Commercial Banking Sector Research Articles

Role of Foreign Banking Institutions in the European Union’s New Financial Markets

The aim of this paper is to analyze the influence of foreign capital on the commercial banking sector of the emerging markets. The entry of foreign banks into the markets of Central and Eastern European countries (CEECs) has been rapid, remarkable and massive. This paper presents some empirical results of foreign banks’ entry, activities, operation and strategies in four CEECs (Estonia, Lithuania, Poland, and Romania); the first three of them have already joined the European Union integrated financial market in May 2004. The paper is based on a special survey results obtained by the authors from domestic and foreign-owned banks in these countries. Meanwhile mergers and acquisitions of the domestic banks are rather technical details of a foreign capital influx. According to our results, the main incentives motivating foreign entry have been to exploit new business opportunities and/or market expansion strategies. The host country market specifics, advantages and disadvantages of foreign banks, main target groups, and fields of activities, as well as foreign banks’ motives for strategic long-term stay in the host country market some more important characteristics of banks’ governance and management are also discussed. Interesting are the questions who are the key decision-makers in the majority of foreign-owned banks, how banks have adopted knowhow and risk management systems from the mother bank, how the mother bank helps its daughter in the host country, etc. The issues of the competitive pressure by foreign banks and the domestic banks’ survival prospects are also addressed in the paper.

Financial deregulation and efficiency: An empirical analysis of Indian banks during the post reform period

The paper investigates the performance of Indian commercial banking sector during the post reform period 1992–2002. Several efficiency estimates of individual banks are evaluated using nonparametric Data Envelopment Analysis (DEA). Three different approaches viz., intermediation approach, value-added approach and operating approach have been employed to differentiate how efficiency scores vary with changes in inputs and outputs. The analysis links the variation in calculated efficiencies to a set of variables, i.e., bank size, ownership, capital adequacy ratio, non-performing loans and management quality. The findings suggest that medium-sized public sector banks performed reasonably well and are more likely to operate at higher levels of technical efficiency. A close relationship is observed between efficiency and soundness as determined by bank's capital adequacy ratio. The empirical results also show that technically more efficient banks are those that have, on an average, less non-performing loans. A multivariate analysis based on the Tobit model reinforces these findings.

State, Capital, and the Politics of Banking Reform in Sub-Saharan Africa

Financial sector reform in sub-Saharan Africa differed cross-nationally in the 1990s. The differences are traceable in part to variations in the strength and autonomy of private capital in each country. One register of the differences is concentration and ownership structure in the commercial banking sector. Variation in banking structure in African countries can be analyzed according to a typology; each system tends to produce a characteristic pattern of banking sector reform (or nonreform). A variety of transitions to the market can be traced in Africa, and they are contributing to continuing differentiation across states.

Financing low-income housing in South Africa: Borrower experiences and perceptions of banks

South Africa is facing a low-income housing crisis, with the current backlog estimated at over three million units. An obstacle in the provision of low-income housing is the difficulty encountered by commercial banks to extend loans in this market despite supporting initiatives by Government. A lack of knowledge on the borrowing behaviour, preferences and experiences of low-income households in accessing housing finance from the commercial banking sector in South Africa hampers an understanding of the reasons for these problems. This paper's contribution is to provide information on the experiences and perceptions of low-income borrowers in the housing market of South Africa, specifically in their dealings with commercial banks. Results from a survey of 653 households across five provinces of the country are provided. In the survey, a structured questionnaire was used to obtain information on the experiences and perceptions of low-income households about their access to credit and housing finance, their experience of banks, the successes in credit approval, their judgements on the suitability of banks’ home-loan products, as well as preferences with regard to prices and interest rates.

Financing microfinance – the ICICI Bank partnership model

Capital constraint is an issue impeding scaling up of microfinance in India. Based on an analysis of traditional financing models and ICICI Bank's experience in India, it analyses the 'partnership model' of financing microfinance institutions (MFIs). This model is unique in that it combines both debt as well as mezzanine finance to the MFI in a manner that lets it increase outreach rapidly, while unlocking large amounts of wholesale funds available in the commercial banking sector in India. The paper also discusses building links to capital markets for financing microfinance through securitization. It concludes by highlighting certain key enablers for an environment of rapid microfinance growth including regulator support for hybrid models of outreach and investments in training and funding of initial expenses for new/emerging MFIs.

Strategising Future 'banks': Hypothetical Model

The banking sector is going through a phase of consolidation and restructuring in India. 'Survival of the Fittest' has become a reality in the case of public sector commercial banks, with the opening up of new branches in all districts by new generation banks such as ICICI and HDFC and the Customer Relationship Management (CRM) practices implemented by private and foreign banks.

Does Bank Consolidation Hurt the Small Business Borrower?

The recent wave of mergers in the commercial banking sector in the United States has led to tremendous industry consolidation. Some fear that such consolidation will leave the small business borrower with fewer opportunities to obtain bank credit. This study uses regression analysis to empirically determine if consolidation has caused larger banks to abandon relationship loans extended to small businesses over time. If so, this leaves small business borrowers with two distinctly different choices, a low interest rate loan from a large bank for those small business borrowers who qualify or a high interest rate loan from a small bank for those who do not. The results of this study support this theory, and find consolidation has raised small business loan rates at small banks and lowered rates at large banks, ceteris paribus.

Commercial Bank Lending to SMEs in Poland

This paper explores the processes of financial intermediation that are used by commercial banks in their interactions with SMEs in Poland. The paper develops an argument for examining the empirical realities of commercial bank involvement with the SME sector within the context of economic transformation by suggesting that the connection between them influences the trajectories of economic change within transition. The paper provides a history of re-organisation of the commercial banking sector in Poland, paying particular attention to the involvement of foreign capital and foreign banks as the trend towards increasing foreign participation is apparent in the Central European transition economies. The findings from this research suggest that there are some significant variations within the commercial banking sector in the approach to, and practices for, lending to the SME sector.

Concentration in Botswana's banking sector

This study examines the degree of competition and efficiency within the commercial banking sector of Botswana. By applying the Herfindahl index, the paper provides an empirical methodology for assessing competition and market concentration among commercial banks. The study also utilises alternative measures of bank input and output by developing simple descriptive indices to assess the level of efficiency in Botswana’s banking sector. Overall, the results indicate that the implementation since 1989, of policies to liberalise and reform financial sector activities has contributed to increased competitiveness and efficiency amongst Botswana’s commercial banks.

Efficiency of banks in a developing economy: The case of India

The objective of this paper is to measure the productive efficiency of banks in a developing country, that is, India. The measurement of efficiency is done using data envelopment analysis. Two models have been constructed to show how efficiency scores vary with change in inputs and outputs. The efficiency scores, for three groups of banks, that is, publicly owned, privately owned and foreign owned, are measured. The study shows that the mean efficiency score of Indian banks compares well with the world mean efficiency score and the efficiency of private sector commercial banks as a group is, paradoxically lower than that of public sector banks and foreign banks in India. The study recommends that the existing policy of reducing non-performing assets and rationalization of staff and branches may be continued to obtain efficiency gains and make the Indian banks internationally competitive which is a declared objective of the Government of India.

The Determinants of Bank Rates in Local Consumer Lending Markets: Comparing Market and Institution-Level Results

1. IntroductionWith the exception of a few very recent studies, the sizeable literature on the impact of market structure in banking markets1 has ignored the potential competitive role played by credit unions. This is surprising, since the continuing consolidation of the financial services industry in recent years has naturally raised concerns about competitive effects and credit unions would seem to be a likely source of market discipline.2 This paper explores these issues using both market and firm data.Using a variety of approaches, economists have started paying some attention to the interaction between banks and credit unions. Emmons and Schmid (2000), using county-level data, examine twoway intertemporal linkages between credit union participation rates and market concentration of the commercial banking sector to support the view that the two types of institutions compete in the market for consumer deposits; similarly, Feinberg and Rahman (2001) find that credit union and bank rates for two consumer loan products can each be shown to be influenced by the other. Tokle and Tokle (2000) found a competitive influence of credit unions on bank certificate of deposit (CD) rates offered in Idaho and Montana, while Feinberg (2001) explored their impact on consumer loan rates in a broader sample of relatively small local markets3 over the 1992-1997 period.The latter article found that both unsecured and new vehicle loan rates offered by banks in these markets were affected in a significant manner by the market share held by the two leading banks (implying a competitive role for smaller financial institutions generally) and-for new vehicle loan rates alone-by the share of credit unions in those markets. Whether these results would generalize to larger metropolitan areas is unclear and is the topic of what follows. I focus on the same two loan products, 24-month unsecured (non-credit card) loans and 48-month new vehicle loans, both of which seem likely to be provided in a local market, and empirically explain the determinants of bank loan rates in a sample of 56 markets-both large and small-for the period 1992-1998. An innovative aspect of this paper is that I analyze both market-level data and institution-level data for 81 banks in those 56 markets and consider as well the role of multimarket linkages affecting these banks.2. Theoretical FrameworkVirtually all models of imperfect competition imply that increasing entry and supply from fringe suppliers will lower prices. This clearly suggests that an increasing credit union presence should discipline prices in local financial services markets. To formalize, I employ a modified version of the dominant firm-price leadership model. The modification involves the notion that while credit unions may generally be thought of as fringe suppliers, not all banks and savings and loans (SL (ii) as CU increases the LI declines; (iii) as [epsilon]^sub CU^ increases the LI declines; and, not quite as obvious (but easy to derive), (iv) the declines in (ii) and (iii) are larger in absolute value as CR2 is larger. …

Job satisfaction and employee performance of Lebanese banking staff

This paper investigates the relationships between job satisfaction, individual job facets, socio‐demographic variables and job performance in the Lebanese commercial banking sector. The sample consists of 202 employees from nine commercial banks. The results indicate that job satisfaction is not independent in all job facets and that satisfaction with one facet might lead to satisfaction with another. Female employees were found to be less satisfied with all facets except pay. Those with lower educational qualifications were least satisfied. Self‐reported job performance was found to increase with tenure.

Financial liberalization, urban unemployment and welfare: some implications of the artificial low interest rate and the high wage rate policies in LDCs

This paper investigates how the low interest rate policy in the commercial banking sector affects the urban unemployment in a small open Harris-Todaro model. The rate of urban unemployment unambiguously declines. The volume of it shrinks if the rural-to-urban employment rate and the urban unemployment rate are sufficiently high relative to the wage elasticity of agricultural labor demand. The national income increases if agriculture is dominant in the domestic production. In such an economy, the “financial liberalization” advocated by the Mckinnon-Shaw school may aggravate the welfare even if it eliminates the “financial repression”.

A credit scoring approach for the commercial banking sector

For managing credit risk, commercial banks use various scoring methodologies to evaluate the financial performance of client firms. This paper upgrades the quantitative analysis used in the financial performance modules of state-of-the-art credit scoring methodologies. This innovation should help lending officers in branch levels filter out the poor risk applicants. The Data Envelopment Analysis-based methodology was applied to current data for 82 industrial/manufacturing firms comprising the credit portfolio of one of Turkey's largest commercial banks. Using financial ratios, the DEA synthesizes a firm's overall performance into a single financial efficiency score—the “credibility score”. Results were validated by various supporting (regression and discriminant) analyses and, most importantly, by expert judgments based on data or on current knowledge of the firms.

Efficiency of the Greek banking system in view of the EMU: a heteroscedastic stochastic frontier approach

The paper estimates empirically cost efficiency of the Greek banking system for the period 1993–1998. The beginning of the examination period coincides with the acceleration of liberalization and deregulation of the Greek financial system, in view of the country joining the EMU. The study uses a multi-input, multi-output technology and adopts a heteroscedastic frontier model instead of a commonly used homoscedastic one to measure cost efficiency in the banking system. The empirical results show that larger banks are less efficient than smaller ones. Also, it is found that economic performance, bank loans and investments are positive related to the cost efficiency of the Greek commercial banking sector.

Regulation, taxation and the development of the German universal banking system, 1884-1913

Previous researchers argue that the legal and regulatory environment helped shape the German financial system in the nineteenth and early-twentieth centuries, with particular emphasis on the damaging effects of the stock-exchange law of 1896. This paper finds that the stock exchange law of 1896 exerted little measurable impact on the growth and concentration of the universal banking system or on the business turnover of universal banks relative to securities markets. The paper also shows that the English commercial banking sector and the German universal banking sector underwent similar movements toward concentration between 1884 and 1920 (both accelerating after 1912), despite no corresponding regulatory changes in England–further suggesting that consolidation of universal banking resulted from factors other than the 1896 law.

Technology and intermediation: do banks pass the gains to their customers?

A key function of the banking system is to facilitate intermediation between borrowers and lenders. In this paper we single out for attention the money transmission function of banks to test whether intermediation costs have been reduced by technology and passed on to consumers. Using data for the commercial banking sector in Ireland over the period January 1986 to August 1996, we find that the gains from technology in the provision of banking services, provided they exist, have not been passed on to the bank customers in the form of a lower bank interest rate spread.

Banking Crises Under Soft Legal Constraints Lessons from the Russian Meltdown

On August 17, 1998, Russia defaulted on its domestic public debt, declared a moratorium on the private banks' foreign liabilities which was equivalent to an outright default, and abandoned its exchange rate regime. The depth of the Russian meltdown shocked the international markets, and precipitated a period of serious financial instability. It is important to understand the roots of such a crisis to learn about possible lessons on both issues of bank supervision and international stability. While the visible cause of the crisis was an unsustainable fiscal deficit coupled with massive capital flight, the critical question concerns the origin of such circumstances. This paper argues that the structure of individual incentives in the Russian legal context, compounded by the exceptional support granted by international institutions to Russia, explains the cycle of nonpayment, capital flight and fiscal unbalances leading to the dramatic 1998 crisis. We offer an interpretative model of noncompliance, cash-stripping and rational collective nonpayment which led to the fiscal and banking crisis and ultimately to a complete meltdown. In our view, the banking sector was already insolvent prior to the crisis, and contributed directly and indirectly to it. The last section of the paper puts forward a radical medium-term policy proposal for a stable banking and payment system for Russia. Russia needs to create a basic foundation for savings and intermediation by asset restrictions and market segmentation, crude but effective rules used in all underdeveloped systems to restrain asset stripping and opportunism. Concretely, we propose a cautious extension of deposit insurance away from the monopolistic Sberbank and towards a narrow banking layer. The proposal also proposes measures to restore charter value in the commercial banking sector.

La orientación al mercado y el rendimiento empresarial: el caso de la banca comercial española

The aim of this article is the study of the consequences of market orientation on business performance. Concretely, we propose a model where market orientation has its effects on profitability through a group of variables that condition company results. An empirical research is done regarding the Spanish commercial banking sector, and structural equation models are used in order to contrast the proposed hypotheses.

Banking Industry Structure, Competition, and Performance: Does Universality Matter?

By studying the German universal banking system in the pre-World War I period, in comparison with its American and British counterparts, this paper investigates whether universality (the combination of commercial and investment banking services) influences banking industry concentration, levels of market power, or financial performance of banks. The short answer is no. First, given that the UK's specialized commercial banking sector was structured very similarly to the German universal industrial banking sector, and that neither system was extremely concentrated in the pre-war era, the paper argues that universality does not necessarily or uniquely propagate concentration. Second, on average, German universal banks behaved no less competitively than their American counterparts in the provision of loan services. Structural price markup models, as well as reduced-form Rosse-Panzar tests, demonstrate little deviation from competitive pricing in either country. The findings therefore indicate that universality does not lead to appreciable market power, in either an absolute or a relative sense. These same results also imply that banking industry concentration, at least up to the moderately high levels found in Germany, does not in itself produce anti-competitive behavior. The empirical results, though contradictory to common wisdom about German universal banking, are easily motivated by the theoretical literature in industrial organization. Finally, estimates of returns on equity and on assets suggest only slight international differences in average returns over extended periods, but large deviations in individual years. Adjusting for prevailing rates on government bonds, commercial loans, or commercial deposits narrows the gaps further. Universality is not linked with superior profitability, whether the hypothesized source is efficiency (economies of scope) or monopoly power. These three sets of findings may assuage fears that deregulation in American banking could lead to excessive concentration and therefore collusive behavior. At the same time, the results may lower hopes of significant efficiency gains from broadening the scope of services.