Tài liệu RISK-TAKING BEHAVIOUR AND OWNERSHIP IN THE BANKING INDUSTRY: THE SPANISH EVIDENCE ppt

LINK DOWNLOAD MIỄN PHÍ TÀI LIỆU "Tài liệu RISK-TAKING BEHAVIOUR AND OWNERSHIP IN THE BANKING INDUSTRY: THE SPANISH EVIDENCE ppt": http://123doc.vn/document/1038982-tai-lieu-risk-taking-behaviour-and-ownership-in-the-banking-industry-the-spanish-evidence-ppt.htm

4
including the replacement of the chairman or the general manager of the bank, increases with
poor economic performance. Also, we expect that bank risk-taking can be reduced by the
implementation of this type of corporate control. However, differences between Savings
banks and Commercial banks mentioned before could lead a different impact of control
mechanisms over risk patterns. Therefore, it is examined how risk-taking is affected by
significant board turnover or the replacement of the general manager in the case of
Commercial banks, and by the replacement only of the general manager in Savings banks.
In addition, the paper focuses on the different size of the entities as a new source of
different patterns in bank risk-taking. In particular, it is analysed whether differences in risk
behaviour between Commercial banks and Savings banks are due more to size differences
than to differences in their organizational form.
The remainder of the paper is organized as follows. Section 2 explains the theoretical
framework. Section 3 describes the risk-taking model. Section 4 presents the data sample
together with a preliminary descriptive analysis. Section 5 reports the results of the
estimation and the tests of the hypotheses. Section 6 contains the main conclusions.

2. Theoretical Background and Hypotheses
2.1. The moral hazard problem and owner-manager agency conflict
Risk-taking behaviour in financial institutions has been examined from different
perspectives. The agency problem in financial institutions has been repeatedly addressed in
the literature. A large part of this literature focuses on managerial behaviour in banking
institutions (Saunders et al., 1990; Allen and Cebenoyan, 1991; Gorton and Rosen, 1995).
Other studies examine different corporate control mechanisms (Prowse, 1995; Houston and
James, 1995; Crawford et al., 1995; Crespí et al.,2004). However, the majority of these
5
authors assume the moral hazard problem to affect financial institutions in the same way as
any other kind of firm.
According to Ciancanelli and Reyes-Gonzalez (2000), the agency problem that arises
in banks is more complex in nature. Regulation in this sector has far reaching effects because
of the interdependence of monetary flows. Excessive risk-taking in an institution may result
in bankruptcy, causing repercussions that are soon felt in the rest of the banking sector and,
before long, in the economy as a whole. One of the commonest forms of intervention is
deposit insurance. Caprio and Levine (2002) explain how deposit insurance reduces
controlling incentives among depositors and debt-holders, who see that part of their capital is
protected. This limited responsibility allows shareholders to retain as much profit as possible,
while recouping part of their losses from the deposit insurance fund. This has a twofold
effect. First, financial institutions are induced to take on more risk, thus increasing their
amount of debt
1
. The second effect reported by Caprio and Levine (2002) is that banks may
become interested in finding a large number of small scale depositors, in order to spread debt
rather than sharing it among just a few. In this way, while accepting some loss of efficiency,
they escape the stricter control under which large scale depositors might place them.
This moral hazard problem has been thoroughly examined in US financial institutions,
especially in an attempt to find an explanation for the 1980s Savings and Loan crisis in the
U.S. (Gorton and Rosen ,1995; Kane, 1988; Barth, 1991 among others
2
). The moral hazard
can be mitigated in banks with high prospects of future gains. At high franchise value, bank
owner interests and manager interests are most likely aligned, since both perceive high costs
associated with financial distress because the franchise value is not fully marketable. This
phenomenon is common in all kinds of firms, but it is particularly serious in financial
institutions, where loans are based on asymmetric information not easily transferable to third
6
parties making the bankruptcy particularly costly (Marcus, 1984; Keeley, 1990; Demsetz et
al., 1997; Galloway et al., 1997).
Banking sector is also affected by the well known owner-manager agency conflict
(Fama and Jensen, 1983). Cebenoyan et al. (1999) suggest that studies of this problem may
result in different findings according to the approach used in each case. Thus, from the
corporate control perspective, when control mechanisms are inadequate and information is
asymmetric, managers will tend to take riskier decisions. Many authors agree, however, that
owner-manager agency conflict may counteract the increase in risk-taking arising from the
moral hazard problem. Managers can be reluctant to risk their wealth, their specific human
capital or the associated advantages with controlling the firm. This risk aversion may lead
them to choose safer investment projects or to operate with higher capital than owners would
consider optimal.
In other hand, the importance of the agency problem depends on the capability of the
bank owners for monitoring management performance. If there is a sufficient concentration
of outside ownership, the agency problem may be attenuated and the degree risk aversion in
managers controlled. If capital is widely dispersed over a large number of shareholders, their
individual incentive to control managers is reduced (the free rider problem). In this sense,
ownership dispersion can increase the likelihood of opportunist managers behaviour.
In short, shareholder control over directors has a two-way effect on risk. On the one
hand, when such control exists, the owner-manager agency conflict disappears, while the
moral hazard problem persists. In such cases, we might therefore expect to find higher levels
of risk in financial institutions. With a low or non existent owners control degree moral
hazard and agency conflicts co-exist. In such a case, the effect on risk-taking is less clear.
First, the agency problem may increase risk, if, faced with the prospect of poor results,
managers decide to risk over and above the optimal level and beyond shareholders' wishes.
7
This would lead to greater risk than that resulting from the moral hazard problem alone.
Lastly, if managers are more intent on retaining their own invested human capital and wealth,
the moral hazard problem will reduce and there will be less risk taken than in the previous
case.
Some authors have pointed out the importance of governance mechanisms in banking
sector and its different effect with respect to companies in other economic sectors (Prowse,
1997; Adams and Mehran, 2003). Prowse (1997) examines relationship between the
economic performance of US Bank Holdings Companies and the probability that a control
mechanisms was activated. He analyses management turnover, hostile takeovers, friendly
mergers and regulatory interventions. Prowse finds that these governance mechanisms are
activates less frequently in the banking sector. Crespí, et al. (2004) examine the effectiveness
of control mechanism in Spanish banking sector. They find that Spanish Saving banks shows
weaker internal control mechanisms than Comercial banks.
2.2. Spanish Commercial Banks versus Savings Banks
In the Spanish banking sector there are several types of financial firms with different
organizational forms and different ownership structures competing in the same market.
Commercial banks are shareholder-oriented corporations while Spanish Savings banks are a
mix between mutual companies and public institutions
3
. That is, they have no capital and
therefore no owners. Regulations, accounting practices, external reporting, etc. are practically
the same for both types of banks.
Savings banks have the ownership form of a private foundation, with a board of
trustees with representatives from regional authorities, city halls, employees, depositors and
the founding entity. In particular, according to García-Cestona and Surroca (2002) between
the 15 and 45% of the members come from the Public Administration, between 20 and 45%
from depositors, between o and 35% from the founding body and between the 5 and 15%
8
from the workforce. This diversity of bodies intervening in the governance of SSB suggests
that their managers have a broad freedom of action. In the case of Commercial banks, there is
a higher likelihood that their managers are under shareholders control. From the property
rights approach we can expect that SSB perform worse than SCB, but the empirical evidence
shows that Spanish Savings and Commercial banks have similar levels of productive
efficiency (Grifell-Tatjé and Lovell, 1997; Lozano, 1998).
In respect to banking risk-taking, various empirical studies find that the organizational
form of the financial institutions is directly related with their risk behaviour. (Verbrugge and
Goldstein, 1981; Cordell et al., 1993; Lamm-Tennant and Starks, 1993; Esty, 1997). García-
Marco and Robles (2003) find significant differences in risk-taking behaviour related with
ownership structure and size in a sample of Spanish financial entities.
Under the moral-hazard point of view, as institutions with shareholders, Commercial
banks might be expected to take greater risks than Savings banks, where there is no capital.
However, in the case of SCB with a low degree of shareholder control, the outcome is less
clear. In this case, the owner-manager agency conflict is likely to arise.
Spanish large Commercial banks are listed in the stock market and their shares,
although concentrated, are more dispersed among small shareholders than other financial
firms. Some medium-sized banks are listed while others are not. We assume, therefore, that
in a Commercial banks, where there is a moral hazard problem affecting the bank risk-taking,
greater shareholder concentration will mean greater risk-taking.
Besides, the diversity of interests in Savings banks' governance structure may cause a
dissimilar pattern of risk-taking. In particular, if any interest group within the board of SSB
gains control over the institution, it will be able to tailor policy to suit its own interests,
causing different patterns of risk behaviour among Savings banks. In this way, managers of
SSB controlled by regional governments will encourage competition and contribute to
9
regional development
4
. However, the effect over risk of politicización of the decision making
is not clearly defined (La Porta et al., 2002). In one hand, the interest of politicians in
conserving the use of the savings banks like an instrument to reach political objectives can
limit the risk-taking to guaranteeing the continuity of the organization. In the other hand,
regional goverments can look for the accomplishment of politically desirable but
nonprofitable projects and increase therefore the risk of the Savings bank.

3·. A risk-taking model
In order to identify the factors that lead to a financial institution being unable to pay
its debts, we propose the following model:
,,()( )Ownership Structure,Corporate Control Size Profitability,Type of BusinessPEf
π
<− = (1)
where
π
are the total bank profits, P(.) indicates probability, and E is the equity capital.
According to model (1) the likelihood of insolvency is a function of factors such as firm
ownership structure, corporate control mechanisms, size of the corporation, profitability and
the type of business.
To assess the level of exposure to insolvency risk in financial institutions, we use the
“Z-score”, proposed by Hannan and Hanweck (1988) or Boyd et al. (1993) and used by Nash
and Sinkey (1997) and García-Marco and Robles (2003), among others.
5
This indicator
considers risk of failure to depend fundamentally on the interaction of the income generating
capacity, the potential magnitude of return shocks, and the level of capital reserves available
to absorb sudden shocks. Mathematically, the Z-score is defined as:

2
()
()
iit
it
iit it
ROA
Z
EROA CAP
σ
⎡
⎤
=
⎢
⎥
+
⎣
⎦
(2)
10
where ROA
it
is the return on assets of bank i in period t, E
i
(.) indicates expected value,
σ
i
(.)
indicates standard deviation and CAP
it
is the averaged ratio of equity capital to total assets for
the entity i in period t.
This indicator reveals the degree of exposure to operating losses, which reduce capital
reserves that could be used to offset adverse shocks. Entities with low capital and a weak
financial margin relative to the volatility of their returns will score high on this indicator.
Since this indicator assigns great importance to the solvency and profitability record of
financial institutions, it is a measure of their weakness or strength.
Ownership structure is measured by means of three variables: Ownership,
Concentration and Public Control. The first of them is a dummy variable that takes a value of
1 for Commercial banks and zero for Savings banks. For Commercial banks, we also
consider an indicator of shareholder concentration. We assume that Commercial banks with a
high concentration, will be shareholder controlled, while in those where shareholders are
more disperse, managers will be free to operate according to their own interests. If
concentration has a positive effect on the likelihood of insolvency, there must be a moral
hazard problem, because owners behave in a riskier fashion. In these circumstances, we
might also expect Commercial banks to assume greater risks than Savings banks.
To measure the degree of ownership concentration, we caluculate Herfindahl's index
for shareholder distribution defined as
3
2
1
iij
j
Cw
=
=
∑
where wji is the proportion of stocks owned
by shareholders in the j cathegory. We consider three cathegories: shareholders with less than
100 shares, with less than 500 but more than 100 and shareholders with more than 500 shares
(see Appendix 1 for calculation details).
In the case of Savings banks, we are interested in analyse differences in risk patterns
related with the control in the board of the regional governments. In order to analyse this , we
construct a dummy variable, Public Control, that takes a value of 1 if the Savings bank is
11
controlled by Regional Government and zero otherwise. We consider public control to be
when the Regional Government together with the public founding bodies makes up more than
50% of the General Assembly.
As corporate control mechanism, we consider turnover in the governance structure.
We use a dummy variable that takes a value of 1 if there is a change of Chairman and/or in
the 50% or more of board members in Commercial banks. In the case of SSB, this variable is
equal to 1 if there is a change of the General Manager of the Assembly. It is expectable that
the turnover effects to be felt in the following period, rather than having a contemporaneous
impact on risk-taking. If this mechanism is used to control the risk level of the bank, the
effect of the turnover must be negative, but If it were due to poor profit, changing governing
body may lead to higher risk-taking.
Profitability is measured by ROE, defined as return on equity. We expect a positive
relationship between risk and profitability, such that profit-maximising policies will be
accompanied by higher levels of risk. For type of business we use the ratio Total Net Lending
to Assets (TLA). We consider this kind of operation generally to involve a higher level of risk
than other alternative forms of investment.
Finally, in expression (1), we consider size of entity to be another determinant of the
likelihood of insolvency. Large banks are likely to be more expertiser in risk management
than small institutions. Also, they have better diversification oportunities. However, as
Demsetz and Strahan (1997) stress, certain activities and characteristic usually linked with
large banking institutions may be inherenty risky. To measure size of entity we take the log
of Total Assets and perform a cluster analysis to obtain the right number of different sizes.
The procedure is described in the following section.


12
4. Data and preliminary analysis
The analysis is performed on data from a sample of financial institutions from 1993 to
2000. 127 institutions make up the sample for 1993 and 129 for the remaining years of the
study period, making a total of 1030 observations. Of the total number of firms, 50 are
Savings banks and the rest are Commercial banks. We collect the data from Annual Balance
Sheets and Profits and Losses Accounts. Data on Savings banks was taken from the Annual
Statistics published by the Spanish Savings Banks Confederation. Data on Commercial banks
was taken from the
Spanish Securities and Exchange Commission (SEC), and the Bulletin of
Statistics published by the Spanish Private Banking Association.
The final years of the sample period were characterised by an intense period of
mergers among Savings banks and mergers among Commercial banks. Since merged
institutions can not be considered to have disappeared, we decide to retain them within the
sample as individual entities
6
.
In order to characterise the financial institutions by size we now use Ward’s method
to perform a cluster analysis on the natural logarithm of Total Assets for each year of the
sample period. Results are reported in Table 1. In each case three clusters emerge, thus
classifying the institutions into three groups: Small, Medium and Large.
[Insert Table 1 around here]
The most numerous group overall is formed by medium sized institutions, followed
by the small and then the large ones. The whole period is characterised by a process of
growth leading to a marked increase in the number of medium sized institutions in 1997 and
1998. The last two years are characterised by a decline in the number of small sized
institutions and a sharp rise in the number of large ones which then become the most
numerous group.
[Insert Figure 1 around here]
13
In Figure 1, size is related to ownership structure. Most of the Commercial banks are
in the small size category, while most of the Savings banks class as medium size. There is an
overall decline in the number of small institutions throughout the period. A striking feature of
the SSB is the process of growth that take them from the medium to the large size category
along the sample period. Indeed, in 1999 and 2000 most of the Savings banks classed as
large. This would suggest that the policies adopted by Savings banks were clearly aimed at
achieving growth. Though an increase in the number of large SCB is also apparent in the last
two years of the sample period, it is not as significant as in the case of the SSB.
The total number of observations is 630 for Commercial banks and 400 for Savings
banks. While there were 14 large Commercial banks in 1993, by 2000 the number had more
than doubled to 28. The SSB growth rate, which was stronger, took the number of large
Savings banks from 10 in 1993 to 32 in 2000.
[Insert table 2 around here]
Table 2 contains descriptive statistics for the non-qualitative variables in model (1). It
reveals much greater dispersion in Commercial banks on all the three variables. Variation
Coefficient (Standard deviation/mean) for the Z-score in Commercial banks, for example, is
seven times higher than in Savings banks (5.49 vs. 0.76), regardless of size. Indeed, it barely
alters at all across different sizes of Savings bank. The maximum and minimum values of the
three variables correspond to Commercial banks. There is also a greater asymmetry among
SCB than among SSB. At first sight, there appear to be differences in the distribution of
variables linked to their different ownership structure.When Z-score, ROE and TLA are
examined in relation to size and ownership structure some differences again emerge. Though
there is no clear pattern, the medium size group appears more disperse.
[Insert table 3 around here]