國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Chapter 1 Introduction
To dispose of failed financial institutions, the government promulgated the Financial Restructuring Fund Statute on July 9, 2001. The Fund may entrust a Central Deposit Insurance Company (CDIC) with the handling of financial institutions with unsound operations. This fund completed periodic tasks by the end of 2011. This Fund also serves the purpose of integrating financial markets and stabilizing financial conditions. In a review of merger events in the Taiwan banking industry before 2000, the government directed the merger policy and asked healthy banks to undertake troubled financial institutions. After 2000, the government encouraged mergers and acquisitions among financial institutions. Voluntary mergers inspired by strategic consideration have been developed since.
The scheme provides a bank with the opportunity to bid. The scheme does not limit the participants, thereby increasing the bank incentive to participate in mergers. After considering their strategy, banks must make the important decision of whether to merge, through the market mechanism. To protect shareholder equity, the obligation of bank management and the board of directors in the merger process are important. This study examines how the financial restructuring scheme affects corporate governance of acquiring banks under or without the restructuring scheme, and whether corporate governance makes a difference in static and dynamic efficiency for bank mergers during implementation of the Financial Restructuring Fund Statute in Taiwan. This study is unique in simultaneously considering Taiwan corporate governance, bank mergers, and the financial restructuring scheme.
China had planned to put China under the global Basel III regime, at the start of 2012 year, a year ahead of the phase-in period stipulated in the Basel agreement. By moving the start date to January 1 2013, China confirmed that those original plans were too ambitious. The CBRC will adopt stricter financial regulations than Basel III1. China had cited worries that the stricter rules would dampen domestic lending and hurt the economy at a time of global instability as reason for postponing the implementation from the original target date. It is obvious that financial regulations will directly affect the behavior of commercial banks. China will not postpone the implementation of Basel III and adopt the stricter financial regulation than Basel III and their own unique regulation indicators are the reasons. This is the incentive why the research chooses China as study subject.
Whether banks implement regulation will enhance the efficiency or impede efficiency?
We attempt to contribute to this assessment by examining whether banks have met the CBRC’s standard of financial regulations and explores how the previously implemented financial regulations have affected bank efficiency in the past. The goal of financial regulation is to
1 In particular, the core tier 1 capital adequacy ratio will be set at 5 percent, 0.5 percent higher than Basel III.The required leverage ratio will be set at 4 percent, 1 percent higher than required by the Basel III agreement.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
enable banks to improve liquidity and solvency. Stricter regulation may be good for bank stability, but not for bank efficiency. In addition, we also explored the trade-off relationship between efficiency and risk2. Unlike other studies, this study used bank assets as a classification standard from the financial risk and differential regulatory perspective.
How can the corporate governance (financial regulation) effects on bank efficiency be measured? Previous studies use static efficiency to measure. Instead, we believe that due to the properties of the corporate governance and financial regulation, if the study uses a static point of view to measure the policy effects on bank efficiency, it may not consider the persistent and intertemporal effects of the policies. Unlike other literatures only investigating the characteristics of corporate governance (financial regulation) that affect the concurrent static efficiency of bank, we further use dynamic slacks-based measure (DSBM) to study the persistent and intertemporal effects on the dynamic efficiency of bank in the long run.
Our results show that major shareholders of acquiring banks had greater controlling power to decide whether to merge during the financial restructuring period. During the financial restructuring period, a bank merger using the financial restructuring scheme had less static and dynamic efficiency in the short run, but gradually increased in the long run. Such an observation is consistent with the hypothesis that controlling shareholders pursue long-term efficiency in a bank merger.
The small banks that possess higher loan to deposit ratio are less efficient. The more loans impede the profit efficiency and enhance the risk. The listed commercial banks that possess higher loan to deposit ratio are more efficient. The more loans enhance the dynamic efficiency and do not affect the risk. The loan to deposit ratio had different effect on profit efficiency for small and listed commercial banks. The higher the provision coverage ratio is, the lower the risk of large bank. But, the ratio did not a significantly affect small bank’s risk.
This indicates that the ability to control risks and asset quality for large and small banks is different. The large banks have greatly enhanced the ability to resist risk. The current ratio had a significant positive effect on the profit efficiency for small banks and negative effect for large banks. The current ratio had a significant effect on profit efficiency for large and small banks, but the significant results are inconsistent. The small banks that possess higher current ratio are more efficient. The more current asset enhances the profit efficiency.
The listed commercial banks that possess higher current ratio are less efficient. The more current asset impedes the profit efficiency. The cost to income ratio had a significant negative effect on dynamic and profit efficiency of China commercial banks. The loan loss provision and leverage ratio had a positive effect on profit efficiency for China banks. This indicates that these two ratios did not restrict the business model of asset expansion for banks.
2 The trade-off between stability and efficiency of financial intermediation particularly interests financial regulators around the globe. Policymakers must consider its trade-off with allocative and dynamic efficiency of financial intermediation.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
The ability to control risks and asset quality for large and small banks is different.
The large banks have greatly enhanced the ability to resist risk and identify the customer to whom to lend funds. In addition, the large banks should pay more attention to the cost of control than small banks should. The purpose of CBRC regulates the current ratio is to reduce the risks of banks. Based on our empirical results, the current ratio did not affect the risks and led to different efficiency results between large and small banks. We also find the capital adequacy did not a significantly affect bank’s static efficiency. It seems the new capital requirements may not swallow their profits and lead to a decline in return. From the risk-prevention point of view, the CBRC should adopt differentiated financial regulation policies for banks of different asset sizes according to the operating status.
Financial regulation affects the profit and dynamic efficiency. To attain the requirement of Basel III, China commercial banks must change the profit model which depends on expand the scale of assets and purse the transformation of business development. The scale expansion of loan will bring an increase in capital. In order to keep up with the regulatory requirements on capital adequacy ratio, bank will be faced with the needs for capital supplementation. Then, the new capital requirements will greatly restrict commercial banks’ credit expansion. Upon the implementation of the new rules, Chinese banks will have to consider possible ways of replenishing capital again.
To attain the requirement of capital adequacy ratio, the circulation pattern of credit expansion and capital complement will be changed. China’s commercial banks are vigorously developing capital-saving products and growing non-interest-related income to contribute more than half of their total incomes. Therefore, the banking sector should make more efforts on credit structure adjustment and credit quality improvement in the coming period of time, which is also the expected goal of the CBRC in its efforts to boost the implementation of new regulatory standards.
This Dissertation consists of three essays in financial reform, regulation and dynamic efficiency of commercial banks from Taiwan or China’s perspective. The remainder of this dissertation is as follows. In chapter 2, we present the first essay “Does Financial Restructuring Change the Relationship between Corporate Governance and the Static and Dynamic Efficiency of Bank Mergers in Taiwan. The second essay “Does Financial Regulation Enhance or Impede the Efficiency of China’s Listed Commercial Banks? A Dynamic Perspective” is displayed in chapter 3. We present the third essay in which we extend the research in exploring the trade-off relationship between efficiency and risk. The third essay “Does Financial Regulation Affect the Profit Efficiency and Risk of Banks? Evidence from China’s Commercial Banks” is presented in chapter 4. Chapter 5 summarizes the main findings of the three studies and future researches.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Chapter 2 Does Financial Restructuring Change the Relationship between Corporate