1. EBA Policy Research Workshop
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Philipp Koziol
Discussion of Altunbas et al. (2016) “Competition and Bank Risk: The Effect of Securitization and Bank Capital”*
*This presentation represents the authors' personal opinions and does not necessarily reflect the views of the ECB or its staff..
EBA Policy Research Workshop

2. Competition and risk-taking
Summary
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Competition and risk-taking
Two strands of literature
Competition stimulates risk-taking (focus on deposit market)
Banks take on more risk to compensate for reduced profits due to competition
Competition reduces risk-taking (considers deposit and loan market)
Competition lowers the interest rate of loans, reducing the default rate of customers
Focus on the influence of securitization and bank capital
Does securitization amplify the relationship between comp. and bank risk?
Does bank capital weaken the relationship between comp. and bank risk?
Probit model regressing risk-taking on competition, an interaction term and bank specifics
Bank risk measured with financial support, systemic risk or idiosyncratic risk
Competition measured with the Boone indicator, bank lending survey or C5
Robust findings of securitization amplifying the comp./risk-taking relationship
No proof for capital to diminish the relationship between comp. and risk-taking
Advising a closer cooperation between supervisory and competition authorities
Discussion of Altunbas et al. (2016)

3. Newness of research and findings
Value added to the literature
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Newness of research and findings
The paper contributes to the discussion on competition and bank risk and the impact of securitization
The authors find that, all else equal, securitization and bank capital diminish risk-taking
When competition is more intense, securitization reduces risk-taking to a lesser extend
Contributes to the discussion on how to deal with competition in the financial sector
How to regulate the sector?
Who should regulate the sector?
The authors argue for better cooperation between banking supervisors and competition authorities
Discussion of Altunbas et al. (2016)

4. Feedback and concerns (1/2)
Suggestions for improvement
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Feedback and concerns (1/2)
Identification strategy can be streamlined
Measuring competition
Why is Lerner index not applied as this index measures competition on bank-level rather than country-level? Reasoning in paper is not clear…
Boone indicator applied on country level, how is this applied for large internationally active banks? For instance French bank operates worldwide… (weighted average?)
Measuring risk-taking
Although the materialization of bank risk is most likely correlated to risk-taking, it is not the same and the moment of risk-taking is uncertain
Causality
Securitization and competition might enhance risk-taking, but risk-taking might also enhance securitization
Partly offset by using different time periods (pre-crisis and crisis periods)
Supervisory/Regulatory authorities make risky banks hold more capital
Self-selection bias: Banks choose their amount of securitization. Risk seeking banks might opt for more securitization, but they are also by definition riskier
Causality true for recent period? Securitization exposures have been considerably reduced and the entire markets has been structurally changed
Discussion of Altunbas et al. (2016)

5. Feedback and concerns (2/2)
Suggestions for improvement
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Feedback and concerns (2/2)
General framework
No statistically significant effect when using idiosyncratic risk
Bank specific factors are used. These should explain bank specific risk
More bank capital relates to lower likelihood of state aid. Does this mean they took on less risk? Or were they simply able to withstand more losses?
When using interaction terms the likelihood of finding statistically significant results increases
Think of using a Bonferroni correction
Rejection of null-hypothesis with statistically insignificant results (p.16)
Inconsistent measurement of certain effects
Competition (Boone: 94-04, bls 03-05; definition of bls, Concentration 95-05)
Inconsistent use of the pre-crisis and crisis period
How can EXLEND (excess lending growth) on average be positive (6.70)?
Measuring securitization: trading book vs. banking book (different purpose)
At least 75% of banks have no securitization in the pre-crisis period
Treatment of systemic vs. systematic effects vs. idiosyncratic effects at least requires explanations
Discussion of Altunbas et al. (2016)

6. Suggestions for improvement
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Minor comments
Literature overview is missing key contributions, e.g. Kick/Prieto (2013), papers by Klaus Schaeck
Improve data section:
Description of data set lacking important information (for instance I am familiar with most of the sources, I am not able to follow which data exactly you are using) and data manipulation procedures require more details (Did you winsorize the data set?)
Check for typos
Discussion of Altunbas et al. (2016)