The effect of holding company affiliation on bank risk and the 2008 financial crisis

Abstract

Purpose The organizational form of financial institutions is related to their level of risk, leverage, liquidity and capitalization. High level of risk and leverage and lower levels of liquidity and capitalization are considered to be the root causes of the 2008 financial crisis. The purpose of this paper is to investigate if banks affiliated to holding company structure contributed more to the root causes of crisis than unaffiliated banks. Design/methodology/approach The paper isolates the effect of holding company association by restricting the sample to one-bank holding companies and individual banks. A comparative analysis of independent and holding company-affiliated banks is performed. Univariate analysis and multivariate regressions are used to compare the risk, leverage, liquidity and capitalization of affiliated and independent banks. Findings The paper finds that holding company affiliation is linked to several root causes of the 2008 financial crisis. Specifically, holding company affiliation results in higher levels of home mortgage loans underwritten and underperforming, higher leverage, lower liquidity and lower capitalization for the subsidiary bank. Practical implications The paper demonstrates that affiliated banks use their higher leveraged positions to engage in riskier home mortgage lending, sacrificing both liquidity and capital adequacy. These findings can help policy makers to focus on the group of banks that are part of holding company affiliation and implement such policies and regulations so as to avoid any re-occurrence of financial crisis. Originality/value This paper is the first to link the structural differences in banks to the root causes of financial crisis and to isolate the effect of holding company affiliation through sample selection. The paper will be valued to other researchers who try to isolate the effect of holding company affiliation and those studying the causes of the financial crisis of 2008.

Banking Finance Experts Consensus on Compliance in US Bank Holding Companies: An e-Delphi Study

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Does promoters’ holding influence the liquidity risk of banks?

“…This global failure of the giant banks has given a reality check on the existing baking regulations. The core idea behind Basel III was to strengthen the banking sector in such a way that it would be able to maintain stability and absorb the shocks brought on by economic and financial crises (Ting, 2017; Dandapani et al, 2017). Starting on April 1, 2010, banks were advised to internally assess their preparedness for moving to advanced techniques, particularly the internal models approach (IMA) for market risk and the standardized approach (TSA) for operational risk.…”

Perbedaan Kredit Bermasalah Dan Kelancaran Kas Berdasarkan Kepemilikan Bank Perkreditan Rakyat

“…Tingkat pengawasan pada BPR-LKP yang menggunakan proksi non performing loan (NPL), ternyata pasca dilakukannya merger justru kredit bermasalah yang dihadapi BPR-LKP jauh semakin semakin besar. Dandapani et al (2017) menegaskan hal tersebut terjadi karena likuiditas dan modal bank yang merger lebih kecil. NPL merupakan sumber masalah dalam BPR karena menurunnya pendapatan dan sekaligus menyebabkan penurunan nilai kas dalam hal ini likuiditasnya.…”