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The impact of risk, fees, corporate governance and unconventional monetary policy on investment bank performance

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posted on 2023-06-09, 01:12 authored by Theodora Bermpei
This thesis examines the effect of bank-specific variables on investment bank performance, as estimated by efficiency and financial indicators, in the G7 and Switzerland countries, over the 1997-2012 period. Moreover, we investigate the impact of expansionary monetary policies on the risk-taking of investment banks between 2007 and 2014. Firstly, we investigate the impact of risk, liquidity and fee-based income on cost efficiency prior to and during the crisis. Then, we examine the presence of possible threshold effects of bank-specific variables on performance (cost efficiency). Moreover, we investigate whether there is difference between the impact of liquidity on the performance of stand-alone investment banks and on investment banks that belong to a larger banking entity. Secondly, we assess the impact of corporate governance on the performance (profitability and profit efficiency) of the US investment banks. We focus on five different categories of governance measures: i) board structure, ii) executive compensation, iii) ownership, iv) CEO power and v) operational complexity. We put emphasis on the impact of board size and board ownership on performance by examining for threshold effects of these variables. Thirdly, we examine the impact of M&A advisory fees on bank performance, as estimated by technical inefficiency, using a methodology that includes as an undesirable output the bank-individual level of risk. Then we test the level of convergence in terms of M&A advisory fees and technical inefficiency of investment banks in the G7 and Switzerland prior to (1997-2007) during (2007-2010) and after the financial crisis (2010-2012). Fourthly, we study the effect of unconventional monetary policies (UMPs) on the risk-taking of investment banks in the US over the 2007-2014 period. We employ a number of alternative proxies that capture both directly UMPs: i) central bank’s assets over gross domestic product ratio ii) monetary aggregates iii) Taylor gap; and indirectly through the usage of low-interest rates: i) federal fund rate and ii) shadow short rate. Finally, we provide conclusions together with limitations of this research and a plan for a future work.


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University of Sussex

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