ریسک پذیری موثر و اجرای پیمان های نظارتی در صنعت بانکداری تجدید ساختار شده
|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|18229||2001||28 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Economics and Business, Volume 53, Issues 2–3, March–June 2001, Pages 255–282
The deregulation of the U.S. banking industry has fostered increased competition in banking markets, which in turn has created incentives for banks to operate more efficiently and/or take more risk. We examine the degree to which supervisory CAMEL ratings reflect the level of risk taken by banks and the risk-taking efficiency of those banks (i.e., whether increased risk levels generate higher expected returns). Our results suggest that supervisors not only distinguish between the risk-taking of efficient and inefficient banks, but they also permit efficient banks more latitude in their investment strategies than inefficient banks.
Over the last twenty years, a variety of measures aimed at deregulating U.S. commercial banking have been enacted. For example, intrastate and interstate branching restrictions have been substantially relaxed, interest rate ceilings on time deposits have been abolished, and thrift institutions have been permitted to enter product markets previously reserved for commercial banks. While the increased competition resulting from such measures can encourage banks to operate more efficiently, it can also increase banks’ incentives to take risk, which can potentially threaten the safety of banks and the payments system. Historically, barriers to competition supported banks’ profitability, and the capitalized value of these profits increased the value of banks’ charters. These high profits provided an important incentive for banks to limit their risk-taking to avoid insolvency and losing their valuable charters. But as increased competition has eroded both bank profits and charter values, banks have attempted to enhance their expected earnings by taking additional risk. The competition-induced incentives to increase risk can reinforce the already existing moral hazard incentives provided by the deposit insurance and discount window safety nets, which historically have not fully priced the risks that banks take. Thus, in a deregulated banking system, bank regulators face the challenge of monitoring and controlling banks’ risk-taking, while at the same time not restricting competitive forces which can discipline banks and improve industry efficiency. At the center of this regulatory challenge are banks’ demand deposits—an unique form of demandable debt used by banks to finance their operations, and a key part of the economy’s payments system. The regulation and supervision of banks’ risk-taking protects the safety of bank deposits and, hence, the payments system. To a large degree, the role played by bank regulators is analogous to that of writing and monitoring debt covenants for the depositors, whose debt is not protected by standard covenants.1Safety and soundness covenants, such as minimum capital ratios and loan concentration limits, constrain banks’ menu of feasible risk-return choices. When these safety and soundness covenants become binding, regulators can enforce remedial covenants, such as restricting asset growth or raising additional equity capital, that constrain the actions of banks further. Because regulatory covenant enforcement can impose substantial costs on banks that encounter financial distress, it provides an important incentive for banks to limit risk-taking. 2 If administered carefully, the threat of covenant enforcement can appropriately balance the risk-increasing incentives created by increased competition and mispriced safety nets. Not all risk-taking is imprudent, and some banks are better at risk-taking than others. Banks that are more efficient risk-takers earn higher expected returns for the risks they take; that is, they enjoy a better menu of risk-return choices. Banks that are efficient risk-takers have a lower probability of experiencing financial distress, and have a higher probability of recovering from adverse exogenous circumstances that produce financial distress. Thus, effective regulation and supervision of commercial banks will distinguish efficient risk-taking from inefficient risk-taking, and will discourage the latter. In response to the risk-increasing incentives created by deregulation and increased competition, over the past decade bank regulators have introduced a number of measures that formally link the regulation of commercial banks to the level of risks they take. Risk-based capital requirements and risk-based deposit insurance premia are two prominent examples. More recently, regulators have changed the procedures for their annual examinations of bank safety and soundness to include an explicit assessment of banks’ ability to manage risk. In this study we look for evidence that, in formally linking regulation to risk, commercial bank regulators distinguish between a bank’s level of risk and its efficiency at risk-taking. We ask, in effect, do bank regulators treat the risk-taking of efficient banks differently than the risk-taking of inefficient banks? Do regulators afford efficient banks more latitude in their investment strategies than inefficient banks? Do regulators create incentives for banks to improve the efficiency of their risk-taking? Our evidence answers, “Yes,” to each of these questions. Our findings suggest that the increased opportunities for risk-taking in the deregulated banking industry are not encouraged equally for all banks. We also find that, despite this differential treatment of banks, regulators provide incentives for both efficient and inefficient banks to manage risk more efficiently. To investigate these questions we focus on banks’ CAMEL ratings, the annual supervisory assessment of a bank’s overall financial condition and its compliance with safety and soundness covenants. Because these ratings reflect the likelihood that supervisors will enforce remedial covenants and, in doing so, impose distress costs on banks, the ratings provide our investigation with the critical clues needed to look for differences in regulatory incentives for relatively efficient and inefficient risk-takers to trade return for reduced risk. We use a three-step procedure to investigate these questions. In the first step, we employ a structural model of production to obtain estimates of expected return and risk for the 356 national banks in our sample. Our model, developed by Hughes et al 1995, Hughes et al 1996 and Hughes et al 1999) and Hughes and Moon (1995), allows bank managers to trade expected return for reduced risk. The model employs the Almost Ideal Demand System (Deaton & Muellbauer, 1980) to recover managers’ preferences for expected return and risk from cross-sectional price and production data for 1994. Using a production-based approach allows us to include both privately and publicly held banks in our tests and also allows us to estimate each bank’s productive inefficiency. Each bank’s expected return-risk combination establishes one point on its own risk-return frontier. In the second step, we fit a stochastic, envelope frontier to the 356 expected return-risk combinations. This produces an overall, best-practice risk-return frontier for all banks in the sample. We measure each bank’s risk-return efficiency by its distance from this frontier. Finally, to consider how bank supervisors evaluate banks’ risk-return trade-offs, we estimate an ordered logit model that relates each bank’s CAMEL rating to its expected return, its risk, its risk-return inefficiency, and its size. By controlling for a bank’s size and its risk-return choice, we can isolate the effect of its efficiency at risk-taking on its CAMEL rating. That is, we can reveal whether the likelihood that regulators enforce remedial covenants, and thus provide incentives for banks to exchange return for reduced risk, is related to the efficiency with which banks take risk. The evidence we find is consistent with our hypothesis that a bank’s regulatory treatment is influenced by how efficiently it manages risk. Among the least efficient banks in our sample, banks that take extra risk for a higher expected return are assigned worse CAMEL ratings, and the larger the bank, the stricter the standard that is applied to it. In contrast, among the most efficient banks in our sample, CAMEL ratings were related only to the degree of banks’ efficiency, not to their risk-return choice or to their size. On one hand, our results suggest that if banks are relatively efficient at risk-taking, examiners provide incentives for further efficiency improvements, but tend not to discourage the “prudent” risks taken by these banks. On the other hand, our results also suggest that if banks are relatively inefficient at risk-taking, examiners not only penalize the choice of a higher risk-higher return strategy, but penalize size as well, perhaps because larger inefficient banks pose a greater threat to the payments system. The principal contributions of our study are the following. First, we show that banks’ efficiency at managing risk as well as banks’ ex ante risk-return choices are important for explaining bank supervisors’ assessments of their safety and soundness. Thus, the risk-increasing incentives created by increased competition may not compromise bank safety when bank supervision distinguishes efficient from inefficient risk-taking and discourages the latter. Second, the success of these measures in explaining CAMEL ratings demonstrates that it is important to account for risk when measuring banks’ profit efficiency. Although there is a large literature on efficiency measurement in banking, only a handful of studies explicitly incorporate ex ante risk. 3 Finally, we introduce the techniques of efficiency measurement that incorporate risk to the literature on CAMEL ratings, which has to date generally focused on the relationship between CAMEL ratings and the market value of banks’ debt and equity. Section 2 that follows describes how the regulation of commercial banks in the United States influences the financial distress costs that they face and how distress costs affect their value-maximizing choice of expected return and return risk. Section 3 briefly reviews some of the literature on the effect of financial distress costs on bank risk-taking. Section 4 describes how a bank’s exam scores, the CAMEL ratings, reflect the safety and soundness objectives of bank regulators. We present our three-step procedure for estimating expected return, risk, and efficiency in section 5, section 6, and section 7. Because each stage of our analysis generates results that are interesting in their own right, we present the intermediate results at the end of each of these three sections. Lastly, we summarize our findings in section 8 and draw conclusions about the incentives that regulatory monitoring and covenant enforcement provide for banks to trade expected return for reduced risk and to manage risk efficiently.
نتیجه گیری انگلیسی
In an era of deregulation that seeks to increase banks’ competition and to improve their efficiency, regulation has been linked to the risks that banks take, to address the increased incentives to take risk that are created by reduced charter values and mispriced safety nets. In addition, banks whose risk-taking leads to episodes of financial distress experience costly regulatory strictures that generally reduce the risk-taking incentives for all banks. Using CAMEL ratings that indicate the likelihood that such strictures will be imposed, we have asked if commercial bank regulators distinguish between a bank’s level of risk and its efficiency at risk- taking in their ratings of banks. Do bank regulators treat the risk-taking of efficient banks differently than the risk-taking of inefficient banks? Do regulators afford efficient banks more latitude in their investment strategies than inefficient banks? Do regulators create incentives for banks to improve the efficiency of their risk-taking? We have offered evidence that answers, “Yes,” to each of these questions. The evidence seems to indicate that examiners draw a line between efficient banks and inefficient banks. Efficient banks are better at risk-taking, and when they take extra risk to increase their expected return, our results suggest that examiners do not penalize them with worse CAMEL ratings. Apparently, their “best-practice” ability to manage risk enables them to take extra risk without compromising their safety and soundness. Hence, the evidence implies that bank regulators impose lower distress costs on these banks and that the structure of these costs encourages efficiency but does not discourage efficient risk-taking. For banks with less ability to manage risks or to enhance return, however, CAMEL ratings do reflect the risk-return trade-off. Examiners penalize these banks for taking increased risk. In addition, our results suggest that supervisors hold large inefficient banks (i.e., banks whose safety and soundness is most likely to have implications for the stability of the banking system) to higher standards than large efficient banks. Thus, the higher schedule of distress costs imposed on inefficient banks gives them the incentive to become more efficient and to take less risk, and the larger the inefficient bank, the greater these incentives. Thus, our evidence suggests that opportunities for risk-taking created in a more competitive, deregulated banking industry are not encouraged equally for all banks and that this differential treatment of banks encourages all banks to manage risk more efficiently.