OPTIMAL BANK CAPITAL AND IMPACT OF THE MM THEOREM: A STUDY OF THE PAKISTANI FINANCIAL SECTOR

The financial sector of Pakistan is showing stability and resilience to financial shocks. Further, with increased ratios for equity capital, its performance is robust and strong. Globally improved financial conditions are also benefiting it. The banking industry is working under competitive environment that is further illustrated by low bank spreads, lower figures for non-performing loans, higher capital adequacy ratios and increased total assets. This study is done with the aim to investigate the newly recommended capital obligations by Basel III, which has created a debate for and against it. It is argued that it will lead to increased lending rate and shrink loan growth and credit supply. Proposed higher capital levels will increase marginal cost for funds which will result in higher rates for lending. For Pakistani banks, this study depicts that overall changes are negligible if funding mixture is changed. Further, the modigliani and miller (MM) offset is illustrating its full impact.

The Dynamics of Bank Spreads and Financial Structure

This paper investigates the effect of within banking sector competition and competition from financial markets on the dynamics of the transmission from monetary policy rates to retail bank interest rates in the euro area. We use a new dataset that permits analysis for disaggregated bank products. Using a difference-in-difference approach, we test whether development of financial markets and financial innovation speed up the pass through. We find that more developed markets for equity and corporate bonds result in a faster pass-through for those retail bank products directly competing with these markets. More developed markets for securitized assets and for interest rate derivatives also speed up the transmission. Further, we find relatively strong effects of competition within the banking sector across two different measures of competition. Overall, the evidence supports the idea that developed financial markets and competitive banking systems increase the effectiveness of monetary policy.

The impacts of information asymmetry in determining bank spreads

Um grande esforço de pesquisa tem sido feito para avaliar os determinantes dos spreads bancários. Neste estudo utilizam-se os dados da pesquisa do Banco Mundal Doing Business para avaliar em que medida a assimetria informacional influencia o nível de spread bancário. Os resultados encontrados neste trabalho sugerem que os spreads sofrem influencia do nível de assimetria informacional. Nas taxas de baixo risco (prime rates) um grau pequeno de assimetria informacional pode reduzir de 2 a 4% o nível do spread. Conjectura-se que maiores reduções podem ser obtidas para dívidas de maior risco. A metodologia econométrica utilizada consiste em técnicas de painel estático. Para confirmar ou refutar os resultados deste trabalho estudos com amostra maiores devem ser feitas assim que novas informações sobre a pesquisa Doing Business estejam disponibilizadas.