Abstract
This study examines relative importance of industry- and country-specific factors for profitability of banks operating in emerging and developed economies. A period spanning between two major crises is examined: since 2002, the end of high-tech bubble burst lasting 1999-2001, until mortgage-driven one in 2008. The empirical support is provided for the idea that industry- and country specific factors are much more important for bank performance in emerging rather than in developed economies due to higher level of uncertainty and as results due to higher magnitude of the reaction of banks to external shocks. The issue of higher level of sensitivity of bank performance to external settings in emerging economies is closely associated with a high level of diverging expectations of market participants with respect to the overall economic situation and the higher agency problems in these economies. Further, this effect is more pronounced for performance of leading banks across-the-board, which is due to their higher ability to deal better with challenges coming from the external environment compared to lagging banks. In addition to that, the findings of this research support the study’s hypothesis that suggests that the importance of the exchange rate regime for bank profitability increases when approaching a semi-flexible regime.
Highlights
This study primarily is inspired by the ideas proposed by Allen and Gale (2001) in their book Comparing Financial Systems where it is noted that the form of a financial system varies from country to country, while the current trend with respect to financial systems is towards market-based systems.“One of the arguments for markets is that they economize on and disseminate information that is needed for efficient decision making
This study explores how strong is the effect of the following industry-specific and country-specific factors on profitability of banks operating in different economies: 1) Sovereign risk
The results reveal that even though banks in emerging markets outperform those in developed countries based on the nominal rates of return, they substantially underperformed in risk-adjusted measures of profitability (Figure 1-4)
Summary
“One of the arguments for markets is that they economize on and disseminate information that is needed for efficient decision making. Market-based financial systems are characterized by dispersed information (publicly traded companies are required to reveal more information than privately held companies) and dispersed shareholdings give a large number of people an incentive to gather information on firms and monitor their performance” The authors noticed that such arguments suggest that market-based financial systems have an informational advantage over intermediary based systems. Intermediaries that are not characterized by the presence of a large number of shareholders “may have a better incentive to gather information and monitor firms.”
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