Thesis Joris van Toor: Which factors influence the performance of banks?
December 14, 2017
Which factors influence the performance of banks? This is the question Joris van Toor tries to answer in his dissertation Essays on Finance: Drivers of Bank Performance and The International Cost of Equity, which he defends on December 15th. Van Toor considers a diverse mix of factors ranging from growth in the bank’s loan portfolio and quality of formal corporate governance to the CEO’s socio-economic background.
The Carrot and the CEO
“The ability of banks to endure the recent financial crisis was unrelated to formal corporate governance. However, the role of the CEO has been of significance. Banks with CEOs who have been raised in a more humble socio-economic environment and whose remuneration package was more focused on the short term, performed the worst during the crisis. Incentives and CEOs’ sensitivity for these incentives have been important in the run-up to the crisis,” Van Toor says.
A New Sheriff
An exquisite moment to gauge the CEO’s influence on bank performance is around the change in CEO. Van Toor describes that “the profitability declines materially after the arrival of a new CEO. Not a decline in income or a surge in costs causes this, but an increase in the provisions for bad loans. The size of these provisions depends on assumptions which are partly determined by the CEO.” An increase in provisions and as a consequence a decrease in profitability is not harmless, because it can lead to a reduction in the extension of credit to the economy. Therefore Van Toor recommends to “closely monitor changes in the amount of provisions after the arrival of a new CEO.”
“The Times They Are a-Changin’”
The financial crisis has had devastating consequences for the economy and society at large. Ranging from loss of pension savings to a rise in budget deficits and unemployment. Van Toor states that the crisis also has had a lasting impact on bank performance: “Top-performing U.S. banks from before the crisis are bottom-performers since the crisis. This can be ascribed to pre-crisis growth in the loan book. The fastest-growing banks benefited most from the credit bubble before the crisis, but experienced most difficulty in adjusting to the new reality of more stringent rules, less room for risk, and higher capital ratios.” For these banks the times have really changed since the crisis: the game these banks played before the crisis is no longer tolerated by market, supervisor, and society.
JORIS VAN TOOR (Zederik, 1989) has studied Econometrics and Operations Research (BSc) and Quantitative Finance and Actuarial Sciences (MSc) at Tilburg University. From May 2014 to October 2017 he pursued his PhD at TIAS School for Business and Society where he investigated the drivers of bank performance. As of December 1st Joris works as a Strategy Advisor at the Dutch Central Bank.