In order to investigate bank characteristics in different bank size, we decompose Z-score into three main components which are mean ROA, mean capitalization asset ratio (Equity/Total asset), and standard deviation of return on asset (Stdv. ROA). In Table 12, we find that large banks have higher average Z-score, lower capitalization asset ratio, and lower Stdv. ROA than small banks which mean although large banks tend to take on more risk from internationalization activates, large banks are more stable than small banks. Furthermore, large banks are associated with lower profitability than small banks as measured by mean ROA.
Table 12 Z-score Decomposition by Different Bank Size
This table reports Z-score decomposition for large size versus small size. ***, **, and * indicate significance at the 1%, 5%, and 10% levels respectively.
Z-score Decomposition
Equity/Asset 0.0575 0.0977 -0.0402 -10.79***
Stdv. ROA 0.0024 0.0064 -0.0040 -8.70***
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
5 Conclusions
Many research papers show that the more internationalized a bank is, the higher the risk it bears. However, based on commercial banks data in Taiwan, we find that internationalization has negative relationship with risk following Berger, A., Sadok El Ghoul, Omrane Guedhami, and Raluca A. Roman (2013) structures, who analyze the relationship between internationalization and bank risk with numerous of empirical models. Also, we deliver the robustness test on different measures of risk and internationalization suggesting a consistent result to support our finding. In the end, we consider banks in distinct size because we find a bimodal distribution in Size variable. After we subsample the data into large size and small size with 70p cut point, a strong evidence shows that large banks tend to take on more risk but small banks can be benefited by diversify their portfolios and gain access to global capital market.
We show large banks could gain more risk from increasing internationalization activities.
However, when we compare characteristics of bank between the two subsamples we find that large bank have a higher average Z-score and higher income diversification indicating that large banks can gain more profit and be more stable. On the other hand, small banks have a diversification effect on internationalization but the overall risk is larger and the operation is not as efficient as large banks. The reason is that regulations in Taiwan are more restricted for banks inside of the country which make only several financial holdings can do financial services differently in Asia Pacific; therefore for those who seeking more profits outside Taiwan might take on more risk. Conversely, the small banks can also provide financial services which are relatively simple and no risky; as a consequence, they could benefit from asset diversification. We suggest that different bank sizes may have different impacts of internationalization on risk and other evaluation methods should be employed in different banks.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
27
Reference
1. Aliber, Robert Z., 1976. ‘International bank: A survey,’ Journal of Money, Credit, and Banking, 16(25), 47-51.
2. Amihud, Y., DeLong, G. and Saunders, A., 2002. ‘The effects of cross-border bank mergers on bank risk and value,’ Journal of International Money and Finance, 21, 857-877.
3. Ana Rosa Fonseca and Francisco González, 2010. ‘How bank capital buffers vary across countries: The influence of cost of deposits, market power and bank regulation,’ Journal of Banking & Finance, 34(4), 892-902.
4. Annavarjula, M. and Beldona, S., 2000. ‘Multinationality performance relationship: A review and reconceptualization,’ International Journal of Organizational Analysis, 8(1), 48-67.
5. Berger, A. and Bouwman, C., 2013. ‘How does capital affect bank performance during financial crises?’ Journal of Financial Economics, 109(1), 146-176.
6. Berger, A., Bouwman, C., Kick, T. and Schaeck, K., 2012. ‘Bank risk taking and liquidity creation following regulatory interventions and capital support,’ Working paper, University of South Carolina.
7. Berger, A., Sadok El Ghoul, Omrane Guedhami and Raluca A. Roman, 2013.
‘Internationalization and bank risk,’ Working paper, University of South Carolina.
8. Bhagat S., Bolton, B. and Lu J., 2012. ‘Size, leverage, and risk-taking of financial institutions,’ Working paper, University of Colorado at Boulder.
9. Boyd, J. and Runkle, D., 1993. ‘Size and performance of banking firms,’ Journal of Monetary Economics, 31(1), 47-67.
10. Buch, Claudia M., John C. Driscoll and Charlotte Ostergaard, 2010. ‘Cross-border diversification in bank asset portfolios,’ International Finance, 13(1), 79-108.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
11. Cetorelli, N. and Goldberg, L., 2012. ‘Banking globalization and monetary transmission,’
Journal of Finance, 67, 1811-1843.
12. Chiorazzo, V., Milani, C. and Salvini, F., 2008. ‘Income diversification and bank performance: Evidence from Italian banks,’ Journal of Financial Services Research, 33, 181-203.
13. Demirgüç-Kunt, A. and Huizinga, H., 2010. ‘Bank activity and funding strategies: The impact on risk and returns,’ Journal of Financial Economics, 98, 626-650.
14. Demsetz, R. S. and Strahan, P. E., 1997. ‘Diversification, size and risk at bank holding companies,’ Journal of Money, Credit, and Banking, 29 (3), 300-313.
15. Doukas, J. and Kan, O. 2006. ‘Does global diversification destroy firm value?’ Journal of International Business Studies, 37, 352-71.
16. Flamini, V., McDonald, C.A. and Schumacher, L.B., 2009. ‘The determinants of commercial bank profitability in Sub-Saharan Africa,’ IMF Working Paper, No. 09/15.
17. Giuliano Iannottaa, Giacomo Nocerab, and Andrea Sironi 2013. ‘The impact of government ownership on bank risk,’ Journal of Financial Intermediation, 22(2), 152-176.
18. Grubel, Herbert G., 1977. ‘A theory of multinational banking,’ Banca Nazionale del Lavoro Quarterly Review, 349-363.
19. Gulamhussena, M.A., Pinheirob, C. and Pozzolo A.F., 2014. ‘International diversification and risk of multinational banks: Evidence from the pre-crisis period,’ Journal of Financial Stability, 13, 30-40.
20. Houston, Joel F., Chen Lin, Ping Lin and Yue Ma., 2010. ‘Creditor rights, information sharing, and bank risk-taking,’ Journal of Financial Economics, 96(3), 485-512.
21. Stiroh, K. J. and Rumble, A., 2006. ‘The dark side of diversification: The case of US financial holding companies,’ Journal of Banking & Finance, 30(8), 2131-2161.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
29
22. Laeven, L. and Levine, R., 2007. ‘Is there a diversification discount in financial conglomerates?’ Journal of Financial Economics, 85, 331-67.
23. Laeven, L. and Levine, R., 2009. ‘Bank governance, regulation and risk taking,’ Journal of Financial Economics, 93, 259-275.
24. Laeven, L., Ratnovski, L. and Tong, H., 2014. ‘Bank size and systemic risk,’ International Monetary Fund.
25. Mamiza Haq and Richard Heaney, 2012. ‘Factors determining European bank risk,’ Journal of International Financial Markets, Institutions and Money, 22(4), 696-718.
26. Shen, C. H. and Chang Y., 2012. ‘To join or not to join?-Do banks that are of a Financial-Holding-Company perform better than banks that are not,’ Contemporary Economic Policy, 30(1), 113-128.
27. Thi Canh Nguyen, Dinh Vinh Vo and Van Chien Nguyen, 2015. ‘Risk and income diversification in the Vietnamese banking system,’ Journal of Applied Finance & Banking, 5(1), 93-109.
28. Wang, Tianxi, 2014. ‘Competition and Increasing Returns to Scale: A Model of Bank Size’
The Economic Journal, Early View.