Narrow banks no sistema financeiro brasileiro

Abstract

The banking segment is important to the economy as they are related to all the other economic agents, being either an investment option or a source of financing. Therefore, the relevance of the banking institutions solidity justifies the existence of a significant regulation of the sector, such as the Basel Convention signed worldwide. The subprime crisis occurred in 2008 rised again some discussions on the concept of Narrow Banking, which refers to banking institutions that act in a more concentrated way in some activity and apply their resources in more secure investments. Some authors believe that this way of working can reduce the systemic risk of the banking segment, because it tends to make the banks more efficient and, in case of any difficulty, the negative effects would have less effect, since the activity is more restricted. However, the discussion on the Narrow Banks is still concentrated in theoretical framework and not having been found the classification of institutions or entries on different degrees of Narrowness. So, the aim of this work is to propose a form of classification of the Brazilian banks in five degrees of Narrowness, that are: High, Medium High, Intermediate, Low to Medium and Minimum. It was used the Cluster Analysis, K-Means method, to form five groups. The variables considered were: Concentration of Revenue, Concentration of Activity, Degree of Risk of Credits, Included Cities and proper funds. The sample was composed of all the multiple private banks that are active in the Brazilian market from 2007 to 2013, totalling 784 elements. In addition, four theoretical banks (Maximum, Medium High, Medium Low and Minimum) were created that served as a reference for the establishment of a hierarchy of the groups, which were not considered in further analyzes. The compositions of the groups remained as follows: Maximum with 56 banks; Medium High with 168 institutions; Intermediary with 155 banks; Low to Medium with 387 banks and Minimum with 18 institutions. Afterwards, some complementary analyzes were performed to identify the conduct of the banks during the considered years and to evaluate the existence of correlation between the degree of Narrowness and the profitability, and also with the Basel Ratio, using the method of Mann Whitney. Related to the evolution of the groups over the years, it can be noticed that, in the following years of the subprime crisis, there is a reduction of some banks in their degree of Narrowness. An explanation is that the more concentrated action raises the risk due to less diversification, then, in moments of crisis, the institutions tend to reduce their risk by decreasing the concentration of their activities. In terms of profitability, it was not found a gradual evolution, but the maximum level outperformed. For the Basel Standards, the initial hypothesis was confirmed, identifying a decrease risk gradual depending on the degree of Narrowness, and for the two higher levels the difference was statistically significant. Therefore, it is possible to deduce that the degree of Narrowness affects positively the performance of banks.