1 / 19

Does the stock market value bank diversification Lieven Baele Tilburg University Olivier De Jonghe Ghent University Rud

Olivier De Jonghe. Diversification: an evolution in the making. Europe: Second Banking Directive (1989)Geographical diversification: single banking license, home country controlFunctional deregulation: no restrictions on financial conglomerationUnited StatesLegal restrictions: Glass-Steagall Ac

noelani
Download Presentation

Does the stock market value bank diversification Lieven Baele Tilburg University Olivier De Jonghe Ghent University Rud

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

    1. Olivier De Jonghe Does the stock market value bank diversification? Lieven Baele (Tilburg University) Olivier De Jonghe (Ghent University) Rudi Vander Vennet (Ghent University) SUERF/NIESR Seminar "De-Regulation and Integration in European Banking"

    2. Olivier De Jonghe Diversification: an evolution in the making Europe: Second Banking Directive (1989) Geographical diversification: single banking license, home country control Functional deregulation: no restrictions on financial conglomeration United States Legal restrictions: Glass-Steagall Act, McFadden Act Geographical diversification: 1994, Riegle-Neal Act Functional diversification: 1999, Gramm-Leach-Bliley act ? Broader scope for diversification in Europe ? Earlier deregulation

    3. Olivier De Jonghe Financial Conglomerates in Europe Broad spectrum: commercial banking securities-related activities insurance

    4. Olivier De Jonghe Evolution of functional diversification

    5. Olivier De Jonghe Long-term performance and riskiness Capital market data Focus on Europe broader scope for functional diversification early deregulation: initiated by Second Banking Directive in 1989 Anticipation of results: functional diversification can improve future bank profits diversification can decrease idiosyncratic risk more diversified banks have higher systematic risk Do financial conglomerates possess a comparative advantage in terms of return/risk profile?

    6. Olivier De Jonghe Structure of the talk Theoretical foundations Measurement of long-run performance and risk Data and Methodology Results Conclusion

    7. Olivier De Jonghe Diversification and profitability: theory Advantages Revenue synergies Cost economies of scale and scope Information economies Corporate governance through takeover market Costs Agency costs Regulatory costs ? Existing empirics offers mixed evidence

    8. Olivier De Jonghe Diversification and bank risk Portfolio theory ?non-correlated revenue sources Correlation between interest and non-interest income (1980-1996) Cyclicality of revenue sources ?Non-interest income may vary less/more with overall business cycle conditions e.g.: mortgages vs life insurance vs investment banking

    9. Olivier De Jonghe Data Listed European banks 17 European countries 1989 – 2004 Data sources Bankscope: balance sheet and income statement Datastream: market capitalization and daily returns Daily returns ?Liquidity criterion (143 out of 255 banks)

    10. Olivier De Jonghe Bank performance: measurement

    11. Olivier De Jonghe Bank performance: results

    12. Olivier De Jonghe Bank risk: multifactor CAPM

    13. Olivier De Jonghe Bank risk: results

    14. Olivier De Jonghe Method Panel data set-up: With: yi,t is a return or risk metric X1 : functional diversification Non-interest income to total income Loans-to-assets Revenue diversity measure X2 : control variables Capital ratio Asset risk (LLP) Inefficiency (Cost-income) Size

    15. Olivier De Jonghe Results: Franchise value Diversified banks Higher return potential Closer to the frontier Nonlinear relation Jointly significant Exponentially increasing Capital (+), Efficiency (+), Size (-) Diversification BENEFIT in Financial Conglomerates in Europe

    16. Olivier De Jonghe Results: systematic risk Diversification increases systematic risk Nonlinear, exponentially Example: D(non-interest income share) = 0.10 ?market beta increases with 0.11 Larger banks have higher betas Capital: non-linear, U-shaped More diversified banks have larger exposure to: changes in market sentiment economy-wide shocks

    17. Olivier De Jonghe Results: idiosyncratic risk Nonlinear relationship, U-shape Minimal risk at 36% Non-interest income is twice as volatile as interest income Low correlation between sources of income Capital (+), Efficiency (-), LLP(+) Size (-) Diversification offers a large potential for bank risk reduction in Europe

    18. Olivier De Jonghe Results: total risk Similar to idiosyncratic risk Nonlinear, U-shaped Lower minimum: 22% => Mixture of effects of underlying components

    19. Olivier De Jonghe Robustness Different diversification measures Economically inspired Subsample of most profitable banks Subsample of well-capitalized banks Subsamples of largest banks Control for important mergers Data– or statistically inspired Winsorized sample Contemporaneous Traditional Q

    20. Olivier De Jonghe Conclusion Does the stock market value bank diversification? ? focus on Europe Diversification offers potential to improve future bank profits Diversified banks co-vary more with the market Idiosyncratic risk can be reduced! Investors face classic return/risk trade-off Bank-dependent parties mainly care about idiosyncratic risk Regulators: bank-specific and systematic risk! ?Careful monitoring of financial conglomerates

More Related