Centre for Economic Policy Research
Universal banking and conflicts of interest outside the
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Universal banking and conflicts of interest outside the United States The literature on conflicts of interest may leave the impression that it is only a US problem. The US banking system’s characteristic of arms’ length transactions instead of relationship banking certainly heightens the awareness of conflicts of interest. While the potential problem may not be as visible, however, the issues remain. Conflicts of Interest in Universal Banking 69 Although the Canadian banking system has some important structural differences with the US system, the Anglo-Scottish tradition of arms’ length transactions allows the examination of potential conflicts of interest. Until the Bank Act of 1987, Canadian chartered banks were prohibited from underwriting corporate securities and offering investment advice. This legislation permitted Canadian banks to enter investment banking by organizing a direct subsidiary of the bank. Hebb and Fraser (2002) compared the yields on all Canadian corporate bonds underwritten by commercial bank affiliates and independent investment banks between 1987 and 1997. Controlling for other factors, regression results show that the former have yields that are 19 basis points lower. Even the presence of a commercial banking relationship does not alter this difference, suggesting that any conflict of interest effect is dominated by the certification effect. 74 This result was stable over time, which may be noteworthy since Canadian banks quickly dominated investment banking, achieving a high level of concentration. While the Canadian case provides similar evidence of general absence of exploitation of potential conflicts of interest, one study of the Israeli system suggests the opposite. Examining Israeli IPOs in the 1990s, Ber et al. (2000) found that issuing firms whose equity was underwritten by an affiliate of a bank that had provided credit to the firm had significantly lower than average stock performance but better accounting profitability. If an investment fund managed by the bank bought into the new IPO, the stock performance was even lower. They tentatively concluded that bank affiliates provide more certification, but that there is some exploitation of the conflict of interest between banks and their investment funds. The most widely admired system of universal banking appeared in nineteenth- century Germany, where there were no legal constraints on universal banking. First private banks then joint-stock banks combined commercial and investment banking. Providing both loans and investment banking services and taking lead roles in founding and managing industrial companies, they have been viewed as essential to the rapid industrialization of the then backward German economy (Fohlin, 1999; Guinnane, 2002). The banks’ size and prominence relative to markets was reinforced by German law. A transactions tax encouraged banks to settle securities trades internally, and the requirement that any issue must be fully subscribed before a company could begin operation gave advantage to large banks, which could carry the issue. These universal banks’ information advantage has been seen as arising not only from the provision of commercial and investment banking services, but also from their ability to place representatives on firms’ supervisory boards. In accordance with the pecking order theory of corporate finance, the ability of universal banks to service firms better has been viewed as a consequence of their ability to adjust financing as companies matured, making use of their accumulated information (Calomiris, 1995). This German relationship banking may have allowed banks to manage and distribute risk better than banks that had more arms’ length transactions, but it also produced a highly concentrated industry. By 1913, the three largest firms in Germany were banks, and they comprised 17 of the largest 25 German firms. They were able to exercise considerable power to promote the business of clients and cartels. Case histories of the banks (Guinnane, 2002) indicate, however, that they protected clients’ national and international projects, but also decided which of their own clients to favour. In a vast literature on the subject, there is almost no discussion of conflicts of interest, although there was clearly potential. In one exception, Fohlin (1999) suggests that internalization of securities trading within universal banks may not have provided investors with the best execution of their trades. The literature does consider the ability of the concentrated and sometimes 70 Conflicts of Interest in the Financial Services Industry collusive banking industry to extract rents from industry, which suggests some exploitation of asymmetric information by less than transparent banks. Unfortunately, just as there are no historical studies of conflicts of interest in European banking to compare to those examining the United States, there is an absence of research on conflicts of interest in contemporary European banking, in spite of the fact that the diversity of regulation provides a natural laboratory. Surveying European countries, Santos (1998) found that, as of 1997, all Western European countries permitted securities activities both within the bank and through a bank subsidiary. Although regulations varied considerably, banks in Austria, Finland, Germany, Italy, Luxembourg, the Netherlands, Sweden and Switzerland conducted their securities operations directly. Greece and Ireland preferred to use a subsidiary; and there was no dominant type in Portugal, Spain and the United Kingdom. While there are no empirical studies, there are perceptions of conflicts of interest. In Germany there are concerns about conflicts of interest where banks serve clients in more than one capacity. Potential conflicts are seen in the fiduciary responsibilities of a bank and its role as investment banker, assisting mergers and acquisitions, and the stuffing and churning of portfolios (Saunders and Walter, 1994). Download 1.95 Mb. Do'stlaringiz bilan baham: |
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