A LITERATURE REVIEW OF BANKS´
PROFITABILITY AND
RISK ADJUSTMENT DECISIONS
Dr. Petr Teplý
Dr. Liběna Černohorská, Dr. Barbora Šútorová Charles University in Prague, Czech Republic University of Economics in Prague, Czech Republic
University of Pardubice, Czech Republic
ICBEFSM 2014: International Conference on Business, Economics, Financial Sciences and Management
Toronto, Canada
17 June 2014
Agenda
Introduction 1.
Literature review 3.
Capital shortfall of EU banks 4.
Conclusion 5.
2 A Literature Review of Banks´ Profitability and
Risk Adjustment Decisions
Theoretical background 2.
17 June 2014
Introduction to The Czech Republic
3
1. Introduction
President Milos Zeman
CV Petr Teplý
4
2000 – Johnannes Kepler University in Linz, Austria 2006 – University of Otago, New Zealand
2006 – State University of New York, New Paltz, USA 2009 – Ph.D. in Finance, Charles University, Czech Rep.
( Co)author of over 100 articles and 10 books Guest lectures in New Zealand, Turkey, USA
Presentations at Harvard University, China, Costa Rica, Dubai, Egypt, France, India, Indonesia, Japan, Nepal, Singapore, UK
Research interests: banking, finance, risk management, financial stability, financial innovation, public finance, RIA
Education
Job experience 2001-05 CSOB Bank, Czech Republic
1. Introduction
2006 Spencer Clarke, New York, USA 2007-13 EEIP, a.s., Czech Republic
2014+ Member of Supervisory Board of The Czech Export Bank
Books about risk management, finance and banking
5
Agenda
Introduction 1.
Literature review 3.
Capital shortfall of EU banks 4.
Conclusion 5.
6 A Literature Review of Banks´ Profitability and
Risk Adjustment Decisions
Theoretical background 2.
17 June 2014
2. Theoretical background
Low capital ratio of a bank ->
high leverage of a bank
Assets Total Liabilities
Creditors
Liabilities Equity Assets
Shareholders
= ( )
2. Theoretical background
Capital as a buffer against risks
Source: OECD (2012). Developments in the Value of Implicit Guarantees for Bank Debt: The Role of Resolution Regimes and Practices
LOSSS
Decreasing banks´ capital ratios implies their lower risk absorption …
Source: Economist (2011)
2. Theoretical background
…because banks prefer low capital ratio and high return on average equity (ROAE)
10
2. Theoretical background
= ( )
( )
Financial firms
Focus on profit
maximization2. Theoretical background
Socialization of losses vs. privatisation of profits
11
Politicians Financial
firms Regulators
Focus on voters/short- term targets
Focus on profit
maximizationLack of personal responsibility
The taxpayer will pay as usual!
Source:Petr Teplý (2011)
12
Zombie bank
Source: Onaran,Y. (2011):. Zombie Banks: How Broken Banks and Debtor Nations Are Crippling the Global Economy.”
New York: Bloomberg Press
a zombie bank as a financial institution with i) a price- to-book value ratio smaller than 1, ii) a negative
economic worth, iii) mispriced assets and iv) support by government´ bail-outs and guarantees.
Examples: Allied Irish Banks, BoA, CITI,
Commerzbank, Crédit Immobilier de France
Kaupthing, Landesbanken, RBS, Spanish cajas, UniCredit
Many zombie banks are still present in Japan, what gives a negative example to follow as these banks do not provide lending to the economy and therefore do not fullfil their basic function
ZBs hinder economic growth in the EU and Japan (they struggle to survive and do not lend money)
2. Theoretical background
13
Real estate bubble in Canada!
2. Theoretical background
When the bubble bursts, Canadian banks wil cry.
Do they have sufficinet capital for that?
14
When will the bubble burst?
2. Theoretical background
Agenda
Introduction 1.
Literature review 3.
Capital shortfall of EU banks 4.
Conclusion 5.
15 A Literature Review of Banks´ Profitability and
Risk Adjustment Decisions
Theoretical background 2.
17 June 2014
3. Literature review
16
Overview of risk - return relationships
3. Literature review
17
Literature review 1/2
Authors Short description Methodology and data used
Capital – Risk Relationship Shrives and
Dahl [23]
Investigation of the relationship between changes in risk and capital in a large sample of the US banks
Simultaneous equations applied on data for 1800 US banks In 1984-1987
+
Jacques and Nigro [16]
Examination of the impact of the risk-based capital standards on the US bank capital and portfolio risk during the first year of the risk-based standards validity
Simultaneous equations model applied on 2570 FDIC (Federal Deposit insurance Corporation) - insured commercial banks with assets greater than $100 million in 1990-1991
-
Rime [24]
Analysis on whether and how Swiss Banks reacted to constraints placed on their capital
Simultaneous equations model applied on data for 154 Swiss banks in 1989-1995
No relationship
Heid, Porath and Stolz [12]
Assessing how German savings banks adjust capital and risk
under capital regulation
A modified version of Shrives and Dahl’s simultaneous equations applied on data of 570 local German savings banks in 1993- 2000
- (in case of a need to increase capital level)
3. Literature review
18
Literature review 2/2
Authors Short description Methodology and data used
Capital – Risk Relationship
Zhang, Wu and Liu [27]
Examines the effects of Regulation Governing Capital Adequacy of Commercial Banks on Chinese banks’ risk-taking behaviors
Simultaneous equations applied on data for Chinese banks (55% of the whole Chinese banking system assets) in 2004-2006
-
Teplý,
Matějašák and Černohorský [25]
Evaluation of regulatory pressure impact on risk and capital behavior of selected banks in the USA and the EU
A modified Shrives and Dahl model on selected banks in the USA and EU in 2000-2005
+
Awdeh, EL- Moussawi and Machrouh, [3]
Analysis of the impact of capital requirements on risk-taking of Lebanese banks
Simultaneous equations model applied on panel data set of 41 commercial banks in Lebanon in 1996- 2008
+
Jokipii and Milne [15]
Examination of the relationship between short-term capital buffer and portfolio risk adjustments for the US banks
Simultaneous equations applied on panel data for the US bank holding company and commercial banks in 1986-2008
+
Agenda
Introduction 1.
Literature review 3.
Capital shortfall of EU banks 4.
Conclusion 5.
19 A Literature Review of Banks´ Profitability and
Risk Adjustment Decisions
Theoretical background 2.
17 June 2014
The European Banking Union (EBU) – 4 pillars in theory…
20
1) The Single Supervisory Mechanism (SSM)
128 large banks, 85% of total assets
ECB (= sole supervisor) will provide The Asset Quality Review (AQR) of the banks until 11/2014 The AQR results = DYNAMITE!
(if done properly-> zombie banks will be revealed but
gov’t don’t have many for their rescue; if not, zombie banks will fail later and the ECB will loose its reputation)
2) the Single Resolution Mechanism (SRM)
3) a common system of deposit protection
4) a single rule book for EU banks.
4. Capital shortfall of EU banks
In reality the EBU is here to rescue zombie banks and PIGS countries =
the Trojan horse of the EU integration
21
The EBU is an illusion and can’t save the Eurozone’s fall in the long-term!
4. Capital shortfall of EU banks
How much capital is needed in the EU?
(EUR 277bn estimated by PWC in 2013)
Source: PWC (2013). De-leverage take 2 - Making a virtue of necessity
224. Capital shortfall of EU banks
Agenda
Introduction 1.
Literature review 3.
Capital shortfall of EU banks 4.
Conclusion 5.
23 A Literature Review of Banks´ Profitability and
Risk Adjustment Decisions
Theoretical background 2.
17 June 2014
5. Conclusion
24
1) Global ‘casino’ banks are mostly undercapitalized
2) Positive capital – risk relationship found in most literature
3) Increase of real estate prices in Canada is not sustainable! Are
bankers ready? I don’t think so…
Discussion
25
Thanks for your attention.
Let´s discuss it now!
Contact
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Dr. Barbora Šútorová Dr. Petr Teplý
Senior Lecturer
Institute of Economic Studies Faculty of Social Sciences Charles University
Opletalova 26 110 00 Prague Czech Republic
E-mail: teply@fsv.cuni.cz Phone: +420 222 112 320
http://ies.fsv.cuni.cz/en/staff/teply
Dr. Liběna Černohorská Senior Lecturer
Institute of Economics Sciences Faculty of Economics and
Administration
University of Pardubice Studentská 84
532 10 Pardubice Czech Republic
E-mail: libena.cernohorska@upce.cz Phone: +420 466 036 548
http://www.upce.cz/english/fea/index.html
