Intermediation patterns in banks: three empirical essays

Abstract

This thesis focuses on the stability, strategic investment decisions and intermediation patterns of banks using different samples that cover many key regions of the world. To this end, three distinct lines of research are pursued. First, an empirical analysis of the relationship between revenue diversification, bank performance and stability in emerging economies is conducted. Second, the initial analysis is extended to the European region and specifically examines how the ownership structure in banks influence the benefits derived from revenue diversification. Finally, using banks in the Mercosur (Argentina, Brazil, Paraguay and Uruguay), the impact of systemic crisis on intermediation patterns is analysed to better understand, the factors that condition the recovery of major bank fundamentals after a crisis.

Using different estimation methodologies, different samples, and an innovative approach to the various lines of research, the following robust evidence is provided: first, diversification within and across business lines decreases insolvency risk in emerging economies. Second, in the European region, revenue diversification is beneficial in banks that have a majority shareholder. This is because a large shareholder protects its own wealth by positively influencing strategic investment decisions. In other words, the presence of a majority shareholder will be consistently associated with risk efficient levels of diversification. Third, there is prima facie evidence of a certain level of ?abnormal? behaviour in banks in the Mercosur. This manifest in protracted recovery of private sector intermediation, high levels of excess liquidity on banks’ balance sheet and high intermediation spread that persists well after the crisis.

The major contributions of the thesis are as follows: all three chapters uses estimation methodologies new to the literature in each area as well an original research approach in order to obtain new insights. For example, the link identified between ownership concentration and revenue diversification is a novel way of analyzing the impact of the latter on insolvency risk, which illuminates the debate on the benefits of revenue diversification that currently exists in the literature. Also this thesis is the first to provide multiple benchmarks for which post-crisis bank behaviour is compared, thus anchoring current debate on the issue.

Finally, the empirical results give rise to important public policy considerations. First, the robust positive association between diversification and bank soundness suggests there is no negative trade-off between the diversification strategy and bank performance. As a consequence, there is no compelling reason to restrict banks activity. Regulatory initiatives should therefore focus on ensuring risk efficient diversification strategies are supported in banks. In addition, the role of ownership structure in ensuring market discipline should also not be undermined by immoderate restrictions on ownership of bank shares. The final recommendation is quite simple in concept and very timely for countries designing a path for post-crisis recovery: it is important to implement policies that bring about a sustained increase of confidence in the banking system, as a starting point, a stable macroeconomic environment alongside improved prudential institutional frameworks.

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ORCID for Simon Wolfe: orcid.org/0000-0001-9815-9535

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