Financial Institutions in the Global Financial Crisis: The Role of Financial Derivatives, Bank Capital, and Clearing and Custody Services

251 Pages·2018·2.705 MB·English

by  Shaofang Li (auth.)

Shaofang Li
Financial
Institutions in the
Global Financial
Crisis
The Role of Financial Derivatives, Bank
Capital, and Clearing and Custody
Services
Financial Institutions in the Global Financial Crisis
Shaofang Li
Financial Institutions
in the Global Financial Crisis
The Role of Financial Derivatives, Bank
Capital, and Clearing and Custody Services
123
Shaofang Li
Schoolof Economics andManagement
Southeast University
Nanjing, Jiangsu
China
ISBN978-981-10-7439-4 ISBN978-981-10-7440-0 (eBook)
https://doi.org/10.1007/978-981-10-7440-0
Jointlypublished with Shanghai JiaoTong University Press
LibraryofCongressControlNumber:2017960777
©ShanghaiJiaoTongUniversityPressandSpringerNatureSingaporePteLtd.2018
Thisworkissubjecttocopyright.AllrightsarereservedbythePublishers,whetherthewholeorpart
of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations,
recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission
orinformationstorageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilar
methodologynowknownorhereafterdeveloped.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this
publicationdoesnotimply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfrom
therelevantprotectivelawsandregulationsandthereforefreeforgeneraluse.
Thepublishers,theauthorsandtheeditorsaresafetoassumethattheadviceandinformationinthis
book are believed to be true and accurate at the date of publication. Neither the publishers nor the
authorsortheeditorsgiveawarranty,expressorimplied,withrespecttothematerialcontainedhereinor
for any errors or omissions that may have been made. The publishers remains neutral with regard to
jurisdictionalclaimsinpublishedmapsandinstitutionalaffiliations.
Printedonacid-freepaper
ThisSpringerimprintispublishedbySpringerNature
TheregisteredcompanyisSpringerNatureSingaporePteLtd.
Theregisteredcompanyaddressis:152BeachRoad,#21-01/04GatewayEast,Singapore189721,Singapore
Preface
Thebookstudiestheroleoffinancialinstitutionsinthefinancialmarketsinnormal
timesandduringtheglobalfinancialcrisis.Theglobalfinancialcrisisforcedalarge
number of financial institutions to restructure their core operations, rely substan-
tially on the government support, or even enter insolvency procedures. This raises
concerns about solvency and liquidity of financial institutions and indicates that
specialattentionshouldbedevotedtoanalyzingtheimpactofthefinancialcrisison
financial institutions. Such analysis could substantially improve the responses of
regulators, policy makers, and financial institutions themselves to the adverse
events in the future. To that end, this book evaluates the role offinancial deriva-
tives,bankcapital,andclearingandsettlementservicesinnormaltimesandduring
the global financial crisis.
By using the most recent data from US bank-holding companies, Chap. 2
examines the impact offinancial derivatives on risk exposures of BHCs in normal
times and during the global financial crisis. The empirical analysis employs a
two-stage time series cross-sectional regression model to examine the relationship
between risk exposures and the use offinancial derivatives. In the first stage, the
stock return of each BHC is regressed against the changes in the market return,
interest rate, exchange rate, and credit spread. In this way, risk betas that measure
theBHC’ssystematic(i.e.,non-diversifiable)exposuretowardmarketrisk,interest
rate risk, exchange rate risk, and credit risk can be obtained. In the second-stage
regression, the risk betas are regressed against the on-balance sheet variables and
financial derivatives variables. The results show that financial derivatives are pos-
itivelyandsignificantlyrelatedtosystematicriskexposuresofBHCs.Higheruseof
interest rate derivatives, exchange rate derivatives, and credit derivatives corre-
sponds to greater systematic interest rate risk, exchange rate risk, and credit risk.
The positive relationship strengthens with the size of a BHC. Our analysis also
confirmsapositiverelationshipbetweentradingderivativesandsystematicrisks,as
well as between hedging derivatives and systematic risks.
v
vi Preface
Chapter 3 aims to investigate whether and how different types of bank capital
affectbanklendingandwhetherthisrelationchangesintimesoftheglobalfinancial
crisis compared to normal times. This chapter focuses on the decline in credit
growth due to the 2008–2010 global financial crisis and also studies the impact of
other variables on lending growth in normal times and in the times of a financial
crisis.Alsoofaninterestishowthelevelofdepositsaffectslendinggrowthandthe
declineinlendinginthetimesofafinancialcrisis.Theimpactofthesizeofabank
on credit growth is also studied. Several other dimensions that may influence the
decline in credit growth during the financial crisis are also analyzed. The analysis
shows a significant and positive effect of the Tier 1 capital ratio on bank loan
growth during the global financial crisis. This positive effect seems to be more
pronounced for small banks and for banks in the non-OECD and BRIC countries.
Customerdepositsalsopositivelyaffectedbanklendingduringtheglobalfinancial
crisis.Furthermore,theresultsalsoindicatesome(butweak)evidencethattheTier2
capital ratio and interbank deposits positively affect loan growth in normal times
and that interbank deposits negatively affected bank lending during the global
financial crisis. The evidence highlights a sharp contrast on the impact of different
funding sources on bank lending during the global financial crisis. Whereas Tier 1
capital and customer depositsacted as a stable source offunding during the global
financial crisis, Tier 2 capital and interbank deposits spurred bank lending during
normal times but did not do so during the global financial crisis. During normal
times,abanklendsmoreiftheTier1capitalratioofcompetingbanksishigh.This
relationship reversed during the global financial crisis; during the global financial
crisis, a bank lends more if the Tier 1 capital ratio of competing banks was low.
Chapter 4 aims to contribute to the scarce knowledge of competitive landscape
in the clearing and settlement industry. This chapter uses the unbalanced annual
dataof49clearingandsettlementinstitutionsfrom24countriesduring1989–2012,
employs the Panzar and Rosse (1982, 1987) model; Lerner index (1934); and
Boone indicator (2001, 2008), and examines the competitive conditions in the
clearing and settlement industry. The findings suggest that monopoly equilibrium
existsintheclearingandsettlementindustry.Duringtheglobalfinancialcrisis,the
level of competition between clearing and settlement institutions is higher than in
normal times. International CSDs face higher competition than CSDs in the local
market. Our evidence also indicates that competition increases continuously over
time, possibly due to the technological development and implementation of new
clearing and settlement systems. The results reveal that competition increases with
the size of clearing and settlement institutions and after mergers and acquisitions
between clearing and settlement institutions. Our findings also suggest that com-
petitionbetweenclearingandsettlementinstitutionsintheUSmarketishigherthan
in the European market. This indicates that renewed initiative is necessary to
enhance competition between clearing and settlement institutions in Europe.
Nanjing, China Shaofang Li
Preface vii
References
Boone, J.(2001).Intensityofcompetitionandtheincentivetoinnovate.InternationalJournalof
IndustrialOrganization,19(5),705–726.
Boone, J. (2008). A New Way to Measure Competition. The Economic Journal, 118(531),
1245–1261.
Lerner, A. P. (1934). Theconcept of monopoly and the measurement of monopoly power.The
ReviewofEconomicStudies,1(3),157–175.
Panzar, J.C.,andRosse,J.N.(1982).Structure,conduct,andcomparativestatistics.Economics
DiscussionPaperNo.248.BellTelephoneLaboratories,Inc.
Panzar, J. C., and Rosse, J. N. (1987). Testing for “monopoly” equilibrium. The Journal of
IndustrialEconomics,35(4),443–456.
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Background of This Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Research Questions Addressed in This Study. . . . . . . . . . . . . . . . 2
1.3 Structure and Contents of This Study . . . . . . . . . . . . . . . . . . . . . 4
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2 The Use of Financial Derivatives and Risks of U.S. Bank
Holding Companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.1 Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.3 Relation to the Literature and Hypothesis Formation. . . . . . . . . . . 12
2.3.1 Relation to the Literature . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.3.2 Hypothesis Formation . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.4 Data Sources, Sample Selection and Data Description . . . . . . . . . 16
2.5 Empirical Methodology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.6 Empirical Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.6.1 First-Stage Regression Results . . . . . . . . . . . . . . . . . . . . . 29
2.6.2 Bank-Specific Determinants of Risk Betas: Initial
Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.6.3 Purposes of Financial Derivatives and Systematic
Risk Exposures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
2.6.4 The Global Financial Crisis and Financial Derivatives . . . . 56
2.6.5 The Impact of Financial Derivatives on Market
Risk and Idiosyncratic Risk . . . . . . . . . . . . . . . . . . . . . . . 56
2.7 Main Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
ix
x Contents
3 Quality of Bank Capital and Bank Lending Behaviour During
the Global Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
3.1 Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
3.2 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
3.3 Previous Studies and Development of Hypotheses . . . . . . . . . . . . 72
3.4 Data Description. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
3.5 Empirical Estimation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
3.6 Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
3.7 Robustness Checks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
3.8 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
4 Competition in the Clearing and Settlement Industry. . . . . . . . . . . . 105
4.1 Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
4.2 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
4.3 Literature Review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
4.3.1 Clearing and Settlement Institutions in Europe
and in the U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
4.3.2 Industry Structure in Clearing and Settlement Services. . . . 108
4.3.3 Formation of Hypotheses . . . . . . . . . . . . . . . . . . . . . . . . . 109
4.4 Methodological Basis to Measuring Competition . . . . . . . . . . . . . 112
4.4.1 Concentration Indicators. . . . . . . . . . . . . . . . . . . . . . . . . . 112
4.4.2 Panzar-Rosse Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
4.4.3 Lerner Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
4.4.4 Boone Indicator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
4.5 Description of Data and Concentration Measures . . . . . . . . . . . . . 121
4.6 Empirical Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
4.6.1 Empirical Analysis Based on Panzar-Rosse Model. . . . . . . 127
4.6.2 Factors Affecting the Lerner Index . . . . . . . . . . . . . . . . . . 138
4.6.3 Factors Affecting the Boone Indicator. . . . . . . . . . . . . . . . 139
4.6.4 Competition in Concentrated Versus Non-concentrated
Markets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
4.7 Robustness Checks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
4.7.1 EU, Euro Zone, and the U.S. Regions . . . . . . . . . . . . . . . 151
4.7.2 Specialization and Type of Clearing and Settlement
Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
4.7.3 Vertical Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
4.7.4 Implementation of New Accounting Standards . . . . . . . . . 162
4.8 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
Contents xi
5 General Discussion and Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . 169
5.1 Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
5.2 Summary of the Main Findings. . . . . . . . . . . . . . . . . . . . . . . . . . 169
5.3 Overarching Theoretical and Empirical Contributions . . . . . . . . . . 173
5.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
Appendix A: Chapter 2 . .... ..... .... .... .... .... .... ..... .... 177
Appendix B: Chapter 3 . .... ..... .... .... .... .... .... ..... .... 213
Appendix C: Chapter 4 . .... ..... .... .... .... .... .... ..... .... 225
Appendix D: Chapter 5 . .... ..... .... .... .... .... .... ..... .... 243