticity vs simple OLS
Expanding the sample to 2007 (GDP data)
Expanding the crisis data
E.g., use both Dell’ Ariccia et al (2008) and Demirguc-Kunt et al (2006) , result the sameRobustness
Proxying for under development in financial markets? world Tables,
Control for capital market development
In the Rajan and Zingales regression (panel B table 5), we put in cross terms between external finance dependence and capital market development,
Just due to “oligarchic” behavior?
Put in an oligarchy variable as an additional control
Or form another cross term in the R& Z regression
same resultRobustness in the interpretation:using banks to entrenchment
Incompetent heir effect? world Tables,
Step one, improve the bank ownership data
Get ownership data to identify families that do and do not own other business
“Orbis” to identify other business owned
Use also the internet
Reclassify those with no “known other business” as independent
Same resultMore on robustness in the economic interpretation
Step two world Tables,
Dig up alternative stories
Find that family ownership is highly related to “entry barriers
Number of procedures,
Time and costs to set up a firm
Aside – family bank ownership is related to more income inequality and a smaller middle class too
Control of the banking system is important for efficiency of capital allocation.
Family and state control over banks have similarly economically significant and negative implications for capital allocation efficiency.
However, family control is also correlated with lower economic growth, elevated macroeconomic instability, and more income inequality.Conclusion
Implication: capital allocation.
Do not let families capture the banking system!
Multiple governments (e.g., Singapore, Canada) actually stipulate against bank owning families from holding non-banking business
"Measures to separate financial and non-financial activities of banking groups“ – Speech by DPM Lee Hsien Loong At The Association Of Banks in Singapore (ABS) 21 June 2000
“with banking and non-banking activities inter-meshed within a conglomerate, there will be a strong tendency to stretch any safety net intended for the banking system also to cover non-bank operations in the group.”
Why is family ownership of banks common? capital allocation.
Political Economy Outcome.
Rajan and Zingales (2004); Morck, Wolfenzon, Yeung(2005); Stulz (2005); Perotti and Volpin(2007); Haber and Perotti(2008); Acemoglu, Johnson and Robinson (2008).
Families are the highest bidders because their efficiency gains are the highest.