A paper report for a course at NCCU, named "The efficiency of Financial Institutions, Application of Microeconomics. "

1. Bank competition & financial stability
in Asia Pacific
Xiaoqing(Maggie) Fu, Yongjia(Rebecca)
Faculty of Business Administration, University of Macau
Bangor Business School, Bangor University, UK
#簡報⼈人- 張博能 | @Stephan_Chang | tcmail0111@gmail.com
Journal of Banking & Finance
ⓒ 2013 Elsevier B.V. All right reserved.
Efficiency Analysis on Financial Institutions @ NCCU

2. StabilityCompetition
Sometimes we trade off
several critical issues
Concentration Regulatory
vs.

3. 14 Asia Pacific Economics
2003 - 2010
4069 banks

4. The key point
This paper proposed
1. Greater concentration foster financial fragility.
2. Tougher entry restrictions may benefit bank stability.
3. Several issues has been highlighted in this work.
# The lower pricing power induces risk exposure as well.
# Deposits insurance scheme⇡ financial soundness ⇣
# To prevent excessive concentration
# To improve the efficiency of resource allocation

5. Agenda
Background introduction |
Related literature | Basic research idea
Today’s presentation
Methodology |
Data description | Descriptive statistics
Empirical results |
Conclusions | Future work for term paper
1
2
3

6. 1.

7. Several policy debates
Since “The great crisis”
There is some impact on financial stability and banks’
competition. (Beck, 2008; Carletti, 2008; …)
Traditional competition-fragility view, competition
leads to great stability. A less competitive banking1
market may lead to more risk-taking if the big banks are
though to be too important to fail. (Marcus, 1984 ; …)

8. Several policy debates
Since “The great crisis”
As we mentioned, there exists positive link between
banks’ competition and financial stability. (Boyd, 2005)
Some researchers argued it is nonlinear link. (2010)
Berger is of the opinion that competition and
concentration might coexist and simultaneously2
induce the banking stability and fragility. (2009)

9. Several policy debates
Since “The great crisis”
Deregulation and excessive competition have both
been highlighted as a factor of “The credit crunch .”
Some researchers present the view of relationship
between banking competition and stability for Asia
Pacific region. 12 Asian economies and 4 South East
Asian countries have been covered in their competition-
stability nexus work. (Soedarmon,2011; Liu, 2012)

10. What’s different ?

11. The author extends previous
empirical literature in several respects.

12. In this paper
Something different …
Previous work pay more attention to apply Z-scores.
The author extends the analysis of the probability of bankruptcy
using the Black & Scholes(1973) and Merton(1974) contingent
claim approaches.
1
# Accounting-based models
# Market-based measures{ }

13. # Market-based measures
Stock prices reflect all available information
in efficient markets.
1
2
3
Firms accounting policies have no influences on
market variables.
Market prices reflect future expected cash flows.
Thus, market based approach should be more
appropriate to use for prediction purposes.

14. In this paper
Something different …
Nevertheless, some non-structural indicators have been proposed in
the contestable markets (Baumol, 1982). To examine the concentration,
competition, and stability nexus in Asia Pacific, this two type measures
have been considered.
2
The author includes structural and non-structural measures
of the competition in his work. Competition and concentration are
inversely related Structure-Conduct-Performance(SCP) model.

15. In this paper
Something different …
3
Regulatory and institutional environmental factors have both
considered in this work. The author adopt instrumental variable
technique with GMM estimator to address potential endogeneity
problem between competition and risk. (Berger’s idea, 2009)

16. Literature review
Competition & stability
Competitive and less concentrated banking system are more fragile
under traditional hypothesis. Diamond(1984), Williamson(1986) and
others argue more concentrated systems can capitalise on economies
of scale and scope and better to diversify portfolios.
Hence, greater concentration and less competition could reduce
the liability risk and lead to greater stability. (Smith, 1984; Boot,
1993; Allen, 2003; Gale, 2004, )

17. Literature review
Competition & stability
Even, Allan and Gale (2004) claimed that financial crisis are more
likely to occur in the less concentrated systems. Boyd et al. (2004)
stated that large “capital buffer” could not be provided if there
doesn’t exist concentrated banking systems or monopolistic larger
banks.
However, “too large to fail” issue must still be considered by
policymakers. (Mishkin, 1996, 2006 ; Barth 2012) Larger banks
often likely lead to generate moral hazard problem. (Kane 2010)

18. Literature review
Competition & stability
Beck et al.(2006) suggest that bank’s size is positively correlated
with organisation complexity. Monitoring larger banks is harder
than monitoring the small ones. As the firm size increase, the
transparency may decrease.

19. Many investigations have emerged testing
for concentration, competition, & banking
stability relationship across countries.

20. Empirical literature
Across several countries
Yeyati and Micco(2007) tested commercial banks from eight Latin
American countries over 1993 - 2002. The finding indicates that a
positive link between bank risk and competition.
Over 3600 European banks and 8900U.S banks have been analysed
for the period from 1995 - 2005 by Schaeck and Cihak(2008). They
find more concentrated banking market benefit the financial stability.
Liu et al (2012) ’s investigation shows that concentration is negatively
associated with bank risk, whereas regulatory restrictions is positively
influenced bank fragility.

21. Still, it is difficult to predict
our experimental results.
“
”

22. “
”
Different channels show different
relationship between competition,
banking stability and concentration.

23. 2.

24. Our panel data model
General form is that…
Bank Risk = f (Concentration, Competition,
Regulator and Institutional Controls, Macro Controls)

25. Market-based measure
The probability of bankruptcy
P = N(
ln(VA
D ) + (u δ
σ2
A
2 )T
σA T
)
McDonald(2002)’s modified probability is that:
N(.) shows cumulative normal density function
VA is value of asset ; u shows return ; T: expiration time
D means face value of debt proxied by total liabilities.

26. Market-based measure
Some details shows here:
VA = VE + D
Bharath and Shumway(2008) presented:
σA =
VE
VA
σE +
D
VA
σD
σD = 0.05 + 0.25 σE
u = ri,t 1
VE is market value of common equity
σE shows the standard deviation of
daily stock return by the square root
of the trading days in a year.
r means the bank’s stock returns over
the previous year.

27. Accounting-based measure
We use the Z-score …
The Z- score calculation model is that:
Zit =
ROAit + Eit/TAit
σROAit
ROA is the return on assets
E/TA is the equity to total assets.
σROA is the standard deviation of the return on assets
The Z score is inversely related to the probability of
the bankruptcy which we mentioned the last slide.

28. Concentration &
Competition measure
# Considering the structural indicator, the author
use the ratio of assets of three largest banks to the
total assets of the banking system as the degree of
market concentration measure. (CR3)
# Further, the non-structural indicator, the Lerner
index(LERNER) is used to measure the degree of
the competition.

29. Concentration &
Competition measure
# Lerner index is calculated as follows:
Lernerit =
PTAit
MCTAit
PTAit
P shows the price of total assets by the ratio of
total revenues to total assets for bank.
0 < Lerner index < 1,where the perfect
competition case implies Lerner index = 0, and
the pure monopoly implies Lerner index = 1

30. Other control variables
Following previous works
# Schaeck and Cihak (2008)…
A bank’s asset size (SIZE) is defined as logarithm(total
assets size). The ratio of loan-loss provisions to total
1
assets (LLT) and the net interest margin are also considered
in our work to track the profitability of a bank’s investing and
lending activities.

31. Other control variables
Following previous works
# Beck et al. (2006) argues bank regulatory policies
and national institutions should be considered in the
cross countries’ investigation. Thus, the author also
2
controls for the banks’ regulations and institutional environ-
ments in the investigation of concentration and competition
on bank stability.

32. Table2- Descriptive statistics

33. Table2- Descriptive statistics
Listed sample Whole sample
Z- score 40.86 39.78
CR3 0.44 0.46
LERNER 0.31 0.32
E-LERNER 0.26 0.27
LLP 1.80 1.69

34. Table3

35. 2007 - 2009 (Panel A)
The probability of bankruptcy
Probability of bankruptcy
2007 0.1862
2008 0.2561
2009 0.3369
2010 0.1523

36. 2007 - 2009 (Panel A)
Lerner’s index
Lerner’s
index(competition)
CR3(concentration)
2006 0.3116 0.4175
2007 0.3028 0.4297
2008 0.2588 0.4472
2009 0.3151 0.4483
2010 0.3336 0.4550

37. Panel B
Risk Exposure on average
Japan(0.2616)
Taiwan(0.1974)
Korea(0.1872)
Singapore(0.0670)
Hong - Kong(0.0477)
Malaysia(0.0362)
Market-based risk measure
>

38. 3.

39. Empirical results
Two different risk exposure indicators are used as the
dependent variables that proxy for financial stability.
We use the First Stage F-test and the Hansen’s J test
to test for the relevance and validity of the instruments
of the degree of market power, respectively.
We would present that …

40. Table3

41. Empirical results
of bank concentration is significantly positive, indicating
that banks in more concentrated markets face greater risk.
(1) suggesting that increases in the degree of bank
pricing power are positively related to individual bank
stability in Asia Pacific. Meanwhile, the coefficient
1
We could know that …

42. Empirical results
The results findings are not surprising for banks
operating in Asia Pacific. The protected, larger2
We could know that …
banks in these concentrated banking systems channel
resources to ‘‘priority sectors’’. “Too large to fail” would
occur in this credit culture. In addition, credit deposits
insurance may occur the moral hazard problem.

43. Conclusions

44. Main conclusions
This paper presented
1
2
Neutral view of competition-stability nexus. Indicate
the competition-fragility and competition-stability
simultaneously apply to Asia Pacific markets.
Tougher entry restrictions may enhance bank
stability, whereas stronger deposit insurance
schemes negatively influence financial soundness.

45. Main conclusions
This paper presented
3
To prevent excessive concentration, regulators should
adopt a more cautious approach to evaluating and
approving merger and acquisitions at the national level.
To improve the efficiency of resource allocation, regulators
should encourage financial innovation among banks based
on the premise of effective risk management.

46. Main conclusions
This paper presented
4
Deposit insurance schemes appear to foster moral
hazard and risk shifting behaviour so any policy moves
to increase coverage should be treated with caution as this
could have the unintended consequence of boosting risk
as opposed to promoting stability.

47. How about my final paper ?

48. Thanks for your time.