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Measuring the Effects of Deregulation in the Banking Sector: Some First Results on the Share Portfolio Rudi Acx National Bank of Belgium, Head of Financial and Economic Statistics, boulevard de Berlaimont 14, B - 1000 Brussels - Belgium Tel : 32 2 221 24 03; Fax : 32 2 221 32 30; E-mail : [email protected] Catholic University of Brussels ( KU Brussel) 1. Introduction The process of deregulation is in essence a judicial determined development. The most recent wave of deregulation in the European financial sector started during the eighties, and was triggered and sustained by several European Directives envisaging a competitive financial sector through the creation of the necessary conditions for a level playing field. The deregulation takes different forms. This contribution deals with one of them in the banking sector. The access to the market which been enlarged on both the supply and the demand side of the market. Companies active in one former segment of the market are now allowed to act in most of the remaining segments of the financial sector, which led to despecialisation. In countries where a net distinction exists between portfolio-companies and deposit taking companies, as f.i. in Belgium, the latter type of companies became entitled to increase and to diversify their share portfolio. The paper presents, on empirical grounds, to what extend the Belgian credit institutions have adapted the size and composition of their portfolio in shares. 2. The Detention of Shares by the Belgian Credit Institutions : Legislation and Datasources The Banking Law of 1993 introduced a new approach to the holdings of shares by the credit institutions established in Belgium. New conditions were described under which the credit institutions could hold different kinds of shares in other companies, whether it is as trading -, investment- or fixed financial financial asset (participation) instrument. The law foresees three categories: - Shares which may remain in portfolio on a temporary base ( up to 2 years). It concerns shares, which are intended to be offered to the public, or shares, which serve as a guaranty for outstanding unpaid claims. - Shares which may be kept in portfolio without any restriction. It concerns shares issued by other credit institutions, insurance companies, investment firms, companies active in financial transactions and companies that render services to the credit institutions. - Shares which can be part of the assets of the credit institutions but limited to a certain amount. It concerns shares in the capital of companies other than those mentioned in the previous part. Apart from quantitative constraints on the individual shares, this group of shares may not exceed 35 pct. of the total own funds of the credit institution holding the shares. The last category constitutes the most important change to the regulation on share holdings by credit institutions. A comparison is made between the situation at the end of 1993 and 1998. The analysis is based on the detailed nominative description of the portfolio composition, which must be communicated to the monetary and prudential control authorities each quarter of a year. On the base of these information, which include also the ISIN code, the National Bank of Belgium has established a database in which, a.o.variables, the institutional sector is attributed to each individual share. 3. Composition of the Share Portfolio of the Banks The total assets of the banks established in Belgium amount to around 745 000 million LQ 1998. Interbank claims and claims on clients represent nearly 66 p.c. of the total. Securities of the government sector constitute another 20 p.c. The balance consists of other securities (7 p.c - mainly long term), fixed assets (2 p.c.) and miscellaneous assets (5 p.c.). The shares are located in the items ’Other securities’ and in the ’ Fixed financial assets’. 7DEOH&RPSRVLWLRQRIWKHVKDUHSRUWIROLRRIWKHEDQNVHVWDEOLVKHGLQ%HOJLXP Period Belgium Financial Institutions ( FI) Year Insurance 1993 1998 1993 1998 1993 1998 1993 1998 98/93 98/93 98/93 Banks Other FI non FI Total Rest of the world All countries Total non FI Total FI (1) non FI(1) FI Total Participation’s in pct. of total share portfolio 100 81 63 72 87 100 84 36 70 83 Horizontal breakdown Participations 2,6 9,0 12,1 23,7 4,3 11,6 18,9 7,2 37,7 4,9 Shares 0,0 4,3 14,3 18,6 1,3 0,0 10,5 37,1 47,5 2,9 Total 1,8 7,4 12,9 22,0 3,3 8,6 16,8 14,9 40,2 4,4 Evolution in p.c. Participations 700 284 8 189 108 Shares 0 209 227 223 181 Total 699 270 89 198 117 74 71 40 10 68 89 67 82 69 80 69 46 67 74 28,0 42,5 1,1 0,6 68,1 54,7 69,2 55,3 91,8 92,4 5,4 5,5 100 100 19,9 50,4 3,5 15,6 64,7 20,4 68,2 36,0 83,3 67,9 4,8 18,5 100 100 25,3 44,6 1,9 4,5 67,0 45,9 68,9 50,3 89,0 86,1 5,2 8,8 100 100 177 -3 46 45 83 84 82 220 470 -60 -33 3 391 26 188 282 12 20 58 178 64 (1) Non adding up to 100 p.c. is due to shares which could, up to now, not be attributed an unambigious institutional sector code. The total value of the share portfolio of the credit institutions rose from 7 339 million LQ 1993 to 12 004 million LQDJURZWKRISF7KHFUHGLWLQVWLWXWLRQVLQFUHDVHGWKHLU participations with 82 p.c. representing three quarters of their total share portfolio, compared to two-thirds 6 years earlier. The bulk, around 92 p.c., of the participations is oriented towards financial enterprises and has not undergone a substantial change over the period under review. The absolute amount of the participations in foreign financial institutions remains higher than the participations taken in domestic financial institutions. Over 80 p.c. of the participations in foreign financial institutions are with institutions located in countries belonging to the Eurozone. Although, contrary to the general idea of internationalisation, the participations in domestic financial enterprises grew much faster than those in non domestic financial enterprises. Within the domestic financial institutions the insurance companies and the credit institutions became those with the largest attraction. This reflects of course the idea of bankinsurance respectively the co-operation tendency without merging. Specific for the shares of Belgian insurance companies held by the credit institutions is the fact that they all concern participations, even for small amounts, and quasi none are kept in portfolio for investment or trading purposes. Although bankinsurance is prominent present in Belgium, this can’t be traced in the portfolio of the banks. This is due to the fact that, apart from some individual cases, the insurance companies took participations in credit institutions. But the main reason lies in the creation of large financial services companies in which participations and cross participations are centralised by the holding controlling the financial services company. Something similar holds for the participations in foreign financial institutions. The relative part of participations in the other domestic financial institutions diminished over time. However the banks keep substantial amounts of shares of these institutions as investment or - to a lesser extent - for trading purposes. 4. The Shares of Non-Financial Enterprises Regarding the shares of non-financial enterprises, one can observe that the amounts invested in that kind of paper remains rather modest : 1 058 million LQDJDLQVWPLOOLRQ LQ 1993. This doubling of the value is higher than the increase of the total share portfolio over the period under review, but still represents only 9 p.c. of the total share portfolio in 1998, coming from 5 p.c. in 1993. In 1998 the total shares held from non-financial institutions were equally divided between domestic one’s and foreign non-financial enterprises. In 1993 there was still a relative preference for investment in shares issued by domestic non-financial enterprises. The objective of the investment in these companies is quite different between the domestic and the foreign one’s. Credit institutions increased substantially their participations in domestic non-financial companies while their modest participations in foreign nonfinancial enterprises have been reduced. For these last they prefer to keep them as an investment or for trading purposes. The holding of shares in the foreign non financial enterprises on the other hand are mainly intended as long term investments or for trading. A more detailed view on the evolution over the period 1993-1998 on this kind of shares in the portfolio of the banks is provided by Figure 1. During the period 1993-1997 the participations constituted the larger part in the portfolio. Only in 1998 the part of the shares outweighted that one of the participations. The participations in domestic non-financial enterprises remained rather stable over the period 1995-1998, after a upward swing in 1994. They represent the largest part of the portfolio during the period 1993-1997. The relative importance of participations in foreign enterprises was stable at a low level over the whole period under review, as did the part of shares, other than those kept as a participation, in the foreign non- financial enterprises. The shares of foreign non-financial enterprises held by the banks surged from 1997 on and forms in 1998 the largest part of the share portfolio of the banks. 1200 900 Total part. 600 Total shares 300 0 93 94 95 96 97 98 1200 Foreign part. 900 Dom. part. Foreign shares 600 Dom. shares 300 0 93 94 95 96 97 98 )LJXUH%UHDNGRZQRIWKHVKDUHVKHOGLQQRQILQDQFLDOHQWHUSULVHV 5. Conclusions The interpretation of the above-mentioned results is not that straightforward and should therefore be interpreted with caution. First of all, there is the problem of valuation. In the case of investment and trading the shares must be valued against the market ( or a market related ) price, while the participations can be valued against historic purchase price. This leads to an underestimate of the part of participations in the total share portfolio of the credit institutions. Secondly, the ongoing mergers do destruct oustanding participations and thirdly aquisitions of credit institutions by the same holding company can lead to a drain of the cross holdings of shares from the portfolio of the concerned credit institutions to the common holding company. Both last mentioned phenomenons reduce the oustandings of shares held by credit institutions. For a correct assessment, corrections taking account of these shifts are needed. As a preliminary conclusion on the reaction of the credit institutions to the major change in the Banking law, one can state that the credit institutions did not exploit so far the possibilities offered by the new law as the proportion of the shares issued by non-financial enterprises do represent only roughly 3 p.c. of the own funds, which is still far away from the legal upperlimit of 35 p.c. Providing this rather low representation of non-financial enterprises’ shares in the banking portfolio suggests a non-interest of the banks in that kind of shares, over the last 5 years. RESUME La loi belge a donné la possibilité aux banques de détenir des actions des entreprises non financiers. Les résultats, basés sur les relevés détaillés communiqués par les banques, montrent que les banques ne sont pas tellement intéressés par ce type d'actions. La mesure de l'impact est néanmoins influencé par les règles comptables, valeur historique contre valeur du marché, et par les constitutions institutionnelles des groupes de services financiers.