Bank Efficiency and Shareholder Value in Asia Pacific

Abstract

The global banking industry has been transformed over the last two decades. Forces driving this transformation include technological innovation, structural deregulation, prudential reregulation, internationalization, and changes in corporate behavior, such as growing disintermediation and increased emphasis on shareholder value (Berger et al., 2010). The global financial crisis of 2008–09 also accentuated these pressures and illustrated that bank performance can have dramatic effects on capital allocation, company growth, and economic development — namely via increased capital and funding costs. It is well known that capital costs are linked to sovereign and other risks (see IMF, 2011; BIS, 2011 & 2013). Post-crisis, regulators in the developed world have forced banks to raise massive amounts of new capital and these firms are struggling to achieve returns in excess of the cost of capital (ECB, 2012). The big, internationally active banks are being asked to hold even more capital and liquidity under Basel III. In such an environment, many banks are finding it too costly and therefore difficult to issue new capital and the only way they can boost capital is to refrain from capital costly activity — so they are cutting lending, selling or shrinking capital costly investment banking, and other businesses (Economist, 2013). This is related to shareholder value creation that focuses on generating returns in excess of the cost of capital to create value for owners (namely, shareholder value creation).