A Study of the impact of environmental change for the commercial banks

• Main Authors: WenChi Lo, 羅文綺
• Other Authors: Jing Twen Chen
• Format: Others
• Language: en_US
• Published: 2012
• Online Access: http://ndltd.ncl.edu.tw/handle/4f6543

博士 === 國立中央大學 === 財務金融研究所 === 100 === Abstract This dissertation consists of three essays on the study of commercial banks and its business environment. The first essay is “Influence of Financial Reform on Business-Lending Performance of Large and Small Commercial Banks.” The second essay is “The examination of the impact of Consumer Debt Negotiation Mechanism on the Financial Institutions in Taiwan.” The third essay is “Interest Rates and Bank Risk-Taking – The case in China.” ”The fourth essay is “Interest Rates and Bank Risk-Taking –an Empirical Research across the Straits.” Last, we present the conclusion in the following sections. Essay 1: Influence of Financial Reform on Business-Lending Performance of Large and Small Commercial Banks To analyze the performance of small business lending, this study uses the regression model of Carter and McNulty (2005) to test the relationships among loan spread, bank size, and financial reform. This article establishes a theoretical and practical mathematical model for unique banking environment in Taiwan. The conclusion and policy implications are as follows. First, bank spread reduces with increasing loan scale. Excluding government-owned banks gets similar results, and indicates similar behavior in government-owned and privatized banks. Second, the loan performance of new privatized banks improved in the long term. Third, if current banks increase their proportion of small business lending, the increase in loan spread remains unchanged, meaning the loan spread is previously higher than it currently is. Additionally, different from the literature of Carter and McNulty (2005), this study fails to find any small bank advantage, but did identify a significant positive relationship between size and loan spread; moreover, the loan spread increased with bank size, indicating that over-banking still exists and the problem of excessively small size of financial institutions remains incompletely resolved, with large banks having gradually improves their business-lending performance over time, slowly increasing the spread of business lending. Essay 2: The examination of the impact of Consumer Debt Negotiation Mechanism on the Financial Institutions in Taiwan The purpose of this research is to discuss whether or not the government promotion of the “Consumer Debt Negotiation Mechanism” would impact financial institutions’ stock price after the explosion of the Taiwan card-debt problems on October of 2005. According to empirical results, financial holding companies and banks were impacted far more than securities and insurance companies. Financial institutions that issued the highest volume of credit cards were impacted significantly more than those that issued moderate and the lowest volume of credit cards. Financial institutions that gave more cash card loans were impacted more than those that gave moderate and the least cash card loans. When compared to different kinds of financial institutions, the promotion of this negotiation mechanism was discovered to cause vastly different mutual competition attitudes. Obviously, the Debt Negotiation Mechanism caused different degrees of impact on financial institutions. The different degrees of impact were due to whether or not the following situations would occur to the financial institution when debt negotiation happened: 1. The market share percentage of the credit card balance was very high. 2. In the past three months, many bad debts were written off, but very little loss preparation was deposited. 3. Not enough number of branches. 4. Banks with overly high growth of the amount draw-down rate of the cardholders. As for these kinds of banks, their cumulative abnormal returns showed negative values during the negotiation period. This revealed that they had a higher degree of risks in negotiation events. Government institutions should learn a policy surveillance experience from this debt negotiation mechanism. They would rather have preventive measures against the unforeseen and establish warning signs to remind the financial institutions to follow. This would be better than formulating a relevant and complete set of measures through the banking union after the crisis happened. Because this set of measures would not assist the financial institution in avoiding management risks, and it would negatively contribute to the whole economy’s depression.   Essay 3: Interest Rates and Bank Risk-Taking—The Case in China A recent line of research views the low interest-rate environment as an element that triggered increased risk-taking appetite of banks in search for yield. However, they are difficult to apply to countries with monetary systems that differ significantly from those of the US and Europe, like China. Therefore, these papers use annual observations on China banks over the period 1996-2010 and presents strong empirical evidence that China is an important counterexample to the findings in the interest rate and bank-risk taking literature. Besides, publicly held banks are inclined to increase the risk assets giving a lower interest rate, and private owned banks will take the opposite action. Finally, changes in the ownership of Chinese banks have little or no effect on the bank’s risk choices when interest rate difference. Essay 4: Interest Rates and Bank Risk-Taking—an Empirical Research across the Straits The differences in supervision systems and the varying degrees of financial liberalization between China and Taiwan, their operational strategies may indeed differ somehow. In a financial environment where larger freedom means more intense competition, a low interest rate will pose a big operation pressure on banking, and accordingly banks are forced to take risky operations more positively, yet on the other hand, if the commercial banks have guarantee of interest margin profit between lending and deposit, like 3% in China, the interest rate risk issue would be minor relative to other risk. This paper taking the commercial banks in China and Taiwan, and aims at discussing if a lower interest rate results in banks’ involvement in higher risky activities for profit pursuit. We found that, the risky asset held by banks in China do not take any significant influence on the level of interest rate. Banks in Taiwan are more inclined to have higher risk assets in a lower interest environment. Under the difference level in interest rate, large and small banks across the strait will adopt opposite strategies in risky assets, that is large banks have a higher risk-taking in a lower interest rate, while small banks take the opposite actions. Finally, regardless of China or Taiwan, the interest rate is positively correlated to the banks’ non-performing loan ratio.