BANK3011-BANK3011代写
时间:2023-04-18
Ownership and stability: How does foreign
ownership affect bank credit risk in the
Australian financial market?
BANK3011 Research Proposal  
2020 Semester 1, University of Sydney Business School  
Abstract
This paper investigates the effect of foreign ownership on the credit risk of
Australian banks by analysing bank-level panel data from 2000-2018. In
line with the concentration-stability and global advantage hypotheses, this
report proposes a negative relationship between foreign ownership and bank
risk, where a higher level of foreign shareholdings enhances financial
stability within Australia’s concentrated banking sector.
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Introduction:
Over the past two decades, banks have become ever more global. Within Australia, foreign
investors hold between 20-30% of all ordinary shares in the four major banks (ANZ, 2019;
CBA, 2019; NAB, 2019; Westpac, 2019). Given that these four banks dominate 80% of
market share – a rare phenomenon among developed nations (Bullock, 2017), does this
expose Australian banks to higher levels of credit risk?
Previous literature has produced conflicting results. Some studies find that foreign banks
improve the efficiency of the local banking system, accelerating economic growth and
reducing financial instability (Demirgüç-Kunt et al., 1998). Others conclude that foreign-
owned banks have a higher risk profile and engender a trade-off between better capitalisation
and financial stability (Chen et al., 2017). However, the impact of foreign bank ownership in
developed economies remains relatively unexplored, and no paper has focused solely on
Australia’s unique condition. Yet differing bank characteristics and market conditions mean
it would be insufficient to conclude that results from another study also apply to Australia.
This paper differs from prior research in numerous ways. Firstly, it contributes to the strand
of literature exploring the link between market control and the bank risk-taking channel by
examining how this alters given foreign shareholdings. Further, it makes an extension to the
pool of literature addressing foreign ownership. With the majority of research comparing
bank performance with a focus on foreign bank entry as an independent entity, this paper
expands previous studies by assessing the risk faced by Australian banks with foreign equity.
The findings of this research have important policy implications, especially in the current
adverse economic climate. Insight into the impact of foreign influence on banks will assist
policymakers in optimal policy design to stabilise the Australian financial sector.
Determining what drives credit risk levels within foreign-owned banks also enhances the
monitoring process, increasing transparency and mitigating the impact of exogenous shocks.

This remainder of this research proposal is structured as follows. The literature review will
provide an overview of extant theoretical and empirical research on this topic. This will be
followed by the hypothesis and methodology, which will outline the model, describe the data
sources, and define the test variables. Discussions on potential challenges will conclude.
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Literature Review:
There have been extensive research investigating the impact of market structure on bank risk.
The concentration-stability view posits that highly concentrated banks are more diversified,
maintain a higher franchise value, and build up capital buffers in response to shocks. Higher
profits mean they face less incentive to take excessive risk, reducing the moral hazard
problem. Conducting a cross-country assessment, Beck et al. find evidence of a negative
relationship between market concentration and financial crisis, suggesting “crises are less
likely in more concentrated banking systems” (2006, p. 1584). Shim (2019) also finds a
negative correlation between market concentration and bank insolvency risk in the US, where
“diversifying banks in highly concentrated markets are likely to have more financial
stability” (2019, p. 113) given varying income streams that reduce idiosyncratic risk.
Conversely, the concentration-fragility view argues that highly concentrated banks become
‘too-big-to-fail’, where governments and regulators provide subsidies to protect large
financial institutions against losses and avoid strains on the entire financial system. This
distorts banks’ risk-taking incentives and exacerbates the moral hazard problem, displaying
how “the presence of larger institutions presents a danger to the safety and soundness of the
financial system” (Mishkin, 1999, p. 680). Additionally, Boyd and De Nicoló find evidence
of a risk-shifting effect, where, “as competition declines banks earn more rents in their loan
markets by charging higher loan rates” (2005, p. 1330), implying higher bankruptcy risk for
borrowers and inducing borrowers pursue riskier activities to make up the profit shortage.
Meanwhile, Martinez-Miera and Repullo find another margin effect caused by concentration,
where greater market control means higher loan rates charged, and thus higher revenue from
performing loans that can buffer against capital losses. They find “that the risk-shifting effect
tends to dominate in monopolistic markets, whereas the margin effect dominates in
competitive markets, so a U-shaped relationship . . . generally obtains” (2010, p. 3662).
Moreover, a related strand of research examines the impact of foreign penetration in domestic
markets. The home advantage hypothesis, which favours the concentration-fragility view, is
supported by Chen et al. (2017), who study 32 emerging economies to conclude that although
foreign banks have a sounder financial profile and greater access to international capital, they
are 30% riskier than their domestic counterparts due to information disadvantages, agency
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problems, flow-on risk from the parent organisation, as well as disparities between different
macroeconomic environments. Levy Yeyati and Micco also find that foreign banks face a
higher risk profile, because their higher charter values created a “disciplining effect . . .
[which] exerted a positive influence on banking sector fragility” (2007, p. 1643).
On the other hand, Demirgüç-Kunt et al. find that foreign banks “lower the probability that a
country will experience a banking crisis . . . improve the efficiency of the domestic banking
system . . . [and] accelerate long-run economic growth” (1998, p. 2). In a study in Korea, they
find that “non-performing loans as a share of total loans fell by 85 percent” (p. 18) due to
foreign bank entry. This supports the global advantage hypothesis, which proposes foreign
banks bring advantages such as global reach and advanced technologies, thus lowering risk.
Lensink and Hermes (2004) find mixed results in their study, where local banks within less
advanced economies incur higher costs if they implement the modern techniques introduced
by foreign banks, which is passed on to borrowers through higher spreads. Conversely, for
more developed economies, competitive pressure makes domestic banks “feel the need to
reduce costs and become more efficient in an effort to keep their market shares” (2004, p.
565). Meanwhile, Lee and Hsieh analyse data from 27 Asian countries to find “an inverse U-
shaped relation between foreign ownership and financial stability” (2014, p. 221). Although
the majority of their evidence supports the home advantage hypothesis, this is mitigated by
the lower levels of interest rate control and bank supervision that permeate in mature
economies, which create a global advantage and enhance financial stability. Measuring Latin
American banks, Peria et al. (2004) find that although large, profitable foreign banks offer
lower interest margins and reduce spreads throughout the banking system, this effect is
undermined by the fact that “greater concentration raises spreads” (2004, p. 535).
Thus, despite various bodies of research, the impacts of foreign ownership on domestic banks
remain ambiguous. The endogeneity of market concentration on the effect of foreign
ownership on bank risk further poses an interesting avenue of research for this report.
Hypothesis:
This paper suggests that Australia’s high banking market concentration leads to heightened
financial stability. Although evidence remains disputed, Shim’s finding of concentration-
stability in a study of US banks is considered most comparable to Australia due to similar
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regulatory environments. Additionally, this paper hypothesises a global advantage in
Australia, where foreign entry reduces risk for the financial sector. This is in line with the
findings of Lensink and Hermes, who conclude that developed economies see lower spreads
precipitated by foreign bank influences, as well as Lee and Hsieh who find a possible global
advantage in mature economies. Therefore, the null and alternate hypotheses are as follows:
H0: Foreign ownership has a negative impact on bank risk
H1: Foreign ownership has a positive or statistically insignificant impact on bank risk
Methodology:
This report will use Australian bank-level panel data between 2000-2018. The timeframe is
defined to capture effects after deregulation, whilst also ensuring a large sample to reduce the
risk of omitted variable bias. Using panel data is more informative than time-series or cross-
sectional data, because it contains both these dimensions and can be used to model time-
invariant unobserved effects as well as lagged responses. In the sample, only commercial
banks will be included to prevent potential biases from varying bank specialisations. Further,
only data within Australia will be obtained to “attain greater homogeneity in the legal and
regulatory environment” (Shim, 2019, p. 104). Relevant data will be sourced from the
Australian Bureau of Statistics, the Reserve Bank of Australia and the Bloomberg databases,
as well as bank share register profiles and shareholder information in bank annual reports.
A fixed effects econometric model will be used. This addresses possible endogeneity
concerns in Ordinary Least Squares methods by removing the unobserved fixed effect,
assuming idiosyncratic errors are serially uncorrelated. The model is as follows:
Riskit = a + bForeignit + g1Sizeit + g2Liquidit + g3Leverageit + g4Diversificationit +
d1GDPit + d2Inflationit + d3Ratesit + fConcentrationit + ni + eit
Here, the dependent variable is the indicator of bank risk faced by bank i in year t. Following
Chen et al. (2017)’s example, this will be measured by the Z-score, which is defined as:
=   + ()
This gives insight into what drives bank risk through the three components of bank
profitability (return on assets), leverage (equity over assets) and asset portfolio risk (standard
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deviation of return on assets). A lower Z-score indicates higher risk. Furthermore, consistent
with the approaches of Chen et al. (2017) and Levy Yeyati and Micco (2007), the NPL ratio
(non-performing loans to total outstanding loans) is included as an alternative indicator of
bank-risk. An ex-post measure of default rate, this allows for a robustness test of the results
to determine whether different econometric models produce varying results.
Foreignit measures the proportion of foreign ownership in a bank. The test statistic
constructed from its coefficient b will be the primary focus of this study.
Bank-specific characteristics are incorporated as control variables. Mishkin (1999) suggests
larger banks have greater risk-incentives, whereas Altunbas et al. find that “large, liquid and
well-capitalized banks are better able to buffer their lending activity” (2010, p. 126). Thus,
the impacts of size (total assets), liquidity (liquid to total assets) and capitalisation (capital to
assets) are included to control for these effects. Shim (2019) also argues loan diversification
has a positive effect on bank stability. Using Shim’s example, a Herfindahl-Hirschman index
(HHI) is used to measure diversification, with loans classified into five sectors: consumer,
real estate, commercial and industrial, agricultural, and other.   = 2 78 +  2 78 + 2 &78 + 2 78 + 2ℎ 78
Taking 1 – HHI yields the loan portfolio diversification, where a “higher value indicates that
the bank engages in a combination of various loan-making activities” (Shim, 2019, p. 107).
Economic factors controlled for include GDP growth, inflation, and interest rates. Especially
in the current environment, potential endogenous effects of unconventional monetary policy
and business cycle downturn on other variables could arise.
Concentrationit is a measure of market concentration in the Australian banking sector.
Consistent with previous studies (for example, Chen et al., 2017), the Lerner index is used as
a proxy for market competition, and is constructed as follows: =   >?@A>
A value approaching 1 indicates greater concentration.
ni is the time-invariant bank-specific unobserved effect, and eit is the idiosyncratic error.
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Discussion:
While the model aims to control for different factors, there is a trade-off between relevance
and reliability. Over-specifying raises sample variance and reduces the efficiency of the
estimators, yet too few variables could result in omitted variable bias and erode the reliability
of results. As the data obtained are secondary, the accuracy with which they were collected
remains ambiguous. Further, while inferences with the fixed effects estimator resolves
endogeneity, they could potentially be sensitive to heteroskedasticity, which then needs to be
addressed through heteroskedasticity-robust test statistics. Overall, these limitations should
be considered when analysing the results.
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References:
Altunbas, Y, Gambacorta, L & Marques-Ibanez, D 2010, ‘Bank risk and monetary policy’,
Journal of Financial Stability, vol. 6, pp. 121-129.
ANZ 2019, 2019 Annual Report, viewed 10 May 2020,
https://www.anz.com/content/dam/anzcom/shareholder/ANZ-2019-Annual-Report.pdf
Beck, T, Demirgüç-Kunt, A & Levine, R 2006, ‘Bank concentration, competition, and crises:
First results’, Journal of Banking and Finance, vol. 30, pp. 1581-1603.
Boyd, JH & De Nicoló, G 2005, ‘The Theory of Bank Risk Taking and Competition
Revisited’, Journal of Finance, vol. 60, no. 3, pp. 1329-1343.
Bullock, M 2017, ‘Big Banks and Financial Stability’, Speech presented at the Economic and
Social Outlook Conference, Reserve Bank of Australia, NSW, 21 July.
Chen, M, Wu, J, Jeon, BN & Wang, R 2017, ‘Do foreign banks take more risk? Evidence
from emerging economies’, Journal of Banking and Finance, vol. 82, pp. 20-39.
CBA 2019, 2019 Annual Report, viewed 10 May 2020,
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-
reports/CBA-2019-Annual-Report.pdf
Demirgüç-Kunt, A, Levine, R & Min, H 1998, ‘Opening to foreign banks: issues of
efficiency, stability, and growth.’ In: Seongtae, Lee (Ed.), The Implications of Globalization
of World Financial Markets. The Bank of Korea, Korea, pp. 83–105.
Martinez-Miera, D & Repullo, R 2020, ‘Does Competition Reduce the Risk of Bank
Failures?’ Review of Financial Studies, v. 23, n. 10, pp. 3638-3664.
Mishkin, FS 1999, ‘Financial consolidation: Dangers and opportunities’, Journal of Banking
and Finance, vol. 23, pp. 675-691.
NAB 2019, Annual Financial Report 2019, viewed 10 May 2020,
https://www.nab.com.au/content/dam/nabrwd/documents/reports/corporate/2019-annual-
financial-report-pdf.pdf
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Lee, C-C & H, M-F 2014, ‘Bank reforms, foreign ownership, and financial stability’, Journal
of International Money and Finance, vol. 40, pp. 204-224.
Lensink, R & Hermes, N 2004, ‘The short-term effects of foreign bank entry on domestic
bank behaviour: Does economic development matter?’, Journal of Banking and Finance, vol.
28, pp. 553-568.
Levy Yeyati, E & Micco, A 2007, ‘Concentration and foreign penetration in Latin
American banking sectors: impact on competition and risk’, Journal of Banking and Finance,
vol. 3, pp. 1633–1647.
Peria, M, Soledad, M & Mody, A 2004, ‘How Foreign Participation and Market
Concentraiton Impact Bank Spreads: Evidence from Latin America’, Journal of Money,
Credit, and Banking, vol. 36, no. 3, part 2, pp. 511-537.
Shim, J 2019, ‘Loan portfolio diversification, market structure and bank stability’, Journal of
Banking and Finance, vol. 104, pp. 103-115.
Westpac 2019, 2019 Annual Report, viewed 10 May 2020,
https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2019_Westpac_
Group_Annual_Report.pdf

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