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– The purpose of this paper is to examine the effect of bank consolidation and foreign ownership on bank risk taking in the Egyptian banking sector.
Abstract
Purpose
The purpose of this paper is to examine the effect of bank consolidation and foreign ownership on bank risk taking in the Egyptian banking sector.
Design/methodology/approach
Following prior studies (e.g. Yeyati and Micco, 2007; Barry et al., 2011), this study uses pooled Ordinary Least Squares regression models under two main analyses to test the relation between concentration and foreign ownership on one hand and bank risk-taking behavior on the other hand, where observations are pooled across banks and years for the 2000-2011 period. The reform plan was launched in 2004 and resulted in various restructuring activities in the banking system. Thus, to control for the effect of implementing the financial sector reform plan on bank insolvency and credit risk, this study includes a reform dummy variable (RFM) for the post-reform period in models testing the association between consolidation, foreign ownership and bank risk. Therefore, this categorical variable identifies whether bank risk is related to the reform activities that have been observed during the post-restructuring period, 2005-2011. Moreover, to accommodate the possibility that effects of bank concentration and foreign ownership on bank risk differ due to the implementation of the reform plan, the author create two interaction terms: one uses the product of the reform dummy variable and concentration measures, while the other uses the product of the reform dummy and foreign ownership variables to capture interactions. These interaction terms and the dummy variable provide ample room to capture the effect of bank concentration and foreign ownership on bank risks during the post-reform period.
Findings
This study provides empirical evidence that bank concentration is associated with low insolvency risk and credit risk as measured by loan loss provisions (LLP) in the post-reform period. These results are consistent with the “concentration-stability” view, suggesting that concentration of the banking sector will enhance stability. Moreover, evidence shows that while a higher presence of foreign banks reduces bank credit risk in the post-reform period, it appears to increase insolvency risk. These results are robust to using alternative measures. These findings imply that regulators in emerging countries should support foreign investments in banks to transfer better managerial skills and systems. However, government-owned banks are found to be more prone to insolvency and credit risks; thus, their ownership should not be encouraged. Finally, policy makers should reinforce bank consolidation, be prudent in determining the capital adequacy ratio (CAR) and monitor intensively less profitable, well-capitalized and small-sized banks.
Practical implications
Consolidation of the banking sector decreases insolvency risk and credit risk, as measured by LLP in the post-reform period. This study proposes that bank supervisors implement prudent polices in determining the bank CAR, and monitor intensively less profitable, well-capitalized and smaller banks, as they have incentives to increase risk. In addition, regulators should encourage foreign investment in the banking sector and facilitate their operations in Egypt.
Social implications
Bank supervisors should intensely monitor banks with high-CARs that exceed mandatory requirements because they may be more likely to engage in more risk-taking activities.
Originality/value
It provides empirical evidence from a country-specific, emerging market perspective, in which restructuring events affect the national economy. Egypt, similar to other emerging countries in Africa, pursues an institutionally based (bank-based) system of corporate governance, where banks are the primary sources of finance for firms. Therefore, restructuring banks and other financial institutions and supervising their operations ensure the soundness and stability of these institutions, which represent the nerve of emerging economies. Because emerging countries tend to share common characteristics and economic conditions, and the reform of their financial systems is significant for economic development, the Egyptian banking reform and restructuring program should be of interest to other emerging countries to capitalize on this experiment. While international studies on these relationships are mostly cross-country or focus on US banks, firm-specific studies are scant. Furthermore, the findings of this study should be of interest to Egyptian regulators, bank supervisors and policy makers studying the implications of bank reforms.
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Andy Mullineux, Juda Agung and Adisorn Pinijkulviwat
This paper briefly reviews the build up to and onset of the 1987 financial crises in S. E. Asia, focusing on the experiences of Thailand and Indonesia. After emphasising the…
Abstract
This paper briefly reviews the build up to and onset of the 1987 financial crises in S. E. Asia, focusing on the experiences of Thailand and Indonesia. After emphasising the importance of banking sector restructuring and regulatory reform, progress with economic stabilisation and financial and enterprise sector restructuring in the three countries is assessed. Future prospects are then considered.
Ki C. Han, Sukhun Lee and David Y. Suk
When faced with a financial crisis, debtor countries rarely choose to default on their international financial obligations. Instead, they typically choose to renegotiate their…
Abstract
When faced with a financial crisis, debtor countries rarely choose to default on their international financial obligations. Instead, they typically choose to renegotiate their debt service obligations. According to a number of economists, the main motivating factor behind borrowers' and creditors' willingness to restructure is the benefit associated with preserving international trade ties. This raises an interesting question: is the benefit associated with maintaining international trade ties shared equally between the borrower and creditor banks? Or is the outcome dependent on a so-called ‘bargaining game’ between the borrower and creditor banks, and if so, can we identify these variables? According to our analysis, as a borrower's trade ties with developed countries strengthen, the borrower's (and/or creditor's) bargaining power diminishes (strengthens) and it thereafter agrees to restructure at less favourable terms. However, even after controlling for trade ties, we found that major borrowers were able to extract more concessions from the lenders.
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Ira W. Lieberman, Ioannis N. Kessides and Mario Gobbo
This chapter is intended to provide the reader with information and insights on the transition or transformation from socialism to a market economy in what are generally termed…
Abstract
This chapter is intended to provide the reader with information and insights on the transition or transformation from socialism to a market economy in what are generally termed the transition economies. This includes countries in Central and Eastern Europe (CEE), the Commonwealth of Independent States (CIS), sometimes referred to as the Former Soviet Union (FSU), the South East European (SEE) countries, sometimes referred to as the Balkans and the major socialist economy of Asia, China. The chapter covers the critical years of reform for most of these countries, from 1990 to 2000. Some transition economies started reforming earlier, such as China which has continued state-owned enterprise (SOE) reforms to the present time. Other transition countries, primarily the SEE economies, lagged due to the conflict which raged throughout most of the region and the period of isolation which followed, particularly for Serbia. China and Serbia are sui generis for a number of reasons. They will be referenced as examples in this chapter, but they will not form part of the core statistical and data analysis.
The purpose of this paper is to assess the impact of the impact of the single currency on the institutional design of the banking union, through evidence on the financial…
Abstract
Purpose
The purpose of this paper is to assess the impact of the impact of the single currency on the institutional design of the banking union, through evidence on the financial integration process.
Design/methodology/approach
Data analysis uses multiple sources of data on key drivers of financial fragmentation. The paper starts from a snapshot the status of financial integration and then identifies the main components of this trend.
Findings
Evidence shows that financial integration in the euro area between 2010 and 2014 retrenched at a quicker pace than outside the monetary union. Home bias persisted. Under market pressures, governments compete on funding costs by supporting “their” banks with massive state aids, which distorts the playing field and feed the risk-aversion loop. This situation intensifies frictions in credit markets, thus hampering the transmission of monetary policies and, potentially, economic growth. Taking stock of developments in the euro area, this paper discusses the theoretical framework of a banking union in a single currency area with decentralised fiscal policy sovereignty. It concludes that, when a crisis looms over, a common fiscal backstop can reduce pressures of financial fragmentation, driven by governments’ moral hazard and banks’ home bias.
Research limitations/implications
Additional research is required to deepen the empirical analysis, with econometric modelling, on the links between governments’ implicit guarantees and banks’ home bias. This is an initial data analysis.
Originality/value
Under market pressure, governments in a single currency area tend to be overprotective (more than countries with full monetary sovereignty) towards their own banking system and so trigger financial fragmentation (enhancing banks’ home bias). To revert that, a common fiscal backstop is an essential element of the institutional design. The paper shows empirical evidence and theory, as well as it identifies underlying market failures. It links the single currency to the institutional design of a banking union. This important dimension is brought into a coherent framework.
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This paper aims to center on the analysis of corporate recovery from internal ethical failure with the examination of Wells Fargo and Company. To move beyond self-inflicted…
Abstract
Purpose
This paper aims to center on the analysis of corporate recovery from internal ethical failure with the examination of Wells Fargo and Company. To move beyond self-inflicted reputational damage and regain sales traction, successful turnaround companies have embarked on a four-step corporate recovery process centered on four key words: Replace, Restructure, Redevelop and Re-brand. Wells Fargo is one recent addition to these recovery stories.
Design/methodology/approach
This paper uses Wells Fargo and Company as a case model to examine corporate recovery. Wells Fargo is just one example of multinational companies that found themselves victims of internal impropriety, poor leadership supervision and unethical strategic decision-making resulting in significant financial losses, drastic declines in stock price and damaged reputation. Using Wells Fargo as an example from the banking industry, the case study approach is an effective way of assessing the viability of the corporate recovery model in various industries.
Findings
The corporate recovery model has served Wells Fargo well over the past few years as the stock price climbed nearly 60% in 2021. In addition, increasingly less public discussion about the account fraud scandal has allowed the reputation of the bank to recover as well. By the last quarter of 2021, the bank saw a 15% increase in revenue and an 86% increase in net income over the previous year. It appears that CEO Scharf is well on his way to turning around the prospects for Wells Fargo and the recovery model has proven again that there is a way through self-inflicted corporate damage.
Originality/value
The recovery story of Wells Fargo and Company adds to the litany of successful corporate recoveries where companies have achieved unprecedented turnarounds by following the model of replacing the leadership, restructuring the organization, redeveloping the strategy and re-branding the product. Implementing this four-pronged recovery strategy can help a company not only survive their specific scandal but also move away from reputational harm and get back on a growth trajectory.
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Russia's size – both in terms of population and geography, spanning 11 time zones, 89 oblasts (states or regions) and autonomous republics and its privatization program…
Abstract
Russia's size – both in terms of population and geography, spanning 11 time zones, 89 oblasts (states or regions) and autonomous republics and its privatization program, encompassing some 100,000 small-scale enterprises, 25,000 medium to large firms, and 300 or so of its largest firms, made its privatization program the largest sale/transfer of assets conducted among the transition economies, with the possible exception of China. Comparisons by many of the program's critics, and there are many, to Poland, Hungary, or the Czech republic are invidious, especially the latter two countries whose populations are similar to just that of greater Moscow.
Maria J. Nieto and Gillian G. Garcia
The purpose of this paper is to analyze the rationale for Bank Recovery and Resolution Funds (BRRFs) in the context of the present European Union's (EU) decentralized safety net.
Abstract
Purpose
The purpose of this paper is to analyze the rationale for Bank Recovery and Resolution Funds (BRRFs) in the context of the present European Union's (EU) decentralized safety net.
Design/methodology/approach
The paper makes some reflections on the governance aspects of BRRFs that would require minimum harmonization in the EU, emphasizing that BRRFs are only one institutional component of financial institutions' effective and credible resolution regime. This paper focuses on depository institutions, but the rationale of BRRFs could be extended to other credit institutions.
Findings
BRRFs contribute to shifting the government's trade‐off between bailing out and restructuring in favour of restructuring, to the extent that there is also an effective bank resolution legal framework. In turn, banks' contributions to BRRFs aim at discouraging their excess systemic risk creation, particularly through financial system leverage.
Originality/value
The paper provides input in the current regulatory debate to develop new measures for the reform of the regulatory framework of financial services in the EU.
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The purpose of this paper is to discuss the long‐term impact of the recent financial crisis on European Union (EU) competition policy.
Abstract
Purpose
The purpose of this paper is to discuss the long‐term impact of the recent financial crisis on European Union (EU) competition policy.
Design/methodology/approach
The paper, first, discusses the implications for competition from the measures adopted by national governments to address the recent financial crisis. Then, policy responses at EU level are presented and discussed. The paper culminates with a discussion of the future challenges.
Findings
The measures adopted by national governments to address the impact of the crisis on the financial sector and the broader economy, whilst necessary to stabilise the markets and pull the economies out of the recession, have potential adverse effects on competition inter alia by maintaining inefficient companies in the markets and delaying necessary market restructuring. The EU authorities have worked to facilitate the national efforts to address the crisis by adding flexibility to existing EU competition rules but they have declared that distortions of competition should be kept to a minimum. Nevertheless, despite these efforts, the current economic and political environment raises a number of challenges to competition policy which will have to be dealt with in 2010 and the years to come.
Originality/value
The paper contains a critical analysis of the impact on competition policy of the recent financial crisis and puts forward proposals for addressing these challenges. It contributes to the debate between economists and policy‐makers on the role impact of the financial crisis on competition policy.
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Emilio Martín, Alfredo Bachiller and Patricia Bachiller
The purpose of this paper is to analyse the performance of Spanish banking entities between 2009 and 2013, a period marked by the reform of the banking system with a large number…
Abstract
Purpose
The purpose of this paper is to analyse the performance of Spanish banking entities between 2009 and 2013, a period marked by the reform of the banking system with a large number of mergers and integrations.
Design/methodology/approach
First, efficiency is measured applying the data envelopment analysis (DEA) methodology and, then, the Malmquist index is calculated to assess its evolution.
Findings
The results show that most of the entities have improved their performance from the production approach. However, from the intermediation approach, the efficiency of the sample has deteriorated, which raises questions about the sustainability of the traditional banking business when the current credit restriction strategy is long lasting.
Practical implications
The comparative analysis demonstrates that, after the deep reforms carried out in Spain, the banking entities maintain similar efficiency rankings to those they had at the beginning of the period analysed. This shows that the reform has created new groups that operate adequately, avoiding the closing of institutions. Despite the better rationalisation of the available resources, the outlook for Spanish banks remains unclear in the current macroeconomic context, which does not favour the banking business.
Originality/value
The study contributes to the literature on the Spanish banking system because it adds new empirical evidence about its restructuring and it applies a DEA model to a sample before and after mergers. The authors discuss theoretical and managerial implications and offer suggestions for future research on this field.
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