No Access

Do Well-Financial Holding Company Organized Banks in Taiwan Take More Risk?

Department of Risk Management and Insurance, National Kaohsiung First University of Science and Technology, Kaohsiung, Taiwan

E-mail Address: lihua@nkfust.edu.tw

Search for more papers by this author

Li-Chin Hung

Graduate School of College of Finance and Banking, National Kaohsiung First University of Science and Technology, Kaohsiung, Taiwan

E-mail Address: u0147906@nkfust.edu.tw

Corresponding author.

Search for more papers by this author

, and

Chau-Jung Kuo

Department of Finance, National Sun Yat-sen University, Kaohsiung, Taiwan

E-mail Address: cjkuo@cm.nsysu.edu.tw

Search for more papers by this author

https://doi.org/10.1142/S0219091516500247Cited by:2 (Source: Crossref)

Abstract

This paper employs panel data regression analysis to explore the measurable differences in risk-capitalization relationship between FHC and non-FHC organized Banks. The main contribution of this paper is in explaining some rethinking which shows the business of FHCBs take more risk than that of NFHCBs, and high degree of capitalization is negatively associated with asset risk and has higher interest rate spread increased bank’s asset risk in FHCBs only. It obviously has its strong anti-incentives domination for high capital banks group in NFHCHs, which a high degree of loans ratio, loans ratio is positively associated with asset risk in NFHCBs only. A large degree of bank size, bank size is negatively associated with asset risk in FHCBs only. The prior studies and previous hypothesis indicate that risk level increases when the bank capital size is high but the finding in this paper is inconsistent with the previous research.

Keywords:

JEL: G21, G28, C12

References

Alali, F and B Jaggi [2011] Earnings versus capital ratios management: Role of bank types and SFAS 114. Review of Quantitative Finance and Accounting, 36, 105–132. Crossref, Google Scholar
Anandarajan, A, B Francis, I Hasan and K John [2011] Value relevance of banks: Global evidence. Review of Quantitative Finance and Accounting, 36, 33–55. Crossref, Google Scholar
Avery, RB and AN Berger [1991] Risk based capital and deposit insurance reform. Journal of Banking and Finance, 15, 847–874. Crossref, Web of Science, Google Scholar
Barth, JR, DE Nolle, T Phumiwasana and G Yago [2002b] A cross-country analysis of the bank supervisory framework and bank performance. Presented at the 77th Annual Conference of the Western Economic Association International, Seattle, Washington. Google Scholar
Barth, JR, G Caprio Jr and R Levine [2004] Bank regulation and supervision: What works best?, Journal of Financial Intermediation, 13, 205–248. Crossref, Web of Science, Google Scholar
Barth, JR, LG Dopico, DE Nolle and JA Wilcox [2002a] An international comparison and assessment of the structure of bank supervision. Corporate Finance Review, 6 (6), 9–34. Google Scholar
Barth, JR, M Bertus, J Hai and T Phumiwasana [2008] A cross-country assessment of bank risk-shifting behavior. Review of Pacific Basin Financial Markets and Policies, 11 (1), 1–34. Link, Google Scholar
Beatty, A and DG Harris [1998] The effects of taxes, agency costs and information asymmetry on earnings management: A comparison of public and private firms. The Review of Accounting Studies, 3, 299–326. Google Scholar
Berger, AN and R DeYoung [1997] Problem loans and cost efficiency in commercial bank. Journal of Banking and Finance, 21, 849–870. Crossref, Web of Science, Google Scholar
Blackwell, DW, JA Brickley and MS Weisbach [1994] Accounting information and internal performance valuation-evidence from taxes banks. Journal of Accounting and Economics, 17, 331–358. Crossref, Web of Science, Google Scholar
Boyd, JH and SL Graham [1986] Risk, regulation, and bank holding company expansion into nonbanking. Quarterly Review (Federal Reserve Bank of Minneapolis), 10 (2), 2–18. Google Scholar
Breusch, T and A Pagan [1980] The LM test and its applications to model specification in econometrics. Review of Economic Studies, 47, 239–254. Crossref, Web of Science, Google Scholar
Chan, VL and SC Hu [2000] Financial liberalization in Taiwan. Review of Pacific Basin Financial Markets and Policies, 3 (3), 429–449. Link, Google Scholar
Chang, LC and YC Lee [2011] Domestic banks’ risk management and the impact of financial crisis on financial performance. Taiwan Bank Quarterly, 62 (1), 1–22. Google Scholar
Chang, MC, CC Nieh and YH Peng [2011] Are bigger banks more profitable than smaller banks?, Journal of Applied Finance & Banking, 1 (3), 59–71. Google Scholar
Chang, TC and YH Chiu [2006] Affecting factors on risk-adjusted efficiency in Taiwan’s banking industry. Contemporary Economic Policy, 24 (3), 634–648. Crossref, Web of Science, Google Scholar
Chen, KH [2012] Incorporating risk input into the analysis of bank productivity: Application to the Taiwanese banking industry. Journal of Banking & Finance, 36, 1911–1927. Crossref, Web of Science, Google Scholar
Chen, PF and PC Liu [2013] Bank ownership, performance, and the politics: Evidence from Taiwan. Economic Modelling, 31, 578–585. Crossref, Web of Science, Google Scholar
Chen, TY [2004] A study of cost efficiency and privatization in Taiwan’s banks: The impact of the Asian financial crisis. The Service Industries Journal, 24 (5), 137–151. Crossref, Web of Science, Google Scholar
Chen, TY and TL Yeh [1998] A study of efficiency evaluation in Taiwan’s banks. International. Journal of Service Industry Management, 9, 402–415. Crossref, Web of Science, Google Scholar
Cheng, LJ [2006] Relationship between the non-performing loans and business performance – the case of Taiwan bank industry. St. John’s & St. Mary’s Institute of Technology Journal, 23, 189–202. Google Scholar
Chiu, YH, C Jan, DB Shen and PC Wang [2008] Efficiency and capital adequacy in Taiwan banking: BCC and super-DEA estimation. The Service Industries Journal, 28 (3), 479–496. Crossref, Web of Science, Google Scholar
Chiu, YH, Z Luo, YC Chen, Z Wang and MP Tsai [2013] A comparison of operating performance management between Taiwanese banking industry and foreign banks based on the Meta-Hybrid DEA model. Economic Modelling, 33, 433–439. Crossref, Web of Science, Google Scholar
Chu, L, R Mathieu, S Robb and P Zhang [2007] Bank capitalization and lending behavior after the introduction of the Basel Accord. Review of Quantitative Finance and Accounting, 28, 147–162. Crossref, Google Scholar
Crane, DB, KA Froot, SP Mason, AF Perold, RC Merton, Z Bodie, ER Sirri and P Tufano [1995] The Global Financial System: A Functional Perspective. Boston: Harvard Business School Press. Google Scholar
Das, A and S Ghosh [2006] Financial deregulation and efficiency: An empirical analysis of Indian banks during the post reform period. Review of Financial Economics, 15, 193–221. Crossref, Google Scholar
Demorguc-Kunt, A, L Laeven and R Levine (2003). The impact of bank regulations, concentrations, and institutions on bank margins. Conference on Bank Concentration and Competition, World Bank, Washington, DC, 3rd–4th. Google Scholar
Demsetz, RS and PE Strahan [1995] Historical patterns and recent changes in the relationship between bank holding company size and risk. Economic Policy Review (Federal Reserve Bank of New York), 1 (2), 13–26. Google Scholar
Demsetz, RS and PE Strahan [1997] Diversification, size, and risk at bank holding companies. Journal of Money, Credit and Banking, 29 (3), 300–313. Crossref, Web of Science, Google Scholar
De Nicolò, G, P Bartholomew, J Zaman and M Zephirin [2004] Bank consolidation, internationalization and conglomeration: Trends and implications for financial risk. Financial Markets, Institutions & Instruments, 13 (3), 173–217. Crossref, Google Scholar
Emel, AB, M Oral, R Arnold and R Yolalan [2003] A credit scoring approach for the commercial banking sector. Socio-Economic Planning Sciences, 37, 103–124. Crossref, Google Scholar
Fock, ST and AC Wong [2001] Post-East Asian financial crisis: Challenges and opportunities for the banking and financial services sector in Singapore. Review of Pacific Basin Financial Markets and Policies, 4 (3), 495–521. Link, Google Scholar
Furlong, FT and MC Keeley [1989] Capital regulation and bank risk-taking: A note. Journal of Banking and Finance, 13, 883–891. Crossref, Web of Science, Google Scholar
Godlewski, CJ [2005] Bank capital and credit risk taking in emerging market economies. Journal of Banking Regulation, 6 (2), 128–145. Crossref, Google Scholar
Gorton, G and R Rosen [1995] Corporate control, portfolio choice, and the decline of banking. Journal of Finance, 50 (1), 1377–1420. Crossref, Web of Science, Google Scholar
Greene, WH [2002] Econometric Analysis. Macmillan Publishing Company: New York. Google Scholar
Guo, WC and CC Yang [2013] Are bank mergers procyclical or countercyclical? Theory and evidence from Taiwan. Applied Financial Economics, 23, 1–14. Crossref, Google Scholar
Huang, CJ and TT Fu [2009] Uncertainty and total factor productivity in the Taiwanese banking industry. Applied Financial Economics, 19, 753–766. Crossref, Google Scholar
Huang, CL and BY Kuo [2014] The impact of credit rating, ownership and relationships on loan Spreads-Taiwan’s evidence. Asian Journal of Finance & Accounting, 6 (2), 19–52. Crossref, Google Scholar
Huang, DF, C Ko and CC Liu [2004] The risk-relevant information content of changes in the Basel capital regulations in Taiwan. Review of Pacific Basin Financial Markets and Policies, 7 (1), 91–117. Link, Google Scholar
Hwa, EC [2000] How Taiwan weathered the Asian financial crisis. Review of Pacific Basin Financial Markets and Policies, 3 (3), 491–518. Link, Google Scholar
Hwang, DY, AC Lee, CC Liu and L Ouyang [2009] Balanced performance index and its implications: Evidence from Taiwan’s commercial Banks. Review of Pacific Basin Financial Markets and Policies, 12 (1), 27–62. Link, Google Scholar
Hwang, DY, JC Lin and CC Lin [2003] A study on designing a financial supervisory institution in Taiwan. Review of Quantitative Finance and Accounting, 20, 81–106. Crossref, Google Scholar
Jeitschko, TD and SD Jeung [2005] Incentives for risk taking in banking — A unified approach. Journal of Banking and Finance, 29, 759–777. Crossref, Web of Science, Google Scholar
Jeitschko, TD and SD Jeung [2007] Do well-capitalized banks take more risk? Evidence from the Korean banking system. Journal of Banking Regulation, 8 (3), 291–315. Crossref, Google Scholar
Kao, MC, CT Lin and L Xu [2012] Do financial reforms improve the performance of financial holding companies? The case of Taiwan. International Review of Finance, 12 (3), 491–509. Crossref, Web of Science, Google Scholar
Ke, B, K Petroni and A Saffieddine [1999] Ownership concentration and sensitivity of executive pay to accounting performance measures: Evidence from publicly and privately-held insurance companies. Journal of Accounting and Economics, 28, 185–209. Crossref, Web of Science, Google Scholar
Keeley, MC and FT Furlong [1990] A reexamination of mean–variance analysis of bank capital regulation. Journal of Banking and Finance, 14, 69–84. Crossref, Web of Science, Google Scholar
Kim, SJ [2004] Bailout and Conglomeration. Journal of Financial Economics, 71 (2), 315–347. Crossref, Web of Science, Google Scholar
Kuo, CJ and SL Lu [2005] Taiwan’s financial holding companies: An empirical investigation based on Markov regime-switching model. Applied Economics, 37, 593–605. Crossref, Web of Science, Google Scholar
Kuo, CJ, YH Lee and CM Chen [2012] Impact of Basel III on the financial stability and monetary policy. Central Bank Quarterly, 35 (2), 11–59. Google Scholar
Liang, CJ, ML Yao, DY Hwang and WH Wu [2008] The impact of non-performing loans on bank’s operating efficiency for Taiwan banking industry. Review of Pacific Basin Financial Markets and Policies, 11 (2), 287–304. Link, Google Scholar
Lin, D, J Barth, J Jahera and K Yost [2013] Cross-Border bank mergers and acquisitions: What factors pull and push banks together?, Review of Pacific Basin Financial Markets and Policies, 16 (4), 1350022. Link, Google Scholar
Lin, JC and V Sum [2012] Bank ownership and performance in Taiwan: Do politics matter?, Journal of Finance and Accountancy, 10, 1–20. Google Scholar
Liu, HH, TY Chen and JW Chen [2013] Incorporating the credit ranking measure to evaluate the operating efficiency of financial holding companies in Taiwan. Asian Economic and Financial Review, 3 (10), 1386–1404. Google Scholar
Liu, YC and W Yang [2010] What caused the soaring non-performing loans in Taiwan from the late 1990s to the beginning of 2000s? Evidence from panel data of domestic banks. International Journal of Information and Management Sciences, 21, 227–246. Google Scholar
Lobo, GJ and DH Yang [2001] Bank managers’ heterogeneous decisions on discretionary loan loss provisions. Review of Quantitative Finance and Accounting, 16, 223–250. Crossref, Google Scholar
Lu, SL [2007] An approach to condition the transition matrix on credit cycle: An empirical investigation of bank loans in Taiwan. Asia Pacific Management Review, 12 (2), 73–84. Google Scholar
Lu, SL [2012] Assessing the credit risk of bank loans using an extended Markov chain model. Journal of Applied Finance & Banking, 2 (1), 197–223. Google Scholar
Lu, SL and CJ Kuo [2006] The default probability of bank loans in Taiwan: An empirical investigation by the Markov chain model. Asia Pacific Management Review, 11 (2), 111–122. Google Scholar
Mishkin, FS [2006] How big a problem is too big to fail? A review of Gary Stern and Ron Feldman’s too big to fail: The hazards of bank bailouts. Journal of Economic Literature, 44 (3), 988–1004. Crossref, Web of Science, Google Scholar
Mohanty, SK, WT Lin and HJ Lin [2013] Measuring cost efficiency in presence of heteroskedasticity: The case of the banking industry in Taiwan. Journal of International Financial Markets, Institutions and Money, 26, 77–90. Crossref, Web of Science, Google Scholar
Nissim, D [2003] Reliability of banks’ fair value disclosure for loans. Review of Quantitative Finance and Accounting, 20, 355–384. Crossref, Google Scholar
Ozyıldırım, S [2010] Intermediation spread, bank supervision, and financial stability. Review of Pacific Basin Financial Markets and Policies, 13 (3), 517–537. Link, Google Scholar
Palia, D and R Porter [2004] The impact of capital requirements and managerial compensation on bank charter value. Review of Quantitative Finance and Accounting, 23, 191–206. Crossref, Google Scholar
Pan, YH [2004] New Basel capital accord and our response to the road. Centeral Bank Quarterly, 26 (2), 31–47. Google Scholar
Pasiouras, F [2008] International evidence on the impact of regulations and supervision on banks’ technical efficiency: An application of two-stage data envelopment analysis. Review of Quantitative Finance and Accounting, 30, 187–223. Crossref, Google Scholar
Pathan, S [2009] Strong boards, CEO power and bank risk-taking. Journal of Banking and Finance, 33, 1340–1350. Crossref, Web of Science, Google Scholar
Rime, B [2001] Capital requirements and bank behavior: Empirical evidence for Switzerland. Journal of Banking and Finance, 25, 789–805. Crossref, Web of Science, Google Scholar
Rose, PS [1999] Commercial Bank Management. Irwin McGraw-Hill, New York. Google Scholar
Santomero, AM and JD Vinso [1977] Estimating the probability of failure for commercial banks and the banking system. Journal of Banking and Finance, 1, 185–205. Crossref, Google Scholar
Saunders, A, E Strock and NG Travlos [1990] Ownership structure, deregulation, and bank risk taking. The Journal of Finance, 45 (2), 643–654. Crossref, Web of Science, Google Scholar
Sheldon, G. [1995] A limit-risk capital adequacy rule: An alternative approach to capital adequacy regulation for banks with an empirical application to Switzerland, Swiss Journal of Economics and Statistics, 131, 773–805. Google Scholar
Sheldon, G [1996b] Capital asset ratios and bank default probabilities: An international comparison based on accounting data. Swiss Journal of Economics and Statistics, 132, 743–753. Google Scholar
Shen, CH [2002] CAMEL in financial holding company banks and individual banks: 1997–1998. Taiwan Banking and Finance Quarterly, 3, 73–94. Google Scholar
Shen, CH and Y Chang [2012] To join or not to join? Do banks that are part of a financial holding company perform better than banks that banks that are not?, Contemporary Economic Policy, 30 (1), 113–128. Crossref, Web of Science, Google Scholar
Tang, TC [2010] An analysis of bank stock price reaction to distressed borrowers: Taiwanese evidence. The Service Industries Journal, 30 (7), 1159–1176. Crossref, Web of Science, Google Scholar
Tang, TC [2010] The costs of lead bank–distressed borrower relationships: Evidence from commercial lending in Taiwan. The Service Industries Journal, 30 (9), 1549–1563. Crossref, Web of Science, Google Scholar
Tu, AH and SY Chen [2000] Bank market structure and performance in Taiwan before and after the 1991 liberalization. Review of Pacific Basin Financial Markets and Policies, 3 (4), 475–490. Link, Google Scholar
Wang, JS, JT Chen and PH Chou [2008] Market reactions to the passage of the financial holding company act in Taiwan. Pacific Economic Review, 13 (3), 453–472. Crossref, Web of Science, Google Scholar
Wong, WP, Q Deng, ML Tseng, LH Lee and CW Hooy [2014] A stochastic setting to bank financial performance for refining efficiency estimates. Intelligent Systems in Accounting, Finance and Management, 21 (4), 207–227. Crossref, Google Scholar
Wu, JL [2005] Capital adequacy ratio and non-performing loans ratio of the bank’s financial performance. Taiwan Bank Quarterly, 56 (2), 1–27. Google Scholar
Wu, WH [2008] The Second Financial Reform and the development of financial industry in Taiwan. Review of Pacific Basin Financial Markets and Policies, 11 (1), 75–97. Link, Google Scholar
Yang, CC [2012] Service, investment, and risk management performance in commercial banks. The Service Industries Journal, 32 (12), 2005–2025. Crossref, Web of Science, Google Scholar
Yang, CH [2006] Relations between the behavior of Taiwan bank credit and the business cycle: The cycle affect the results along the new Basel capital accord on the road it bases coping. Centeral Bank Quarterly, 28 (1), 43–72. Google Scholar
Yu, PY [2003] Competitive issues in the Taiwanese banking industry: Mergers and universal banks. The Developing Economies, 41 (3), 309–339. Crossref, Web of Science, Google Scholar
Yu, PY and BV Luu [2003] Banking mergers: The impact of financial liberalization on the Taiwanese banking industry. Review of Quantitative Finance and Accounting, 20, 385–413. Crossref, Google Scholar