Entry Of New Banks Research Articles

Impact of financial development on bank profitability

PurposeThis paper investigates the effect of financial development on bank profitability. The authors examine whether financial development is an important determinant of bank profitability.Design/methodology/approachThe ordinary least square and the generalized method of moments regression methods were used to analyze the impact of financial development on the profitability of the Nigerian banking sector.FindingsThe authors find a significant negative relationship between the financial system deposits to GDP ratio and the non-interest income of Nigerian banks. This indicates that higher financial system deposits to GDP depresses the non-interest income of Nigerian banks. The result implies that the larger the size of the Nigerian financial system, the lower the profitability of banks in Nigeria. Also, the authors observe that bank concentration, nonperforming loans, cost efficiency and the level of inflation are significant determinants of the profitability of Nigerian banks.Practical implicationsIt is recommended that regulators should establish market-enabling policies that encourage new banks to emerge in the banking industry. The entry of new banks can lead to increase in financial system deposits and credit supply for economic growth. Regulators also need to understand the role of Nigerian banks in promoting financial development and find ways to collaborate with banks towards financial sector development. Another implication of the findings for asset managers is that asset managers will need to take into account the prevailing level of financial development, particularly the size of the financial system, in their asset pricing and investment decisions. This will ensure that investors get value for their investments in Nigeria. The financial implication of the study is that the level of financial development in Nigeria can improve the finance-growth linkages in Nigeria through the efficient allocation of credit and capital to crucial sectors of the Nigerian economy to spur growth in those sectors.Originality/valueEvidence dealing with how financial development affects the profitability of the banking sector in African countries is scarce in the literature, and is completely absent for Nigeria. This paper addresses this research gap.

Competition vs. Stability: Oligopolistic Banking System with Run Risk

This paper develops a model where large financial intermediaries subject to systemic runs internalize the effect of their leverage on aggregate risk, returns and asset prices. Near the steady-state, they restrict leverage to avoid the risk of a run which gives rise to an accelerator effect. For large adverse shocks, the system enters a zone with high leverage and possibly runs. The length of time the system remains in this zone depends on the degree of concentration through a franchise value, price-drop and recapitalization channels. The speed of entry of new banks after a collapse has a stabilizing effect.

Effect of Banking Concentration on Monetary Policy Transmission Mechanism in Cameroon

The aim of this paper is to evaluate the effect of banking concentration on the monetary policy transmission mechanism in Cameroon. To conduct our study, we focus our attention on the bank lending channel. Using bank-level data of 6 commercial banks from 2006-2016 collected from National Credit Council, we estimate our model using the Dynamic Ordinary Least Square (DOLS) method. We find that, banking channel exist in Cameroon. Moreover, it appears that banking concentration weakens bank lending channel of monetary policy transmission in Cameroon. But, its impact is not significant. It also appears that banking concentration negatively and significantly affect credit supply in Cameroon. Therefore, we recommend to the Central Bank authority to reduce the amount of regulatory capital to a reasonable level in order to facilitate the entry of new banks into the sector. This should ultimately lead to the migration of concentrated structure to competitive structure more able to convey monetary policy decisions.

Does Competition Reduce Racial Discrimination in Lending?

This paper examines whether increases in bank competition reduce discriminatory practices in mortgage lending. Lenders are significantly less likely to approve black applicants' loan applications despite facing similar credit risk. However, following the relaxation of interstate bank branching laws in the 1990s, increases in local lending competition reduced the approval differential between potential white and black borrowers by roughly one quarter. The reduction was driven both by incumbent lenders altering lending policies to avoid losing market share and by the entry of new banks. The results suggest strong complementaries between direct regulation and the competition mechanism. In particular, direct regulation is effective against large lenders where statistical proof problems are less severe, while competition provides incentives to smaller, harder to regulate lenders.

The relationship between competition and risk-taking behaviour of Indian banks

Purpose Under the traditional franchise value paradigm, competition in banking markets is considered to be risk enhancing because of its tendency to raise interest rates on deposits. Taking a contrarian view, Boyd and De Nicolo (2005) have argued that competition in the loan market can lead to lower interest rates and hence reduce bank risk-taking. Following these contradictory theoretical results, the empirical evidence on the relationship between risk and competition in banking has also been mixed. This paper analyses the competition–stability relationship for the Indian banking sector for the period 1999-2000 to 2012-2013. Design/methodology/approach Banking competition is measured using structural measures of concentration, namely, five-bank concentration ratios and the Herfindahl-Hirschman Index as well as a non-structural measure of competition – the Panzar-Rosse H-Statistic. Panel regression methods are used to estimate the relationships. Findings Our results show that while concentration leads to lower levels of default, market and asset risks, it exacerbates the levels of capital and liquidity risks. Practical implications These results have interesting implications for banking sector policy in emerging economies. For instance, any strategy on entry of new banks has to be carefully coordinated with supervisory efforts and macro-prudential policy to derive the benefits of greater competition in the banking industry. Originality/value This is the first paper that analyses the competition – stability relationship using a large number of alternative measures for the banking sector, an emerging economy.

The Glass–Steagall Act in historical perspective

Abstract Implementation of Volcker's Rule requires a historical perspective on the original Glass–Steagall Act of 1933 that separated commercial banking from investment banks in the United States. Like the Dodd-Frank legislation, the Banking Act of 1933 was passed before full analysis of the financial crisis was possible. The intended consequences of Glass–Steagall made Federal deposit insurance feasible by limiting entry of new banks while preserving unit banking. The unintended consequences, however, cut off access by small- and medium-size enterprises to external finance and also reduced the capital base for investment banks. Despite these harmful effects, the American economy did recover eventually.

An Examination of Entry and Competitive Performance in Rural Banking Markets

This article explores the change in the level of competition in rural banking markets after the deregulation that occurred following passage of the Riegle‐Neal Act of 1994. Using an empirical model that utilizes both the number of banks and the value of deposits in a cross‐section of 278 rural markets, we decompose the impact of the entry of new banks into resulting changes in per capita demand and the costs/profits of local banks in 1994 and 2004. The results support the view that local banking markets have become more competitive since the mid‐1990s.

Financial Deregulation and Household Debt: The Australian Experience

Financial Deregulation and Household Debt: The Australian Experience

Free banking and bank entry in nineteenth-century New York

AbstractPrevious studies of entry under New York's free banking law of 1838 have generated conflicting results. This article shows that different measures of entry lead to different conclusions about the competitive effects of the law. Measured by the entry of new banks, New York's free banking law led to increased rates of entry relative to other states. Free banking did not, however, lead to significant increases in capital accumulation in the industry. This paradoxical outcome resulted from the regulatory features of free banking, especially the bond security feature, which reduced profitability and incentives to invest in banking.

Bank Consolidation and Lending Policies to Small Business: Differences Across Geographical Areas

Using Bank of Italy data on Italian banks in the period 1990-2004, the paper analyses the short and long-run effects of the concentration of the banking industry on the availability of credit to small and medium-sized firms. Our study employs a bank-based approach and investigates the differential effects of banking consolidation in the various geographical areas, in order to capture the influence of the different economic contexts. Our research also considers the different groups of intermediaries involved, as well as the role of new entry banks and of those not involved in consolidations (e.g. rivals). We find that banks' specialization in terms of credit policy seems to be affected by MA this effect is stronger in the South and in the North East of Italy. On the other hand, in the case of acquisitions, banking groups improve their expertise in small business lending. These results hold in all the main geographical areas, except for the southern regions, where - everything being equal - small firms are riskier and banks' takeovers are motivated mainly by the need to allow financial restructuring. However, in this market, the entry of new banks and close relationships between local banks and agglomerations of small firms partly offset the lower specialization on small business financing induced by acquisitions.

A Bennet Decomposition of Industry Dynamics: An Application to the Nationwide and State Level U.S. Banking Industry

This paper considers the aggregate performance of the banking industry, applying a modified and extended Bennet (1920) dynamic decomposition of bank return on equity as an illustration. The aggregate performance of any industry depends on the underlying microeconomic dynamics within that industry - adjustments within banks, reallocations between banks, entry of new banks, and exit of existing banks. Bailey, Hulten, and Campbell (1992) and Haltiwanger (1997) develop dynamic decompositions of industry performance. We extend those analyses to derive a Bennet decomposition that includes their decomposition as a special case. We also extend the decomposition, consider geography, and implement decomposition on a state-by-state basis, linking that geographic decomposition back to the national level. We then consider how deregulation of geographic restrictions on bank activity affects the components of the state-level dynamic decomposition, controlling for competition and the state of the economy within each state and employing fixed- and random-effects estimation for a panel database across the fifty states and the District of Columbia from 1976 to 2005.

Financial Sector Development In South Africa, 1970-2002

The importance of financial sector development to overall economic development is well documented in the literature. Financial sector development literature has historically emphasized the connection between a country's financial superstructure and economic development. In this paper we discuss development of the financial sector in South Africa from the early 1970s to 2002, a period that comprises about two decades of the apartheid period and more or less a decade of democracy. We use various indices of financial development to draw some conclusions as to where the country is heading. Pertinent positive findings suggest a move towards the cashless economy, a trend of increasing credit allocation to the private sector as well as the ability of banks to extend mortgage loans, short term savings being better and more effectively mobilized than before, and the deepening of the JSE Securities Exchange. On the negative side, long-term savings which were on the decline have now stabilized; the banking sector has not been quite successful in attracting more savings from the wider population; the entry of new banks and the introduction of financial instruments have not significantly impacted on interest rate spread.

Banking sector reforms in India and China: Does India’s experience offer lessons for China’s future reform agenda?

India and China both carried out banking sector reforms in the 1990s. Despite taking a gradual approach, India’s reforms have been the more comprehensive and have been implemented at a faster pace than in China. India’s experience suggests that the following four issues would be relevant in China’s future reform agenda: (1) privatizing the wholly state-owned commercial banks (WSCBs) and introducing measures to improve corporate governance; (2) removing Government intervention to make WSCBs more commercially oriented; (3) reducing the dominance of WSCBs by rationalizing weak banks and downsizing large WSCBs; and (4) if adopted, relaxing the stringent statutory liquidity requirement, which seems to discourage banks from lending. There are also lessons to be learned from India’s reforms. First, the entry of new banks should be promoted provided they are sufficiently capitalized and are technology-oriented. Second, diversification of banks’ business should accompany interest rate liberalization in order to compensate for the expected decline in net interest income and prevent banks from taking excessive risks. Third, strict regulations should be introduced to prevent connected lending.

Banking reform in transition countries

An important debate about financial reform in transition economies is whether or not governments should try to rehabilitate existing state-owned banks or allow a new or parallel banking system to emerge. A comparison of institutional development of banks in twenty-five transition countries suggests that more rapid progress can be made with the entry of new banks as opposed to rehabilitation, especially relative to initial conditions. In most countries, however, a cadre of weak banks still exists. Regression estimates suggest that the progress of these weak banks is inhibited by poor troubled-bank intervention, preferential treatment and limited entry.

What Can Regulators Regulate? The Case of Bank Entry

Previous researchers have claimed that the Banking Acts of 1933 and 1935 reduced the annual rate of entry of new commercial banks by as much as 50 percent between 1936 and 1962. In contrast, the authors find that this legislation did not reduce bank entry rates. Previous studies did not account for legislative changes that reduced restrictions over branch banking and stimulated growth in the number of branches in about half the states during the 1936-62 period. After accounting for these changes in branching laws, it becomes clear that entry of new banks was depressed by growth in branch banks, not by restrictive federal regulations. Copyright 1992 by Ohio State University Press.