Does activity mix and funding strategy vary across ownership? Evidence from Indian banks

Ghosh, Saibal (2009): Does activity mix and funding strategy vary across ownership? Evidence from Indian banks. Published in: Atlantic Review of Economics , Vol. 1, No. 1 (June 2011): pp. 1-33.

Abstract

Using data on Indian banks during 1996-2007, the paper examines the impact of bank activity and short-term funding for bank returns and risks. The findings indicate that larger, fast growing financial firms tend to have higher fee income shares. In addition, banks with greater reliance on fee income generating activities exhibit higher profitability. On the contrary, the impact of non-deposit funding share on bank profitability is weak. In terms of bank riskiness, the evidence is consistent with the conjecture that big, cost efficient and capitalized banks are less risky. As in case of bank profitability, there is limited evidence on any non-linear relationship between risk and fee incomes as also between risk and non-deposit funding share. Finally, the analysis supports the fact that foreign and de novo private banks exhibit lower risk as compared to old private banks.

• Item Type: MPRA Paper
• Language: English
• Keywords: Banking; Return on asset; Z-score; Fee income; Non-deposit funding; India
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; P - Economic Systems > P5 - Comparative Economic Systems > P52 - Comparative Studies of Particular Economies

References

Adrian, T. and H. S. Shin (2009). Money, liquidity and monetary policy. American Economic Review 99, 600-05.

Basel Committee on Banking Supervision (2008). Principles for Sound Liquidity Risk Management and Supervision. BIS: Basel.

Berger, A.N., L. F. Klapper, M. Soledad Martinez Peria and R. Zaidi (2008). Bank ownership type and banking relationships. Journal of Financial Intermediation 17, 37-62.

Berlin, M., and L. Mester (1999). Deposits and relationship lending. Review of Financial Studies 12, 579-607.

Bonin, J.P., I. Hasan and P. Watchel (2005). Privatization matters: Bank efficiency in transition economies. Journal of Banking and Finance 29, 2155-78.

Borio, C., and P. Lowe (2002). Asset prices, financial and monetary stability: Exploring the nexus. BIS Working Paper No.114. BIS: Basel.

Boubakri, N., J. Cosset, K. Fischer and O. Guedhami (2005). Privatization and bank performance in developing countries. Journal of Banking and Finance 29, 2015-41.

Breuer, L., G. Gasha and J. Peschiera (2009). Credit growth: Anatomy and policy responses. In Peru: Selected Issues. IMF: Washington DC.

Brunnermier, M., and L. Pedersen (2009). Market liquidity and funding liquidity. Review of Financial Studies 22, 2201-38.

Calomiris, C. (1999). Building an incentive-compatible safety net. Journal of Banking and Finance 23, 1499-1519.

Chairlone, S., and S. Ghosh (2009). India. In P. Bongini, S.Chairlone, G.Ferri (Eds.) Emerging Banking Systems. Palgrave McMillan, UK.

Cornett, M., J. McNutt, P. Strahan and H. Tehranian (2011). Liquidity risk management and credit supply in the financial crisis. Journal of Financial Economics 101, 297-312.

Cottarelli, C., G. Dell’Ariccia and L. Vladkova-Hollar (2005). Early birds, late risers and sleeping beauties: Bank credit growth to private sector in Central and Eastern Europe and in the Balkans. Journal of Banking and Finance 29, 83-104.

Das, A., and S. Ghosh (2006). Financial deregulation and efficiency: An empirical analysis of Indian banks during the post reform period. Review of Financial Economics 15, 193-221.

Das, A., and S. Ghosh (2009). Financial deregulation and profit efficiency: A nonparametric analysis of Indian banks. Journal of Economics and Business 61, 509-28.

De Nicolo, G. (2000). Size, charter value and risk in banking: An international perspective. IFC Discussion Paper No.689. Board of Governors of the Federal Reserve: Washington DC.

Demirguc Kunt, A and E. Detragiache (1998). Financial liberalization and financial fragility. In G. Caprio, P. Honohan and J.E.Stiglitz (Eds.) Financial Liberalization: How far, how fast? Cambridge University Press.

Demirguc-Kunt, A., and L. Serven (2009). Are all the sacred cows dead? Implications of the financial crisis for macro and financial policies. World Bank Policy Research Working Paper No. 4807. World Bank: Washington DC.

Diamond, D. (1991). Monitoring and reputation: The choice between bank loans and directly placed debt. Journal of Political Economy 88, 689-721.

Dinc, I.S. (2005). Politicians and banks: Political influences on government-owned banks in emerging markets. Journal of Financial Economics 77, 453-79.

European Central Bank (2008a). EU banking structures 2008. ECB: Frankfurt.

European Central Bank (2008b). Financial Stability Review (December). ECB: Frankfurt.

Fama, E.F. (1985). What’s different about banks? Journal of Monetary Economics 15, 29-39.

Flannery, M.J. (2005). No pain, no gain: Effecting market discipline via reverse convertible debentures. In H.S. Scott (Ed.) Capital Adequacy beyond Basel: Banking Securities and Insurance. Oxford: Oxford University Press.

Furlong, F., and S.Kwan (2005). Market-to-book, charter value and bank risk-taking: A recent perspective. Paper presented at the Basel Committee Research Task Force Conference. Vienna, April 2005.

Goodhart, C. A.E., and A.Persaud (20080. How to avoid the next crash? Financial Times (January 30).

Goodhart, C.A.E. (2009). The regulatory response to the financial crisis. Journal of Financial Stability (forthcoming).

Griffith-Jones, S. and A. Persaud (2008). The Procyclical Impact of Basel II on Emerging Markets and its Political Economy. New York: Oxford University Press.

Honohan, P (1997). Banking system failures in developing and transition countries: Diagnosis and predictions. BIS Working Paper No.39, BIS: Basel.

Laeven, L. and R. Levine (2007). Is there a diversification discount in financial conglomerates? Journal of Financial Economics 85, 331-67.

Laeven, L., and R. Levine (2009). Bank governance, regulation and bank risk-taking. Journal of Financial Economics (forthcoming).

Lins, K., and H. Servaes (1999). International evidence on the value of corporate diversification. Journal of Finance 54, 2215-40.

Megginson, W., and J. Netter (2001). From state to market: A survey of empirical studies on privatization. Journal of Economic Literature 39, 321–89.

Megginson, W.L. (2005). The economics of bank privatization. Journal of Banking and Finance 29, 1931-80.

Mercieca, S., K.Schaeck and S.Wolfe (2007). Small European banks: Benefits from diversification? Journal of Banking and Finance 31, 1975-98.

Mester, L., L. Nakamura and M. Renault (2005). Checking accounts and bank monitoring. Working Paper No.14, Federal Reserve Bank of Philadephia.

Poveda, R. (2000). Reform of the system of insolvency provisions. Address delivered at the APD in Madrid (January). Available at <www. bse.es>

Raddatz, C. (2010). When the rivers run dry: Liquidity and the use of wholesale funds in the transmission of the US subprime crisis. World Bank Policy Research Working Paper No. 5203. The World Bank: Washington DC.

Rajan, R.G. (1992). Insiders and outsiders: The choice between informed and arms-length debt. Journal of Finance 47, 1367-1400.

Rajan, R.G. (2009a). Cycle-proof regulation. The Economist (April 8). The Economist: London.

Rajan, R.G. (2009b). The credit crisis and cycle free regulation. Homer Jones Lecture delivered at the Federal Reserve Bank of St.Louis (April 15). Available at <www.chicago. facultybooth.edu/raghuram.rajan>

Ratnovski, L and R. Huang (2009). Why are Canadian banks more resilient? IMF Working Paper No. 152. IMF: Washington DC.

Reserve Bank of India (2008). Handbook of Statistics on the Indian Economy. RBI: Mumbai.

Reserve Bank of India (2009). India’s Financial Sector: An Assessment (Report of the Advisory Panel on Financial Stability Assessment and Stress Testing). RBI: Mumbai.

Sapienza, P. (2004). The effects of government ownership on bank lending. Journal of Financial Economics 72, 357-84.

Stein, J. C. (2002). Information production and capital allocation: Decentralized versus hierarchial firms. Journal of Finance 57, 1891-1921.

Stiroh, K. (2004). Diversification in banking: Is non-interest income the answer? Journal of Money, Credit and Banking 36, 853-82.

World Bank (2002). Bank Loan Classification and Provisioning Practices in Selected Developed and Emerging Countries. The World Bank: Washington DC.