تاثیر یورو بر مواجهه با ریسک صنعت بزرگ بانکداری جهان
|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|18252||2004||32 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of International Money and Finance, Volume 23, Issues 7–8, November–December 2004, Pages 1011–1042
In this paper, we examine if the introduction of the euro impacted the risk exposures, risk premiums and, hence, the cost of equity of the banking industry of 11 Eurozone countries, five non-Eurozone European countries, and three non-European countries. Using a multi-factor asset-pricing model that allows time variation in the risk exposures, we find a statistically significant and economically large decline in the cost of equity of the banking industry across the three groups of countries following the introduction of the euro. Though we find an increase in the market and currency exposures after the euro, consistent with increased competition among banks, the fall in the cost of equity arises from an economically large decline in the currency premium. As expected, the Eurozone banking industry experienced the largest decrease. Our results are inconsistent with the argument that increased banking competition arising from the legislative changes accompanying the introduction of the euro would result in an increase in the overall risk premium of the banking sector.
It is arguably the case that since the dismantling of the Bretton Woods System, the most dramatic and important change to the world financial markets has occurred in the European Monetary Union (EMU) where 12 national currencies have been replaced with a single currency—the euro. This important structural change in the European financial markets has had both direct and indirect effects on the European financial system in terms of competition and consolidation within the banking industry and the portfolio strategies of individual banks. Theoretical work by Diamond and Dybvig, 1983 and Kalemli-Ozcan et al., 2001, among others, contends that financial markets and banks (the financial system) perform functions in an economy that are of critical importance to the growth and development of a country and/or region. This ability to promote growth and development comes about in primarily three ways. First, financial intermediaries are better qualified and have more resources dedicated to evaluate and select projects, thereby increasing the profitability of investment. Second, by providing liquid financial markets, a greater proportion of savings can be invested in projects of longer duration, thereby raising productivity within the economy. Third, by promoting diversification the financial system allows risk-averse savers to allocate a larger proportion of their savings to riskier projects. This typically promotes specialization and thus benefits the economy’s division of labor and capital, therefore enhancing growth. Empirical work by Levine and Zervos, 1998, Rajan and Zingales, 1998 and La Porta et al., 1998 provides evidence consistent with these arguments. Danthine et al. (2000) point out that banks are the most important players in the European financial markets. If the EMU is to be successful in achieving economic growth, then the way in which the banking sector is affected by the introduction of the euro will go a long way in determining the extent to which this objective is met. Conventional wisdom is that the introduction of a single currency should lead to a decrease in the overall risk exposure within the banking industry. However, it is possible that market and interest rate exposures of banks could in fact increase. This is because the adoption of a single currency led to a tremendous decrease in bank revenues stemming from a decline in currency trading and a decline in arbitrage profits from trading bonds and other financial securities (Danthine et al., 2000). Additionally, there has been an increase in the internationalization of the financial markets and consolidation of the banking industry (Rajan and Zingales, 2003), leading to an increase in competitive pressures within the banking industry on two fronts. First, their role as a major provider of financing for large corporations has diminished, as evidenced by the dramatic increase in the corporate bond market within the Eurozone. This has largely replaced the long-term corporate financing component of banks’ business. Second, there has been an influx of banks and other financial institutions from non-Eurozone countries. The implication of these changes is that the revenue streams and profit margins of banks within the Eurozone have been eroded. In this paper, we examine the impact of the introduction of the euro on the time-varying market, interest rate, and currency risk exposures and risk premiums and, as such, the cost of equity of the banking industry of the member countries of the EMU and other industrialized countries. Drawing on the literature (reviewed below) on the relationship between competition, regulation, and risk exposure of the banking sector we hypothesize that greater competition between banks within and across national borders for liabilities increases the difficulty of maintaining reasonable levels of liquidity by means of liability management and could increase the banks’ exposure to interest rate risk. Hence, with the introduction of the euro, we may observe a significant increase in the interest rate risk exposure of the banking industry. Alternatively, given the pursuit of a single monetary policy, we may find that even in the face of increased competition within the banking industry there may be a decline in interest rate risk exposure. Likewise, increased competition and structural changes in the market place can affect the market risk exposure of the banking industry via the asset side of the balance sheet, as they may lead to an increase in the riskiness of banks’ asset portfolio (e.g., Keeley, 1990 and Besanko and Thakor, 1993, and others). Several theoretical and empirical papers have also established a relationship between the competitive structure of the banking industry and bank stability. For instance, Keeley (1990) finds that higher levels of competition reduce the capital-to-asset ratio and increase banks’ risk premium. In contrast, DeNicolo and Kwast (2001) argue that increased competition leads to greater stability. Similar to Keeley (1990), Marquez, 2002 and Carletti et al., 2002 argue that the increased competition due to deregulation following the formation of the EMU could have adverse consequences on the banking industry. This is because deregulation could lead to higher, not lower, loan rates. This would reduce the banks’ capacity to foster economic growth, which in turn could lead to an overall increase in the cost of equity of not only the banking sector, but also other sectors in the economy. Existing evidence on banks’ exposure to currency risk is mixed (see, e.g., Choi et al., 1992, Chamberlain et al., 1997 and Francis and Hunter, 2003). Given the touted stability of a single currency, it is likely that we will find that the currency risk premium of the banking industries of the EMU has declined. However, in the first few years after its introduction the euro depreciated significantly, thereby raising fears about its long-term stability. This could have caused an increase in the currency risk premium investors expect from investing in the banking (or other) industry.1 While the introduction of the euro will affect firms from all industries, we focus on the banking sector for several reasons.2 First, as evidenced by the adoption of the 1988 Basle Committee on Banking Supervision and the ongoing revisions, there is great interest internationally not only in the monitoring of the overall risk exposure of the banking industry, but also in the factors that determine this exposure. Second, given the importance of the banking sector to capital formation in the Eurozone countries, it is expected that a lowering of its cost of equity would enhance the sector’s ability to play a leading role in helping the “new organization” to attain one of its major objectives—significant economic growth. Third, banks are one of the mechanisms for the transmission of the single monetary policy of the EMU across and within the various member states. Given that the efficacy of the mechanism determines the impact of monetary policy on the economy, it is important that banks’ ability to effectively play the transmission mechanism role is not impaired by the new developments.3 In this paper, we use a multi-factor asset-pricing model over the period January 1990 to September 2003, to examine the extent to which various risk premiums in the ex ante expected returns (cost of equity) of the banking sector of 16 European and three non-European countries have changed following the introduction of the euro. According to a recent European Central Bank (ECB) report, the introduction of the euro is expected to impact various types of risks to which banks are exposed (ECB, 1999). These include strategic, credit, market, market liquidity, credit institutions’ liquidity, settlement, operational, and legal. An important implication of this is that our model needs to capture a broad range of risks. Our analysis is comprehensive in nature in that we focus on the impact of exchange rate risk, interest rate risk, and other macroeconomic risks, as captured by changes in the global stock market index. This multi-factor approach is motivated by the fact that the EMU is much more than just the conversion of 12 currencies to a single currency and, as such, the adoption of the euro will have a much broader impact on the risk exposures of the banking sector than just through the exchange rate exposure. We use equity returns of the banking industry to gauge the impact of the introduction of the EMU on bank risk exposure. This is because returns more efficiently reflect the impact of the various types of risks than a more narrowly-defined measure of performance, such as cash flows or profitability. Our asset-pricing model allows for time variation of the risk exposures (betas) of the banking industries. This enables us to examine if risk exposures around the world have changed as a result of the changes in the competitive environment due to the introduction of the euro. Our model specification also reflects the fact that although exposure to a particular risk factor may increase, if the associated expected compensation per unit of exposure (the risk price) is negative, then the factor’s risk premium, the factor’s contribution to the cost of capital, would decline. An additional feature of the model is that we decompose the cost of equity into the portion that is attributable to each risk factor. This is important in that it allows us to determine which of the components the introduction of the euro has affected the most. The results indicate that the introduction of the euro has resulted in a substantial reduction in the ex-ante expected returns and, therefore, the cost of equity for the banking industry of countries belonging to the Eurozone. Importantly, the results also indicate that this is not only a Eurozone phenomenon as similar results are obtained for the banking industries of non-Eurozone European countries and countries outside of Europe. As expected, the banking industry across the countries belonging to the Eurozone has experienced the greatest decline followed by the non-Eurozone European countries. The decline in the cost of equity for both the Eurozone and non-Eurozone European countries is due to the decline in the currency risk premium. Our finding that the expected returns have declined does not support the argument that increased internationalization of and competition in the banking sector would lead to an increase in risk premiums and as a result may lead to increased financial instability. Instead, it suggests that with the reduction in the cost of equity the banking industry may be able to fulfill its role as one of the most important sectors in aiding the EMU to achieve its main objective. The rest of the paper is organized as follows. Section 2 presents a review of the relevant literature. Section 3 outlines the methodology. Section 4 describes the data and presents summary statistics. Section 5 contains evidence of the risk exposures, risk premiums, and cost of equity of the banking industry over the full sample period. Section 6 presents evidence of the impact of the euro on the banks’ cost of capital. Section 7 concludes.
نتیجه گیری انگلیسی
The formation of the EMU and the adoption of a common currency (the euro) is one of the most dramatic changes to occur in the world financial markets in the last three decades. Given the breadth and depth of this structural change, it potentially has the ability to have a tremendous impact on the world’s economic and financial landscape. In this paper, we study the effects of the introduction of the euro on the banking industry of 19 countries. These are 11 countries belonging to the Eurozone (Luxembourg is excluded), five non-Eurozone European countries (Demark, Norway, Sweden, Switzerland, and the UK), and three non-European countries (Canada, Japan, and the US). Specifically, we use an asset-pricing model to determine how the exposures to and risk premiums of market, currency, and interest rate risks and, hence, the cost of equity, change over the period January 1990 to September 2003. We show that there is a decline in the cost of equity for all the banking industries of the Eurozone countries, for all the non-Eurozone European countries, and for two of the three non-European countries. The magnitude of these changes indicate that the decline for each group is not only statistically significant but also, perhaps more important, economically significant. Importantly, our results also show that, for all practical purposes, the decline in the cost of equity can be attributed to the decline in the currency risk premium and not the market or interest rate risk premiums. Specifically, for the Eurozone countries, we find that while the market risk premium increased, the currency risk premium declined with little or no change in the interest rate risk premium. Similar results were also found for both the non-Eurozone European countries and the non-European countries. The only exception is Japan, where the currency risk premium increased (became less negative). The finding that the currency risk premium declined substantially for the banking industry of 18 of the 19 countries in our sample is not surprising given that, of all the changes accompanying the introduction of the euro, it is the adoption of the single currency that has received the greatest attention and is expected to have the greatest effect. More important, it is through the reduction in currency risk that policymakers and politicians have suggested that the greatest benefits from the introduction of the euro would occur. Although not surprising, our results are significantly different from those reported by Bartram and Karolyi (2003), who found that most of the impact of the introduction of the euro came through a reduction in non-currency related risk, and from De Santis et al. (2003) who predicted that the introduction of the euro would not have a significant effect on currency risk premium. Our results have implications for policymakers in that they provide evidence that policies that increase competition in the banking sector do not necessarily lead to an across-the-board increase in the risk premiums of the sector. In fact, our results indicate that, when accompanied by rational economic policies, it leads to a decrease in some risk premiums and an overall decline in the cost of equity. This suggests that policies that are geared towards increasing bank competition should be encouraged. Although our findings are quite strong and robust to different specifications, caution should nevertheless be exercised in their interpretation. First we focus only on the banking industry; thus it is not clear if our results can be generalized to other industries. Second, our post-euro s