| Abstract | This thesis examined the effect of antitrust law and bank concentration on European and North American bank performance and managerial slack. This study empirically investigated the interrelated issues of antitrust policy, competition, and corporate governance and showed their significant roles in maximising shareholder wealth. Our analysis also examined the impact of concentration, antitrust law, internal corporate governance, and bank-specific and macro-economic factors on European and North American banking industry performance. With attention to E.U. commercial banks (1998-2014), European savings banks (2001-2014), European cooperative banks (2005-2014), United States commercial banks, Canada commercial banks, and European/North-American listed commercial banks (Part A – Data analysis with no governance variable [1995-2018]; Part B – Data with governance variables [2006-2018]).
The higher level of property and agricultural loans, loan loss allowance, loan charges off, and non-performing loans to total asset ratio contributed to United States commercial bank failures (Alali and Romero, 2012). Also, in years leading to the 2007-09 financial crisis, banks failed to comply with the minimum capital requirements for risk-weighted capital ratio, and many banks held an excessive level of capital on the balance sheet above the minimum regulatory threshold (Lindquist, 2004; Jokipii and Milne, 2008; Ayuso et al., 2004). The holding of excessive capital buffer signified managerial risk aversion, under-investment, and reduced bank competitiveness. This study investigated how antitrust policy helped increase bank competitiveness and profitability in the European Union and North America. Our study found evidence that antitrust policies increased bank profitability and minimised managerial slack. In addition, many studies showed that the management ownership structure aligned the managers' interests with that of the shareholders (Saunders et al., 1990; Gorton and Rosen, 1995; Houston and James, 1995).
Our study explored new empirical evidence for the nineteen European listed and unlisted banks with different bank specialisations. Bank profitability is proxied by return-on-average-equity, return-on-equity, and equity returns, which are the dependent variables in this study. The explanatory variables considered are bank-specific, macro-economic, internal corporate governance proxies, age, bank concentration, antitrust law, and financial crisis dummy variables. We utilised different panel data estimators (such as pooled ordinary least, between estimator, population average, fixed effects, first differences, and random effects estimators) and other estimation techniques (probit/logit regression, principal-component-analysis, difference-in-difference (DID) estimation, and instrumental variable regression) to examine the causal effect of bank longevity, antitrust policy, bank concentration, internal corporate governance, bank-specific factors, macro-economic factors and dummies of year, country and specialisation on bank profitability. The difference-in-difference estimation assists in exploring the effects of concentration (HHI) interaction with antitrust policy and governance measures on bank performance. We also examined the effects of other explanatory variables and interactions on managerial slack.
Our fixed effect analysis showed that liquidity ratio, cost-income ratio, net-loan-to-total-asset, non-earning-assets-to-total-asset, asset utilisation, income diversification (BAAM), inflation, and credit risk had significant beneficial effects on cooperative bank performance. However, certain interactions (mHHIxAge, lHHIxAge), bank-specific (age, total-earning-asset-to-total-asset, capital-fund-liabilities, burden-total-asset) and macro-economic factors (GDP per capita) have significant and negative effects on EU co-operative banks performance. The bank-specific, exogenous factors (anti-trust-policy), and macro-economic factors that positively influence savings banks' performance are, for ROAE, Age-HHI-interactions, antitrust-policy, and total assets. On the other hand, the following explanatory factors negatively influenced E.U. saving bank performance, GDP per capita, credit risk, market share, net-loan-to-total-asset (NLTA), and cost-income ratio. The following bank-specific and exogenous factors improved European commercial bank performance. For ROAE, we confirmed antitrust-policy, capital-funding-liabilities (CFL), burden-total-asset, asset utilisation, income diversification (BAAM). The capital strength, cost-income ratio, and financial crisis adversely influenced European commercial bank performance. The United States commercial banks shared a similar beneficial influence of antitrust policy and CFL on profitability. Our random effect analysis showed that liquidity ratio, CFL, NEATA, and asset utilisation influenced Canada's commercial bank beneficially. On the other hand, average bank concentration, capital strength, cost-income ratio, and credit risk hampered Canadian commercial bank performance.
According to the managerial slack (QLTTTA) findings, our random-effects modelling of European cooperative banks showed age, average concentration, high-concentration-age interaction, CFL, overheads, total assets, market share, GDP per capita, and financial crisis reduced managerial slack significantly. On the other hand, high-HHI, liquidity ratio, cost-income, NLTA, BURDENTA, TEATA, NEATA, asset utilisation (AU), BAAM, inflation, and credit risk significantly increased cooperative bank managerial slack. Our fixed effect analysis of United States commercial banks showed that antitrust policy, ETA, inflation, government debt significantly reduced managerial slack. The effect of age and total assets on QLTTTA is similar to our European cooperative bank findings. The adverse effects of our control variables on managerial slack follow the same pattern as European cooperative banks in some respect.
For listed commercial banks, our fixed effect modelling showed that the loan-loss-reserve, capital expenditure, and the interaction of low HHI with structural changes in antitrust policy significantly minimised the likelihood of negative return-on-equity. The marginal effect analysis also confirmed that the structural change in antitrust policy at low bank concentration minimised the possibility of negative ROE empirically and graphically. The DID analysis also confirmed that the interaction of high HHI with the structural change in antitrust policy and dividend-per-share significantly increased listed bank ROE. The probit/logit analysis showed that earnings-per-share, board-specific skills, and the interaction of high-HHI with the independent board members significantly reduce the likelihood of negative returns. As the non-executive total compensation increased, the marginal effects of independent board members on the probability of negative returns increased. Our thesis implied that the non-executive board members must be optimally incentivised to ensure effective oversight.
This thesis contributed to previous bodies of empirical studies on bank efficiency and profitability in four ways. Firstly, we measure bank concentration proxied by the Herfindahl-Hirschman-Index method on total assets [chapter 4 and 5], return-on-invested-capital [Chapter 6 Part A], and price [Chapter 6 Part B]. Secondly, we assumed the interaction of bank concentration with antitrust policy and the interaction of concentration with corporate governance proxies had not been explored at the time of this study. The first empirical chapter examined the impact of the HHI-Antitrust law on bank performance and managerial slack. The process of interacting governance proxies with competition measures contributed to policy efforts to improve corporate governance. Finally, this study contributes to the literature by examining the impact of income diversification as part of the control variables on bank performance.
This study presents conclusive findings on changes in bank performance around the antitrust policy in European and North American banks. The coefficients of the antitrust policy dummy (AT2004) for European commercial banks, United States commercial banks, and European savings banks are positive and significant, which implies that the antitrust policy significantly increased return-on-average-equity. The findings provided a contrasting view to Giroud and Mueller (2010) that empirically showed that business combination laws significantly minimised return-on-asset in North American banks. As expected, the results are not homogeneous in the European Union. For instance, the antitrust policy was not significant for Cypriot commercial banks and significantly negative for the returns on assets of Swedish savings banks. The negative effects of antitrust policy on bank performance may explain the less competitive banking industry in Cypriot and the European savings banks are generally less competitive than commercial banks.
In previous studies, the impact of HHI and business-law interaction on managerial quiet life had been explored in the United States (Giroud and Mueller, 2010). Their analysis indicated overhead, input, and real incomes surge due to business law introductions. There is a significant positive relationship between the HHI-BC-Law interaction and some quiet life proxies in non-competitive industries, i.e., the ratio of overhead costs to total assets; the cost of goods sold to sales; and the ratio of real wages to the number of employees, deflated by inflation. This type of research had not been conducted in Europe, and there are no comparative studies on North American Banks and Europe. In Table 19, 22-24, our findings are similar to Giroud and Mueller's (2010) study. Structural changes since the antitrust regulatory changes only significantly increased the negative ROE or the likelihood of poor bank performance.
Contrary to Giroud and Mueller's findings, there is a significant negative relationship between the antitrust policy and QLTTTA (for European savings banks, U.S. commercial banks), while previous studies found no link. Our findings indicated that the overheads and employee wages decreased due to antitrust laws for less competitive and competitive banking industries. QLPEE (Ratio of personnel expenses to no of employees, deflated by CPI) – In support of previous literature (Bertrand and Mullainathan, 1999; 2003; Giroud and Muller, 2010), our REM model findings found a positive relationship between U.S. commercial banks QLPEE and antitrust policy. |
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