Are German-Type Universal Banks Superior In Performance To Other Types Of Universal Banks?

1. Are German-Type Universal Banks Superior In Performance To Other Types Of Universal Banks? 曾惟苓 林韻茹

2. Outline • Introduction • Types of Universal Banking System • Conflicts Between Theory & Research • Empirical Analysis • Conclusion • Comment

3. Introduction • Change in financial structure • New competitive style • Financial Disintermediation • Financial Innovation • New Information Technologies • Financial Globalization

4. Effect • on demand and supply side of financial service

5. Effect • deregulation • Strategies • M&A • Alliance • Become specialized banks • Set up universal banks

6. Definition of Universal Bank • “Universal banking means that banks are permitted to offer all of the various kinds of financial services. This includes classical banking activities, like the credit and deposit business, as well as investment services, securities placement and brokerage, and even insurance activities, real estate trading, and others.”------Theodor Baums Source: Anthony Saunders, Ingo Walter , 1996 Universal banking : financial system design reconsidered,

7. Types of Universal Banking System

8. Full Integration • All in house • Merit • Effect of economies of scope is best • Optimal allocation of resources • Profit stability • Demerit • A serious conflict of interest • Side-effect: bureaucratic mefficiencies • Hard to audit

9. Types of Universal Banking System

10. Germany-type • Banking and security-related operations in house; Other operations like insurance by setting up subsidiaries • Preserve most of the merits and demerits of full integration type • Country Germany, France, Italy, the Netherlands,and Switzerland

11. Germany • 1984年修正「German Banking Act 」 Separate wholly owned subsidiaries • 在業界扮演之角色 • 企業重整 • 金援資金短缺之企業 • 有效率的籌劃進行國營企業民營化 • 私人企業公開發行之媒介機構  德國之金融界、產業界或政府當局皆認為其銀行制度較英、美等國優異 • 面臨問題 • 銀行佔有過度的經濟上勢力 • 國內之資本市場被認為相對地缺乏效率

12. European Union • 1989 年公佈採「Single Banking License」 會員國銀行在母國取得之單一銀行執照後，可跨 越國界至其他會員國設立分行 • 1989年公佈採「Home Country Control」原則之「The Second Banking Directive」 業務範圍，包括傳統商業銀行與投資銀行業務

13. Types of Universal Banking System

14. U.K. type • Concentrate only on commercial banking operations; Other operations like insurance and securities by setting up subsidiaries • Merit • Abrupt shock in one part does not spread to the other parts • Demerit • Cannot benefit from the efficiencies of multiple operations • Country Japanese and U.K.

15. Japan

16. Types of Universal Banking System

17. U.S. type • Holding company possesses separated banks and non-banks subsidiaries • Merit • A loss in one subsidiary does not spread to other subsidiaries • Auditing is more feasible than other systems • Demerit • High cost of establishment • Hard to take advantage of economies of scope • Country U.S. , Taiwan

18. U.S

19. Theoretically speaking • Major benefit of universal banks is supposedly the economies of scope • Forestieri(1993): two source of economies of scope • Demand side • Crete new demands by meeting a variety of customers’ needs • Supply side • Overall costs can be lowered because computer networks and customer info can be shared

20. Question • In comparison with specified banks, are Universal Banking Systems more efficient? Some researchers have done the research • In terms of economies of scope, German-type universal banks are more advantageous than the U.K. type or U.S. type. Is it true? Sul, W., and J.S. Oh

21. Test empirically

22. different resultsWHY? • Problem of classification • By country follow country’s financial system Now

23. different resultsWHY? • Problem of classification • By bank according to the portion of a bank’s non-commercial activities, not financial regulation

24. Purpose of the research • Classify banks into Specified Banking System and Universal Banking System Hard work • German-type V.S Other Universal Banking type German-type preserves most of the merits and demerits of full integration type

25. Sul, W., and J.S. Oh(1999) • Are German-Type Universal Banks Superior In Performance To Other Types Of Universal Banks? • Samples: 8 countries, 371 banks • German-type : total 219 banks France, Germany, Italy, the Netherlands, Switzerland • Other universal banking systems : total 152 banks Japan, U.K., U.S. • Period: 1988~1995 fiscal years

26. Research Model Yit: dependent variable; BTYPEi: dummy variable representing each bank’s type; Xitk: variables relating each bank’s internal resources and market enviroments Uit: Vi + ei + ;

27. Variables • Dependent variable(Yit) -Net Profit to Assets(NPTA) -Net Profit to Equity(NPTE) • Independent variables(Xitk) -internal resource-related ASSET,EARATIO,NIM,COST,LOANS,LIQ -market-related INVGDP,MMR,MINDEX

30. Dummy variable • BTYPE -German-type universal banks (1) e.g.France,Germany,Italy,the Netherlands -Other types of universal banks (0) e.g.Japan,the U.K.,the U.S.

31. German-type universal banks are not superior in performance to other types of universal banks Empirical analysis

32. Bank size & Economies of scope • Positive relation between size and performance -more resources -diversification strategies • Sample Classification(based on total assets in 1995) 1.The World Largest 1000 Banks(N=187) -German-type 63 -other type 124 2.Other Banks (N=184) -German-type 156 -other type 28

34. Summery • Economies of scale attains better economies of scope. • Large banks: -performance does not significantly different Medium & small banks: -other types of universal banks are superior • Diversification vs. Specialization

35. Type comparison • There are differences in the performance determinants between German-type universal banks and other types of universal banks. -LIQ vs.LOANS c.f. Sul,W.,”Do universal banks in major European countries have better performance compared to specialized banks?:empirical investigation,”Journal of Financial Management and Analysis(1:1998)

37. Conclusion • Theoretically,German-type universal banks can make the best use of “economies of scope.” • Contrary to theory, the German-type universal banks’ performance is less than other types of universal banks. • Economies of scope require the size effect at the same time.

38. Comments Data selection • Time (1988~1995) too short to reveal the synergy effect • Other relevant factors

39. Other References Lang, G.,and Welzel, P., “Efficiency and Technical progress in banking : Empirical results for a panel of German cooperative banks,” Journal of Banking and Finance ( 20:1996 ) • A panel of German cooperative banks (N=757) • 1989~1992 • Translog cost function • economies of scale and economies of scope • Agency problem ?

40. Other References Sul,W.,”Do universal banks in major European countries have better performance compared to specialized banks?:empirical investigation,”Journal of Financial Management and Analysis (1:1998 ) • Germany,France,Italy,Netherlands and Switzerland • Universal banks & specialized banks (each of 2100) • 1990~1995 • Universal banks have performance premium. • Specialized banks are comparatively small size and have competitive advantage with cost efficiency.

41. Thanks for your attention ! !