190 likes | 366 Vues
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
E N D
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