The Effect of Capitalization on Bank Risk in the Presence of Regulatory and Managerial Moral Hazards

- -Thomas D Jeitschko and Shin Dong Jeung

The conventional wisdom is that well-capitalized banks are less inclined to increase asset risk, because the option value of deposit insurance decreases with capitalization. There are, however, at least three shortcomings in the existing theories that cast doubt on the validity of the conventional wisdom. First, many studies neglect agency problems arising from the separation of management and ownership. Second, past studies rely on limited risk-return profiles of the asset choice set and do not consider profiles in which higher risk is associated with higher return. Finally, empirical studies on this issue provide only mixed evidence. The aim of this paper is to shed new light on this issue by expanding existing models to account for the shortcomings identified. Thus, it explicitly models three different incentives of the agents that shape the risk-taking behavior in banking, regulatory bodies, shareholders, and management. The paper considers how the respective incentives influence the riskiness of a bank portfolio for four distinct assumptions about the characteristics of risk-return profiles. As a result it is demonstrated that a bank's risk can either decrease or increase with capitalization. The paper empirically demonstrates the differences in risk-capitalization relationships across high and low capital banks and across publicly and non-publicly traded banks, indicating that risk-capitalization relationships are, indeed, sensitive to the relative forces of the three agents in determining asset risk.

© 2008 IUP . All Rights Reserved.

User Perception of Retail Banking Services: A Comparative Study of Public and Private Sector Banks

- - R A Ravi

Due to increasing competition in retail banking, understanding the customer perception about service quality is becoming indispensable. The private sector banks are posing a very stiff competition to the public sector banks through their initiatives for meeting customer expectations and gaining a cutting edge. This is reflected by the increasing market share and better profitability of private banks in comparison to that of public sector banks. At the same time, public sector banks have also responded to the challenges posed by the private sector banks through conscious efforts to enhance their service quality. This study compares public sector banks and private sector banks in terms of user perception of their retail banking services.

© 2008 IUP . All Rights Reserved.

Internet Banking in India: Issues and Prospects

- - Geetika, Tanuj Nandan and Ashwani Kr. Upadhyay

This paper discusses the concept of Internet Banking, perception of Internet bank customers, non-customers and issues of major concern in Internet banking. The state of Internet banking in India has been explored using various concepts like E-banking continuum, and gap analysis related to the various services and the security features offered. In order to have a clear and focussed insight about the perceptions of users (and non-users) about Internet banking a survey was conducted. The findings of the survey provide valuable insights into concern for security, reasons for lower penetration, and likeliness of adoption, which have been used to make useful recommendations.

© 2008 IUP . All Rishts Reserved.

Preferences, Satisfaction Level and Chances of Shifting: A Study of the Customers of Public Sector and New Private Sector Banks

- - Aruna Dhade and Manish Mittal

The phenomenal changes taking place in the banking industry indicate that the new private sector banks have gradually won the market with their customer-centric approach. The depleting market share of the public sector banks poses a threat to them. This study mainly focuses on the primary opinion of the customers of these banks. The State Bank of India (SBI) is selected as the representative of the public sector banks and HDFC, ICICI, IDBI and UTI as representatives of the new private sector banks. The study is divided into three parts: the first part deals with customers' preferences while selecting the bank of their choice; the second part covers the satisfaction level of the customers; and the third part is an attempt to record the instances of customers shifting from one bank to another (competitor bank) due to dissatisfaction. It is evident from the study that the customers of private banks are more satisfied than those of the SBI. Customers of the SBI are more sensitive with regard to the processing time taken for account handling and technological updates. Dissatisfaction in those areas can lead to shifting to another bank, while in the case of private banks' customers, proximity to residence and sometimes delay in the processing time can be the likely reasons to change the existing bank with a new one.

© 2008 IUP . All Rights Reserved.

Pricing the Prime and Bank Lending Rates

- - Ganti Subrahmanyam

In this study, a highly useful and comprehensive survey of the several loan pricing approaches has been discussed. Particular attention has been paid to the most significant and popularly practiced techniques of pricing the prime lending rate. In the process, highly useful illustrative examples have been discussed on how to scientifically compute the marginal cost of funds. Specifically, the present value approach to loan pricing is discussed as a novel and all inclusive model. This method explains as to how to incorporate the benefits of any deposit balances the borrower leaves with the lending bank. Finally, a brief discussion on the various forms of financial intermediation has been presented. This is done with a view to relating the costs of borrowing funds under several forms of financial intermediation.

© 2008 IUP . All Rights Reserved.