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A New Approach to Measure the Transmission Mechanism of Monetary Policy in the Intrinsic Value of Banks
International Journal of Business Administration
Abstract
This paper investigates the transmission channels of monetary policy in the economy. Therefore, an economic and financial simulation model was developed based on the five main valuation models to estimate the intrinsic value of the five largest Brazilian banks as basic interest rates vary. This approach, in short, attempts to complement the traditional analysis of the transmission mechanism through the asset price channel by considering the intrinsic value channel of assets. The results show that the impact of these changes on the banking sector does not tend to affect its intrinsic values negatively. In fact, in most situations, banks increase their intrinsic value with lower base interest rates and lose very little intrinsic value when those rates rise. These findings demystify the notion that the main Brazilian banks prefer a macroeconomic environment with high basic interest rates and are useful to policymakers, investors, and other economic agents.
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Given the high resilience of the Central and Eastern Europe (CEE) banking sectors during the last financial crisis and their major role in the CEE region in financing the economy and supporting the high growth rates achieved there, our paper investigates the determinants of banking profitability in the CEE banking sectors based on a Generalized Method of Methods (GMM) approach using data between 2009 and 2018. We have selected determinants from the macroeconomic factors and from the financial-banking specific factors using a two-step GMM method. Our findings demonstrate that unemployment rate, inflation, budget balance, non-governmental credit, non-performing loan rates, concentration rate and capitalization rate negatively impact on the banking profitability in the CEE banking sectors. According to these findings, some policy recommendations were elaborated.
Digital finance which is facilitated by electronic banking is absolutely paramount for realising the developmental objectives of emerging economies. Success of service innovations in the field of electronic banking depends to a great extent on the perceptions and consumption patterns of the intended users of such services. This paper reports on a study that investigated customers' usage of electronic banking services in a multi‐channel context. As e‐banking usage is found still low, banks have scope for further propagation of technology and reaping its benefits. With the inclusion of technology, banks should not ignore the importance of employees as manual and electronic banking are found complementary to each other. There is still need to make electronic banking simpler and more secured as these are the major inhibitors of complete reliance on electronic media.
Monetary policy comprises the rules and actions adopted by the central bank to achieve its objectives. In most countries the primary goal of monetary policy is price stability. However, the mandate of many central banks also encompasses other objectives, including attainment of full employment, domestic financial stability , and normal operation of foreign payments. The priority of price stability over other policy goals tends to be politically accepted in most countries, if not actually enshrined in the laws governing the central bank. Changes in monetary policy are triggered by domestic and external shocks that can imperil the attainment of policy objectives. Central banks implement policy changes by resetting their policy instrument, usually a short-term interest rate or a monetary or bank credit aggregate. These instruments affect the economy through various mechanisms of transmission to the ultimate policy goals. Hence a useful way to understand monetary policy is to focus separately on central bank policy actions and the transmission mechanisms through which those actions work their effect. The central banks policy rule or reaction function embodies its response to deviations in macroeconomic variables in order to achieve its ultimate policy objectives. Beyond the simple description of these policy rules, it is important to assess their efficiency (in the sense of achieving the desired combination of goals, subject to the structure of the We are grateful to Francisco Gallego for his valuable contribution to the preparation of this overview.
This paper builds on earlier studies which examined oligopolists in a repeated interaction as responding simply to past prices of their strategic rivals, and which used data from a mature market, with stable rules of thumb (mappings from past actions, or states of the market, to present prices) for the oligopolists’ behaviour, whether purposefully learnt or emerging from the natural selection of the rivalry. The earlier studies imposed exogenous partitions on the action space, as perceived by the players. This study explores how such perceptions might be endogenised. A firm answer to the question of how oligopolists partition their perceptions of others’ actions, both through time and across the price space, will also provide information on how much or how little information they choose to use: in short, how boundedly rational the oligopolists have chosen to be. We use data from a retail coffee market to examine the evolved optimal partitioning and mapping of price space, manifest as the oligopolists’ rules of thumb. The data suggest that brand managers are using very little information: whether prices changed or not.
O presente trabalho analisa as possíveis relações existentes entre estrutura de capital,operações de crédito e de tesouraria, spread e índice de eficiência com a rentabilidade, medidapelo ROE, dos bancos de varejo brasileiros, no período compreendido entre 1999 e 2005.A amostra utilizada consiste em instituições financeiras pertencentes ao segmento Varejo,segundo segmentação proposta por Gonzalez e Savoia (2006). Utilizando técnicas econométricasde dados em painel, os resultados encontrados indicam que as variáveis consideradasapresentaram relação estatisticamente significativa com a lucratividade no período analisado.
This paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful
for resolving incentive problems between borrowers and lenders. It presents a characterization of the costs of providing incentives
for delegated monitoring by a financial intermediary. Diversification within an intermediary serves to reduce these costs,
even in a risk neutral economy. The paper presents some more general analysis of the effect of diversification on resolving
incentive problems. In the environment assumed in the model, debt contracts with costly bankruptcy are shown to be optimal.
The analysis has implications for the portfolio structure and capital structure of intermediaries.
Purpose
The Asian banking system has been appreciated with many distinct qualities including consistent in profitability. Many studies have examined the profitability of Asian banking sector from diverse perspectives. However, studies on bank profitability in connection to the capital structure, operating efficiency and non-interest income are only a few. This study investigates the influence of capital structure as estimated by leverage ratio and long-term debt, operating efficiency and non-interest income on the profitability of the banking industry in 28 countries of Asia.
Design/methodology/approach
This paper utilizes fixed effect regression model by involving panel data with sample of 492 banks from 28 countries of Asia for the time span of 15 years from 2004 to 2018.
Findings
The results confirm that an increase in total debt ratio increases the profit margin of the bank as supported by the agency cost theory, suggesting that the debt financing increases the profitability of the firm. In addition, the findings reveal that lowering the operating expenses and managing of costs effectively can boost the profitability of bank. Furthermore, non-interest income plays a vital role when the interest rates are lower. Hence the study suggests that a careful investment in this sector can generate income as well as increase the profit margin of the banking arena.
Originality/value
The paper examines the profitability of bank by including impact of leverage ratio and long-term debt as a measure of capital structure along with the influence of operational efficiency and non-interest income which contributes to the understanding of the existing literature.
The interaction between interest rates and banks’ market power generates a motive for bank risk-taking. Low interest rates depress bank profits from the deposit market as competition from cash intensifies. Limited liability and the consequent low bank market value move banks closer to the convex region of their payoff function and thus lead to more risk-taking. We estimate a model that embodies this intuition. We find that when interest rates are low, over 10% of new loans exceed the number that would be optimal in a counterfactual world with no risk-taking incentives.
Purpose
The paper examines the effect of bank-specific, financial structure and macroeconomic factors on the profitability of banks in Asian economies during 1995–2017.
Design/methodology/approach
It uses the data of 2,446 banks across 47 Asian countries between 1995 and 2017 (41,582 year observations). The static and dynamic panel generalized methods of moments (GMM) estimation techniques are applied.
Findings
The results show that banks that are highly dependent on nontraditional activities have lower net interest revenue and net interest margin but higher return on assets, return on equity and profit before tax. Higher opportunity cost, capitalization, demand deposits and market risk result in a better bank profits. Furthermore, banks with higher loan exposure and growth have more profit. However, nonperforming loans have negative and significant impact on bank profitability. Asian banks do not suffer from diseconomies of scale and scope. The author also finds that banks located in countries with high gross domestic product, inflation rates and high rates of interest or in financially developed economies offer better profits. High credit to the private sector reduces the bank profitability. This study finds evidence to support the structure-conduct-performance (SCP) hypothesis. It also provides evidence that the impact of financial turmoil on the profitability of the Asian banking sector is negative and significant and has severely weakened the Asian banking system.
Originality/value
As Asia has become an important economic area and the Asian topic has not earned enough discussions, this paper is the first to examine Asian banks with the latest and a wider range of panel data that cover 2,446 banks at 47 Asian countries over the period 1995–2017. The present study is among the first to address the influence of financial turmoil on bank profitability in this region. It also studies new variables, such as demand deposits, opportunity cost and off-balance sheet activities, which have not been examined in relation to bank profitability. It also applies both static techniques and dynamic panel estimation techniques to analyze the data.
The purpose of this paper is to survey the development of discounted cash flow criteria of investment evaluation before 1950. No attempt is made to discuss the problem of the cost of capital or the difficulties caused by risk and uncertainty. The technique of discounted cash flow requires both an understanding of compound interest and an ability to set out the cash inflows and outflows likely to result from a particular decision to invest. Knowledge of compound interest goes back at least as far as the Old Babylonian period (c. 1800-1600 B.C.) in Mesopotamia.' Setting out the cash implications of an investment is more difficult. It is not surprising that the earliest applications of discounted cash flow were to loans where the cash outlays and receipts were known and to life insurance where probabilities could be calculated from historical evidence. The extension of discounted cash flow to investment in fixed assets came much later and was based on the work of engineers and economists. We therefore have to consider developments in three fields: actuarial science, engineering economy, and political economy. They will be discussed in the order stated.
Contenido: 1. El valor de la empresa y la misión del director: ¿Por qué valorar el valor?; El gestor del valor; Principios fundamentales para la creación de valor; Los parámetros de medida: cómo sobrevivir al bombardeo de parámetros de medida del valor; El cash flow manda; Cómo generar valor; Fusiones, adquisiciones y joint ventures; ; 2. Valoración por el cash flow: una guía para profesionales: Esquemas para la valoración; Análisis de los rendimientos históricos; Estimación del coste de capital; Previsión de los resultados; Estimación del valor residual; Cálculo e interpretación de los resultados; 3. Aplicar la valoración: Valoración de empresas multinegocio; Valoración de las dot.com; Valoración de empresas cíclicas; Valoración de filiales extranjeras.
Valuation lies at the heart of much of what we do in finance, whether it is the study of market efficiency and questions about corporate governance or the comparison of different investment decision rules in capital budgeting. In this paper, we consider the theory and evidence on valuation approaches. We begin by surveying the literature on discounted cash flow valuation models, ranging from the first mentions of the dividend discount model to value stocks to the use of excess return models in more recent years. In the second part of the paper, we examine relative valuation models and, in particular, the use of multiples and comparables in valuation and evaluate whether relative valuation models yield more or less precise estimates of value than discounted cash flow models. In the final part of the paper, we set the stage for further research in valuation by noting the estimation challenges we face as companies globalize and become exposed to risk in multiple countries.
The value of tax shields is the difference between the present values of two different cash flows, each with their own risk: the present value of taxes for the unlevered company and the present value of taxes for the levered company. For constant growth companies, the value of tax shields in a world with no leverage cost is the present value of the debt, times the tax rate, times the unlevered cost of equity, discounted at the unlevered cost of equity. This result arises as the difference of two present values and does not mean that the appropriate discount for tax shields is the unlevered cost of equity.
Loans are illiquid when a lender needs relationship-specific skills to collect them. Consequently, if the relationship lender needs funds before the loan matures, she may demand to liquidate early, or require a return premium, when she lends directly. Borrowers also risk losing funding. The costs of illiquidity are avoided if the relationship lender is a bank with a fragile capital structure, subject to runs. Fragility commits banks to creating liquidity, enabling depositors to withdraw when needed, while buffering borrowers from depositors' liquidity needs. Stabilization policies, such as capital requirements, narrow banking, and suspension of convertibility, may reduce liquidity creation.
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