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This book investigates important policy-related issues in Asia Pacific banking.

Inhaltsverzeichnis

Frontmatter

1. Introduction

Banking market integration is accelerating in the Asia Pacific region, which has increased competition between domestic and foreign banks. Thus, the measurement of bank efficiency, competition, and liquidity creation in Asia Pacific economies is critical for both policy makers and bank managers to understand how these changes influence the domestic banking sector. These are important issues for policy makers because improved bank performance and competition should improve resource allocation, which will benefit society by intermediating more funds, providing a greater variety of products with better prices and higher service quality for clients, improving bank profitability, and achieving greater safety and soundness in the banking sector. These issues are also critical for bank managers because they can develop many different strategies, including rationalization, restructuring, consolidation, and so on, to improve performance in response to changes in their environment. This book consists of three empirical chapters addressing bank competition, efficiency, and liquidity creation in the Asia Pacific region.

Xiaoqing Maggie Fu, Yongjia Rebecca Lin, Philip Molyneux

2. Development of the Asia Pacific Banking System

Banks have continuously dominated financial systems across the Asia Pacific region and played an important role in regional economic development. After experiencing rapid growth during the 1990s, Asia Pacific financial systems, especially banking systems, were hit hard by the 1997 Asian financial crisis. Regulators implemented a series of reforms to improve bank efficiency, competition, regulation, supervision, and profitability to enhance financial stability. These efforts have made Asia Pacific banking systems more resilient. These banks have weathered the global financial crisis much better than they did during the Asian financial crisis and better than banks in the U.S. and Europe. Basel III, which responded to the problems of sophisticated Western financial systems, have been widely implemented in Asia Pacific financial systems that are bank-dominated systems with relatively small capital markets and limited securitization. Tighter capital and liquidity requirements under Basel III may constrain bank lending and economic development. Therefore, the effectiveness of the Basel III changes is unclear.

Xiaoqing Maggie Fu, Yongjia Rebecca Lin, Philip Molyneux

3. Bank Competition and Financial Stability in Asia Pacific

The impact of bank competition on financial stability has been a focus of academic and policy debate over the last two decades and particularly since the 2007–08 global financial crises (Beck, 2008; OECD, 2011). Under the traditional competition-fragility view, banks cannot earn monopoly rents in competitive markets, and this results in lower profits, capital ratios, and charter values. This makes banks less able to withstand demand- or supply-side shocks and encourages excessive risk-taking (Marcus, 1984). Alternatively, the competition-stability view suggests that competition leads to greater stability. A less competitive banking market may lead to more risk-taking if the big banks are deemed too important to fail and as such obtain implicit (or explicit) subsidies via government safety nets (Mishkin, 1999). In addition, banks with more market power tend to charge higher loan rates, which may induce borrowers to assume greater risk leading to greater default. In competitive banking markets loan rates are lower, Too-Big-To-Fail issues and safety net subsidies are smaller, and this results in a positive link between bank competition and stability (Boyd and De Nicoló, 2005). It could also be the case, as noted by Martinez-Miera and Repullo (2010) that bank competition and stability are linked in a non-linear manner, and in a similar vein Berger et al. (2009) argue that competition and concentration may coexist and can simultaneously induce stability or fragility.

Xiaoqing Maggie Fu, Yongjia Rebecca Lin, Philip Molyneux

4. Bank Efficiency and Shareholder Value in Asia Pacific

The global banking industry has been transformed over the last two decades. Forces driving this transformation include technological innovation, structural deregulation, prudential reregulation, internationalization, and changes in corporate behavior, such as growing disintermediation and increased emphasis on shareholder value (Berger et al., 2010). The global financial crisis of 2008–09 also accentuated these pressures and illustrated that bank performance can have dramatic effects on capital allocation, company growth, and economic development — namely via increased capital and funding costs. It is well known that capital costs are linked to sovereign and other risks (see IMF, 2011; BIS, 2011 & 2013). Post-crisis, regulators in the developed world have forced banks to raise massive amounts of new capital and these firms are struggling to achieve returns in excess of the cost of capital (ECB, 2012). The big, internationally active banks are being asked to hold even more capital and liquidity under Basel III. In such an environment, many banks are finding it too costly and therefore difficult to issue new capital and the only way they can boost capital is to refrain from capital costly activity — so they are cutting lending, selling or shrinking capital costly investment banking, and other businesses (Economist, 2013). This is related to shareholder value creation that focuses on generating returns in excess of the cost of capital to create value for owners (namely, shareholder value creation).

Xiaoqing Maggie Fu, Yongjia Rebecca Lin, Philip Molyneux

5. Bank Liquidity Creation and Regulatory Capital in Asia Pacific

According to the modern theory of financial intermediation, one of the two central roles played by banks is liquidity creation. Bryant (1980) and Diamond and Dybvig (1983) suggest that banks create liquidity on the balance sheet by financing relatively long-term illiquid assets with relatively short-term liquid liabilities. Holmstrom and Tirole (1998) and Kashyap et al. (2002) argue that banks also create liquidity off-balance sheet by offering loan commitments and generating similar claims to liquid funds. Therefore, banks hold illiquid assets/loan commitments and provide liquidity to stimulate the rest of the economy. Such a liquidity creation function attracted significant attention recently because the global financial crisis of 2008–09 vividly demonstrated that illiquidity can dramatically affect macroeconomic stability. As an outcome, one major regulatory response has been the introduction of Basel III that introduces higher liquidity and capital standards with the goal of promoting a more resilient banking sector (BIS, 2011).

Xiaoqing Maggie Fu, Yongjia Rebecca Lin, Philip Molyneux

6. Conclusions

Banks in Asia Pacific face increasing competition with increases in mergers and acquisitions and entry of foreign capital. Analyzing bank efficiency competition and liquidity creation is of great importance for Asia Pacific policy makers and bank managers to enhance their understanding of these changes and highlight issues for additional reforms. This chapter utilizes a large sample of commercial banks in 14 Asia Pacific countries from 2003 to 2010 to examine three critical issues, including bank competition, efficiency, and liquidity creation in Asia Pacific, which are of interest to these stakeholders.

Xiaoqing Maggie Fu, Yongjia Rebecca Lin, Philip Molyneux

Backmatter

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