South Asian Journal of Management

Open Access Open Access  Restricted Access Subscription Access
Open Access Open Access Open Access  Restricted Access Restricted Access Subscription Access

Non-Banking Activities of Commercial Banks under Financial Deregulation in Developing Countries: Evidence from Bangladesh


Affiliations
1 Department of Finance, University of Chittagong, Chattogram-4331, Bangladesh
2 College of International Management, Ritsumeikan Asia Pacific University, 1-1 Jumonjibaru, Beppu, Oita,, Japan
     

   Subscribe/Renew Journal


The separation between banking and non-banking activities was withdrawn in 2009 in Bangladesh, following which the stock market has experienced the development of the biggest bubble and its eventual bursting in 2010-2011. This study aims at evaluating the non-banking activities of commercial banks by highlighting the causes behind the accelerated use of such activities under financial deregulation and their after-effects. The shrinking of the spread margin under an intensified level of competition encourages banks to accelerate the nonbanking activities. Moreover, the withdrawal of the separation hinders the well-functioning of the financial sector including the banking sector by amplifying the fundamental principalagent and moral hazard problems; by creating conflict of interest between central bank and Bangladesh Securities and Exchange Commission (BSEC); by eroding the regulatory structure of the central bank for monitoring and supervision of the banking sector; and by hampering the objective of financial deepening under financial deregulation. The banking sector regulator needs to consider the associated bad consequences of the withdrawal of the separation between banking and non-banking activities of commercial banks in a developing country like Bangladesh.

Keywords

Bangladesh, Bank Subsidiary, Conflict of Interest, Financial Deregulation and Non-banking Income.
User
Subscription Login to verify subscription
Notifications
Font Size

  • Allen, L., & Jagtiani, J. (2000). The risk effects of combining banking, securities, and insurance activities. Journal of Economics and Business, 52, 485-497.

  • Arestis, P., Demetriades, P. O., & Luintel, K. B. (2001). Financial development and economic growth: The role of stock markets. Journal of Money, Credit and Banking, 33(1), 16-41.

  • Bangladesh Bank. (2012). Annual report 2011-2012. Dhaka, Bangladesh: Bangladesh Bank.

  • Barth, J. R., Caprio, G., & Levine, R. (2004). Bank regulation and supervision: What works best? Journal of Financial Intermediation, 13, 205-248.

  • Beim, D. O., & Calomiris, C. W. (2001). Emerging financial markets (International ed.). Singapore: McGraw-Hill.

  • Berger, A. N., Demsetz, R. S., & Strahan, P. E. (1999). The consolidation of the fnancial services industry: Causes, consequences, and implications for the future. Journal of Banking and Finance, 23, 135-194.

  • Bhargava, R., & Fraser, D. R. (1998). On the wealth and risk effects of commercial bank expansion into securities underwriting: An analysis of Section 20 subsidiaries. Journal of Banking and Finance, 22, 447-465.

  • Blass, A. A., & Grossman, R. S. (1998). Who needs Glass-Steagall? Evidence from Israel’s bank shares crisis and the Great Depression. Contemporary Economic Policy, 16, 185-196.

  • Boot, A. W. A. (2011). Banking at the crossroads: How to deal with marketability and complexity? Review of Development Finance, 1(3-4), 167-183.

  • Boot, A. W. A., Gopalan, R., & Thakor, A. V. (2008). Market liquidity, investor participation, and managerial autonomy: Why do firms go private? The Journal of Finance, 63(4), 2013-2059.

  • Boyd, J. H., Graham, S. L., & Hewitt, R. S. (1993). Bank holding company mergers with nonbank financial firms: Effects on the risk of failure. Journal of Banking and Finance, 17, 43-63.

  • Chiarella, C., Flaschel, P., Hartmann, F., & Proano, C. R. (2012). Stock market booms, endogenous credit creation and the implications of broad and narrow banking for macroeconomic stability. Journal of Economic Behavior and Organization, 83(3), 410-423.

  • Czyrnik, K., & Klein, L. S. (2004). Who benefits from deregulating the separation of banking activities? Differential effects on commercial bank, investment bank, and thrift stock returns. The Financial Review, 39, 317-341.

  • Degryse, H., & Ongena, S. (2008). Competition and regulation in the banking sector: A review of the empirical evidence on the sources of bank rents. In A. V. Thakor., & A. W. A. Boot. (Eds.), Handbook of financial intermediation and banking (pp. 483-554). UK: Elsevier B.V.

  • Deidda, L., & Fattouh, B. (2008). Banks, financial markets and growth. Journal of Financial Intermediation, 17, 6-36.

  • Edwards, F. R. (1979). Banks and securities activities: Legal and economic perspectives on the Glass-Steagall Act. In L. G. Goldberg., & L. J. White. (Eds.), The Deregulation of the banking and securities industries (pp. 273-291). Lexington, Massachusetts: Lexington Books.

  • Ekerete, P. P. (2005). Marketing of financial services: A case study of selected merchant banks in Nigeria. Pakistan Economic and Social Review, 40(2), 271-287.

  • Fry, M. J. (1997). In favor of financial liberalization. The Economic Journal, 107, 754-770.

  • Gande, A. (2008). Commercial banks in investment banking. In A. V. Thakor & A. W. A. Boot (Eds.), Handbook of financial intermediation and banking (pp. 163188). UK: Elsevier B.V.

  • Hellmann, T. F., Murdock, K. C., & Stiglitz, J. E. (2000). Liberalization, moral hazard in banking, and prudential regulation: Are capital requirements enough? The American Economic Review, 90(1), 147-165.

  • IMF. (2011). Bangladesh: 2011 article IV consultation. IMF Country Report No.11/314, 1-44. Retrieved from http://www.imf.org/external/pubs/ft/scr/2011/cr11314.pdf.

  • Jahur, M. S. (2010). Stock market review 2010: Some important aspects. Portfolio: A Review of Capital and National Economy by Chittagong Stock Exchange, OctoberDecember, 57-63. Retrieved from http://www.cse.com.bd/download/portfolio/Oct10Dec10%20portfolio.pdf.

  • Krishnan, K. (2012). Commercial banks getting underwriting business: Tying or business building? Journal of Economics and Business. doi: 10.1016/j.jeconbus.2012.12.001

  • Kroszner, R. S., & Rajan, R. G. (1997). Organization structure and credibility: Evidence from commercial bank securities activities before the Glass-Steagall Act. Journal of Monetary Economics, 39, 475-516.

  • Laeven, L., & Levine, R. (2007). Is there a diversification discount in financial conglomerates? Journal of Financial Economics, 85(2), 331-367.

  • Mishkin, F. S. (2001). Prudential supervision: Why is it important and what are the issues? In F. S. Mishkin (Ed.), Prudential supervision: What works and what doesn’t (pp. 1 - 30). Chicago: The University of Chicago Press.

  • Perera, S., Skully, M., & Wickramanayake, J. (2006). Competition and structure of South Asian banking: A revenue behaviour approach. Applied Financial Economics, 16(11), 789-801.

  • Pill, H., & Pradhan, M. (1997). Financial liberalization in Africa and Asia. Finance and Development, 34(2), 7-10.

  • Puri, M. (1996). Commercial banks in investment banking: Conflict of interest or certification role? Journal of Financial Economics, 40, 373-401.

  • Ratner, D. L. (1979). Deregulation of the intersection of the banking and securities industries. In L. G. Goldberg & L. J. White (Eds.), The Deregulation of the banking and securities industries (pp. 323-333). Lexington, Massachusetts: Lexington Books.

  • Santos, J. A. C. (1998). Commercial banks in the securities business: A review. BIS Working Paper No. 56, 1-29, Retrieved from http://www.bis.org/publ/work56.pdf.

  • Saunders, A. (2000). Financial institutions management (3rd ed.). New York: McGraw-Hill.

  • Saunders, A., & Walter, I. (1994). Universal banking in the United States: What could we gain? What could we lose? New York, NY: Oxford University Press.

  • Stevens, J. W. (1979). The intersection of the banking and securities industries and future deregulation. In L. G. Goldberg., & L. J. White. (Eds.), The deregulation of the banking and securities industries (pp. 295-304). Lexington, MA: Lexington Books.

  • Stiglitz, J. E. (1994). Whither socialism? Cambridge, MA: The MIT Press.

  • Turk Ariss, R. (2010). On the implications of market power in banking: Evidence from developing countries. Journal of Banking and Finance, 34(4), 765-775.

  • Uddin, S. M. S., & Suzuki, Y. (2011). Financial Reform, Ownership and Performance in Banking Industry: The Case of Bangladesh. International Journal of Business and Management, 6(7), 28-39.

  • Uddin, S. M. S., & Suzuki, Y. (2014). The impact of competition on bank performance in Bangladesh: An empirical study. Int. J. Financial Services Management, 7(1), 73-94.

  • Uddin, S. M. S., & Suzuki, Y. (2015). The dynamics of concentration and competition in the banking sector of Bangladesh: An empirical investigation. South Asian Journal of Management, 22(1), 114-136.

  • Wahab, M. A., & Faruq, M. O. (2012). A comprehensive study on capital market developments in Bangladesh. Working Paper Series WP1203, Research Department, Bangladesh Bank, 1-42. Retrieved from http://www.bb.org.bd/pub/research/workingpaper/workingpaperlist.php.

  • Wall, L. D. (1987). Has bank holding companies’ diversification affected their risk of failure? Journal of Economics and Business, 39, 313-326.

  • Yeager, T. J., Yeager, F. C., & Harshman, E. (2007). The financial services modernization act: Evolution or revolution? Journal of Economics and Business, 59(4), 313-339.

  • Younus, S., & Akhtar, M. (2009). The SLR as a monetary policy instrument in Bangladesh. Policy Note PN 0903, Bangladesh Bank, 1-12. Retrieved from http://www.bangladesh-bank.org/pub/research/policynote/policynotelist.php.

  • Zhao, T., & Murinde, V. (2011). Bank deregulation and performance in Nigeria. African Development Review, 23(1), 30-43.


Abstract Views: 373

PDF Views: 0




  • Non-Banking Activities of Commercial Banks under Financial Deregulation in Developing Countries: Evidence from Bangladesh

Abstract Views: 373  |  PDF Views: 0

Authors

S. M. Sohrab Uddin
Department of Finance, University of Chittagong, Chattogram-4331, Bangladesh
Yasushi Suzuki
College of International Management, Ritsumeikan Asia Pacific University, 1-1 Jumonjibaru, Beppu, Oita,, Japan

Abstract


The separation between banking and non-banking activities was withdrawn in 2009 in Bangladesh, following which the stock market has experienced the development of the biggest bubble and its eventual bursting in 2010-2011. This study aims at evaluating the non-banking activities of commercial banks by highlighting the causes behind the accelerated use of such activities under financial deregulation and their after-effects. The shrinking of the spread margin under an intensified level of competition encourages banks to accelerate the nonbanking activities. Moreover, the withdrawal of the separation hinders the well-functioning of the financial sector including the banking sector by amplifying the fundamental principalagent and moral hazard problems; by creating conflict of interest between central bank and Bangladesh Securities and Exchange Commission (BSEC); by eroding the regulatory structure of the central bank for monitoring and supervision of the banking sector; and by hampering the objective of financial deepening under financial deregulation. The banking sector regulator needs to consider the associated bad consequences of the withdrawal of the separation between banking and non-banking activities of commercial banks in a developing country like Bangladesh.

Keywords


Bangladesh, Bank Subsidiary, Conflict of Interest, Financial Deregulation and Non-banking Income.

References