This paper tests the hypothesis that banks with more risky loans and higher interest-rate risk exposure would select loan and deposit rates to achieve higher net interest margins. Call Report data for different size classes of banks for 1989–1993 show that the net interest margins of commercial banks reflect both default and interest-rate risk premia. The net interest margins of money-center banks are affected by default risk, but not by interest rate risk, which is consistent with their greater concentration in short-term assets and off-balance sheet (OBS) hedging instruments. By contrast, (super-) regional banking firms are sensitive to interest-rate risk but not to default risk. The data show that OBS activities promote a more diversified, margins-generating asset base than deposit- or equity-financing, and that cross-sectional differences in interest-rate risk and liquidity risk are related to differences in OBS exposure.

Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking

This study analyses the interest margin in the principal European banking sectors (Germany, France, the United Kingdom, Italy and Spain) in the period 1993–2000 using a panel of 15,888 observations, identifying the fundamental elements affecting this margin. Our starting point is the methodology developed in the original study by Ho and Saunders [Journal of Financial and Quantitative Analysis XVI (1981) 581–600] and later extensions, but widened to take banks' operating costs explicitly into account. Also, unlike the usual practice in the literature, a direct measure of the degree of competition (Lerner index) in the different markets is used. The results show that the fall of margins in the European banking system is compatible with a relaxation of the competitive conditions (increase in market power and concentration), as this effect has been counteracted by a reduction of interest rate risk, credit risk, and operating costs.

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Factors Explaining the Interest Margin in the Banking Sectors of the European Union

The determinants of bank interest rate margins: an international study

This study investigates how Australian asset revaluations are associated with share prices and non market-based firm value estimates. We find that revalued financial, tangible, and intangible assets can be value-relevant. Although prior research presages the financial assets findings, the intangible assets findings are striking in strength and consistency. Findings for property, plant, and equipment are less consistent. Also, we find stronger value-relevance for plant and equipment than for property, suggesting revalued operating assets are more value-relevant. Perhaps surprisingly, the market does not distinguish director- and independent appraiser-based valuations, consistent with directors' enhancing value estimates by using their private information countervailing distorting effects associated with management discretion. Also, even several year old revalued amounts are value-relevant, suggesting timeliness is not critical for long-term asset revaluations. Finally, evidence indicates that investors value differently upward and downward revaluations, suggesting the discretionary nature of asset write-ups can affect value-relevance.

Revalued Financial Tangible, and Intangible Assets: Associations with Share Prices and Non Market-Based Value Estimates

Four foreign exchange spot rate series, recorded on an hourly basis for a six-month period in 1986 are examined. A seasonal GARCH model is developed to describe the time-dependent volatility apparent in the percentage nominal return of each currency. Hourly patterns in volatility are found to be remarkably similar across currencies and appear to be related to the opening and closing of the worlds major markets. Robust LM tests designed to deal with the extreme leptokurtosis in the data fails to uncover any evidence of misspecification or the presence of volatility spillover effects between the currencies or across markets.

Intra-Day and Inter-Market Volatility in Foreign Exchange Rates

A theoretical model of the determination of trading bank interest margins, based on the hedging theory of interest margin determination, is tested on time series cross-section data of Australian trading banks. Generally, the results are consistent with that theory. That is, there exists a stable non-linear relationship between Australian trading bank net loan/deposit interest margins and measures of market power, degree of absolute risk aversion, and to interest rate uncertainty. Furthermore, the shift from business sector to personal sector loan and deposit business is associated with increased bank interest margins.

A time series/cross section analysis of the determinants of Australian trading bank loan/deposit interest margins: 1962–1981

Risk and regulation: An empirical test of the relationship

Several recently reported studies have considered whether changes in accounting methods by firms whose securities are publicaly traded have led to any discernible response in the form of shifts in share prices. (I) These studies have been framed in differing terms, and have looked at share price movements under a variety of conditions. But a common finding has been that changes in accounting methods do not appear to have had much of an effect on stock market prices. This paper presents some evidence of changes in accounting method which lead to shifts in stock prices. It describes an examination of movements in share prices of a sample of relatively large Australian public companies which announced upward asset revaluations during the period 1960-70. This examination revealed that announcements of asset revaluations were associated with substantial upward movements in stock prices, and that these shifts in stock prices were generally sustained in the post-announcement months. Furthermore, the stock market appears to digest this new information quickly into stock prices as the adjustment was almost complete at the close of the announcement month. Further analysis suggested that the observed movements in stock prices could not be attributed entirely to such additional information signals as earnings and dividend changes. Nor were the results explained by induced changes in volatility which could conceivably result from the release of revaluation information. Given that the revaluations reflected changes in the worth of assets which had predominantly taken place but had not been recorded during prior accounting periods, then the findings are consistent with claims that the failure of accounting to systematically provide contemporary information about the affairs of firms can deprive the stock market of valuable information and lead to the inequitable treatment of individual investors.

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Asset Revaluations and Stock Market Prices

W N announcing the Financial Systems Inquiry on 30 May 1996, Australia’s ComI monwealth treasurer (1996) referred to the need for specific recommendations -A^on a number of topics, including the establishment of ‘a consistent regulatory framework for similar financial functions, products or services . . . This reference reflects a very strong current interest in the ‘functional’ approach to regulation, which Merton (1995) defines as the similar regulatory treatment of economically equivalent transactions. Several factors have contributed to this interest, including an emerging view that technological developments and financial innovation have stripped banks of their piv­ otal position in the financial system. Indeed, banks currendy do little that is not also done either by financial markets or non-bank financial institutions (NBFIs). Moreo­ ver, with the development of financial derivatives, such as options and swap contracts, traditional institutional categories are becoming quite arbitrary. Financial innovations have also increased competition in financial markets. In the mortgage market, improvements in communications and information technology, along with flic development ol securitisation, have made it possible for loans to be generated and serviced by institutions different from those that fund them. In Austra­ lia, diis has resulted in a loss ol business for, and pressure on the profitability of, banks and building societies, the traditional mortgage lenders. I he erosion of the distinctions between various participants in Australian financial markets has been accelerated by the introduction of compulsory superannuation payments for all die workf orce. The effect has been to restrict die supply of retail de­ posits to banks and to increase banks’ demand for wholesale deposits where pricing and quantity supplied reflect asset allocadons by funds managers. Segmentation of the market for retail funding reflects the previous prohibition, now to be relaxed, on banks bidding direedy for superannuation funds by offering special retirement savings accounts. The prohibition encouraged banks to expand their activities into insurance and funds management through subsidiaries. At the same time, insurance companies have expanded into traditional banking activities: for example, Colonial Mutual Group

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Prudential Regulation of the Financial System: A Functional Approach

Recent contributions to the theory of regulation have suggested the possibility of discriminatory regulation affecting risk and profits of firms subject to public intervention. This paper examines risk and wealth effects associated with Australian banking regulation. Support is found for the Peltzman and Edwards and Heggestad hypothesis that regulation reduces risk and for Johnson's hypothesis that statutory reserve deposit requirement policy involves an implicit tax on bank shareholders.

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Ian G. Sharpe

Papers

A time series/cross section analysis of the determinants of Australian trading bank loan/deposit interest margins: 1962–1981

Risk and regulation: An empirical test of the relationship

Asset Revaluations and Stock Market Prices

Prudential Regulation of the Financial System: A Functional Approach

Regulation, Risk and the Pricing of Australian Bank Shares, 1957–1976*