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Article
Publication date: 24 September 2020

Aigul P. Salina, Xin Zhang and Omaima A.G. Hassan

The contribution of the banking industry to the financial crisis of 2007/8 has raised public concerns about the financial soundness of banks around the world with many…

Abstract

Purpose

The contribution of the banking industry to the financial crisis of 2007/8 has raised public concerns about the financial soundness of banks around the world with many countries still suffering the backlogs of this crisis. The continuous emergence of such crises at both national and international levels increases governments', bank regulators' and financial market participants' need for reliable tools to assess the financial soundness of banks. In this context, this study investigates the financial soundness of the Kazakh banking sector, which is ranked by the World Bank as the first in the world in terms of the percentage of nonperforming loans (NPL) to total gross loans in 2012.

Design/methodology/approach

Using data about all Kazakh banks over the period January 01, 2008 to January 01, 2014, the study identifies a number of accounting indicators that influence the financial soundness of banks using principal component analysis (PCA). Then, it uses the outcomes of the PCA in a cluster analysis and groups the Kazakh banks into sound, risky and unsound banks at two points in time: January 01, 2008 and January 01, 2014. This methodology was further tested against a ranking system of banks and proved to be more reliable in detecting risky banks.

Findings

Fifteen financial ratios were initially selected as accounting indicators for the assessment of bank financial soundness. Using PCA, twelve indicators were isolated, which explain five principal components of capital adequacy, return on assets, profitability, asset quality, liquidity and leverage. Then using the “k-means” method, the results suggest a structure of the Kazakh banking sector on January 01, 2008 that includes two groups of banks: sound and risky banks. On January 01, 2014, this structure of the banking system has changed to include three groups of banks: sound, risky and unsound banks. Thus, in 2014 a new group of banks has emerged, i.e. financially unsound banks.

Practical implications

The proposed cluster-based methodology has proven to be a reliable tool to detect the financial soundness of Kazakh banks, which makes us advocate its employability for bank monitoring and supervision purposes.

Originality/value

This study is the first to employ a cluster-based methodology to assess the financial soundness of a banking sector. This methodology can be used at a micro-level to determine the structure of a banking sector. Also, it can be used to monitor any changes in the structure of a banking sector and provide early warning signals about the financial health of banks.

Details

Asian Journal of Accounting Research, vol. 6 no. 1
Type: Research Article
ISSN: 2443-4175

Keywords

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Book part
Publication date: 17 August 2011

Biswa Nath Bhattacharyay

Several developing economies witnessed a large number of systemic financial and currency crises since the 1980s that resulted in severe economic, social, and political…

Abstract

Several developing economies witnessed a large number of systemic financial and currency crises since the 1980s that resulted in severe economic, social, and political problems. The devastating impact of the 1982 and 1994–1995 Mexican crises, the 1997–1998 Asian financial crisis, the 1998 Russian crisis, and the ongoing financial crisis of 2008–2009 suggests that maintaining financial sector stability through reduction in vulnerability is highly crucial. The world is now witnessing an unprecedented systemic financial crisis originated from the USA in September 2008 together with a deep worldwide economic recession, particularly in developed countries of Europe and North America. This calls for devising and using on a regular basis an appropriate and effective monitoring and policy formulation system for detecting and addressing vulnerabilities leading to crisis. This chapter proposes a macroprudential/financial soundness monitoring, analysis, and remedial policy formulation system that can be used by most developing countries with or without crisis experience as well as with limited data. It also discusses a process for identifying and compiling a set of leading macroprudential/financial soundness indicators. An empirical illustration using Philippines data is presented. There is an urgent need for increased coordination, collaboration, and partnership among central banks, banking and financial market supervision agencies, and ministries of finance, economic, and planning for proper macroprudential monitoring. A high-level national financial stability committee under the auspices of the head of the state as well as a ‘‘regional financial stability board’’ needs to be established to complement and support the activities of an “international stability board.”

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Article
Publication date: 19 June 2017

Abdul Rashid, Saba Yousaf and Muhammad Khaleequzzaman

This paper aims to empirically assess the contribution of Islamic banks toward the financial stability of Pakistan. For this, the authors investigate the relative financial

Abstract

Purpose

This paper aims to empirically assess the contribution of Islamic banks toward the financial stability of Pakistan. For this, the authors investigate the relative financial strength of Islamic banks and their contribution toward the financial stability. They also examine the relationship between the competitive conduct of banks and banking system stability.

Design/methodology/approach

The authors use quarterly data of ten conventional banks, four full-fledged Islamic banks and six standalone Islamic branches of conventional banks of Pakistan for the period 2006-2012. The z-score has been computed and used as the measure of stability of banks and the random effects estimator applied to quantify the impact of bank-specific variables and macroeconomic indicators on the financial stability. The empirical framework used in the paper enables the authors us to examine the differential effect of each underlying variable on the financial stability across Islamic and conventional banks. To check the robustness of the results, the authors have estimated several models with different specifications.

Findings

The regression results indicate that income diversity, profitability ratio, loan to asset ratio, asset size and the market concentration ratio of banks have significant effects on the stability of banks. Comparing Islamic and conventional banks, notable differential effects of the empirical determinants of financial stability for Islamic and conventional banks have been observed. The results suggest that Islamic banks have performed better as compared to conventional banks and contributed more effectively in the stability of financial sector. Overall, the results depict that the contribution of Islamic banks toward the financial stability has been reasonable and prospective.

Practical implications

The empirical results of the paper are very useful not only for banks’ managements but also for the investors, bank customers and policymakers. Specifically, the findings help in enhancing our understanding as to how the bank-specific variables and macroeconomic indicators are related to the financial stability of the banking system. The results also help understand the role of both Islamic and conventional banks in the financial stability. Further, the results suggest that the financial soundness can be enhanced by creating healthy competition in the banking industry. The results about macroeconomic indicators imply that protective measures are required to intensify (mitigate) the positive (negative) effect of gross domestic product (inflation) on banks’ financial stability.

Originality/value

This paper provides an overall comparative analysis of financial stability of both Islamic and conventional banks of Pakistan. First, the paper computes the z-score for each bank included in the sample, and then, it performs the regression analysis to study how bank-specific variables and macroeconomic factors are related to the financial stability of banks. Unlike the previous studies, our empirical framework enables the authors to examine the differential effect of each underlying variable on the financial stability across Islamic and conventional banks.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 10 no. 2
Type: Research Article
ISSN: 1753-8394

Keywords

Content available
Article
Publication date: 12 July 2021

Ignacio Moreno, Purificación Parrado-Martínez and Antonio Trujillo-Ponce

Despite the sophisticated regulatory regime established in Solvency II, analysts should be able to consider other less complex indicators of the soundness of insurers. The…

Abstract

Purpose

Despite the sophisticated regulatory regime established in Solvency II, analysts should be able to consider other less complex indicators of the soundness of insurers. The Z-score measure, which has traditionally been used as a proxy of individual risk in the banking sector, may be a useful tool when applied in the insurance sector. However, different methods for calculating this indicator have been proposed in the literature. This paper compares six different Z-score approaches to examine which one best fits insurance companies. The authors use a final dataset of 183 firms (1,382 observations) operating in the Spanish insurance sector during the period 2010–2017.

Design/methodology/approach

In the first stage, the authors opt for a root mean squared error (RMSE) criterion to evaluate which of the various mean and SD estimates that are used to compute the Z-score best fits the data. In the second stage, the authors estimate and compare the explanatory power of the six Z-score measures that are considered by using an ordinary least squares (OLS) regression model. Finally, the authors report the results of the baseline equation using the system-GMM estimator developed by Arellano and Bover (1995) and Blundell and Bond (1998) for dynamic panel data models.

Findings

The authors find that the best formula for calculating the Z-score of insurance firms is the one that combines the current value of the return on assets (ROA) and capitalization with the SD of the returns calculated over the full sample period.

Research limitations/implications

The main limitation of the research is that it addresses only the Spanish insurance sector, and consequently, the implications of the findings must be framed in this institutional context. However, the authors think that the results could be extrapolated to other countries. Future research should consider including different countries and analyzing the usefulness of aggregated insurer-level Z-scores for macroprudential monitoring.

Practical implications

The Z-score may be a useful early warning indicator for microprudential supervision. In addition to being an indicator of the soundness of insurers simpler than those established in the current regulation, the information provided by this accounting-based measure may help analysts and investors obtain a better understanding of insurance firms' risk factors.

Originality/value

To the best of the authors’ knowledge, this study is the first to examine and compare different approaches to calculating Z-scores in the insurance sector. The few available results on the predictive power of the Z-score are mixed and focus on the banking sector.

研究目的

雖然在償付能力標準II 內已建立了精密的監管制度,但分析人員應可以考慮以不太複雑的指標,來分析保險公司的穩健程度。Z-分數的估量在銀行業一向作為是個體風險的代理而使用,而Z-分數如應用於保險業,或許會成為有用的工具。唯在文獻裏,學者和研究人員提出了不同的方法來計算這個指標。本文比較六個不同的Z-分數估量方法,以研究出最適合保險公司的方法。我們使用一個最終數據集,包括在2010年至2017年期間在西班牙保險業界營運的183間公司(1382 個觀察)。

研究設計/方法/理念

在首個階段,我們選擇使用一個方均根誤差(RMSE) 標準來衡量用來計算Z-分數的各個平均值和標準差估量中哪個最適合使用於有關的數據。在第二個階段, 我們以普通最小平方 (OLS) 迴歸模型,去估計並比較被考慮的六個Z-分數估量的解釋力。最後,我們以Arellano與Bover (1995), 以及Blundell與Bond (1998) 為動態追蹤資料模型而發展出來的系統-廣義動差估計推定量,來發表我們基線方程式的結果。

研究結果

我們發現,計算保險公司Z-分數的最佳公式是把資產收益率及資本總額的現值,和在整個樣本期間計算出來的囘報的標準差結合起來的公式。

研究的局限/含意

我們研究主要的局限為:研究只涉及西班牙的保險業;因此,研究結果的含意,必須在這個體制的背景框架下來闡釋。唯我們相信研究結果或許可外推至其它國家。未來的研究,應考慮納入不同國家作為研究對象,並分析保險公司層面的集成Z-分數的功用,以求達到宏觀審慎監控的目的。

實際意義

Z-分數或許就微觀審慎監管而言是一個有用的早期警告器。這些以會計為基礎的估量而提供的資訊,除了較現時規例内已建立顯示保險公司穩健程度的各個指標更簡單外,還會幫助分析人員和投資者更了解保險公司的風險因素。

研究的原創性/價值

據我們所知,本研究為首個研究,去探討並比較保險業內的Z-分數的計算方法。以前關於Z-分數預測能力的,為數不多並可供取閱的研究結果均不統一;而且,這些研究都聚焦探討銀行業。

Details

European Journal of Management and Business Economics, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2444-8451

Keywords

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Article
Publication date: 12 January 2021

Ahmad Sahyouni, Mohammad A.A. Zaid and Mohamed Adib

The purpose of this paper is to investigate how much liquidity banks create and how liquidity creation changed over time in the MENA countries and to examine the soundness

Abstract

Purpose

The purpose of this paper is to investigate how much liquidity banks create and how liquidity creation changed over time in the MENA countries and to examine the soundness of banks in these countries based on the CAME rating system, in addition to investigating the relationship between CAME ratios and liquidity creation of these banks.

Design/methodology/approach

The study regresses the CAME ratios together with other control variables to model liquidity creation. The robustness of the results is evaluated by using a different measure of liquidity creation and by excluding the observations of the Islamic banks.

Findings

The results show that the CAME rating system, as an indicator of bank soundness, is negatively related to bank liquidity creation. Specifically, capital adequacy, management efficiency and earning ability ratios affect the on-balance sheet components of liquidity creation, while asset quality ratio affects its off-balance sheet component.

Practical implications

The paper offers insights to regulators and banks managers in terms of better understanding of the negative relationship between CAME rating system and bank liquidity creation.

Originality/value

This paper sheds more light on the relationship between bank soundness and liquidity creation by using the ratios of the CAMEL rating system as an indicator of bank strength and soundness.

Details

EuroMed Journal of Business, vol. 16 no. 1
Type: Research Article
ISSN: 1450-2194

Keywords

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Book part
Publication date: 2 March 2011

Carlo Gola and Francesco Spadafora

The global financial crisis has magnified the role of Financial Sector Surveillance (FSS) in the International Monetary Fund's activities. This chapter surveys the various…

Abstract

The global financial crisis has magnified the role of Financial Sector Surveillance (FSS) in the International Monetary Fund's activities. This chapter surveys the various steps and initiatives through which the Fund has increasingly deepened its involvement in FSS. Overall, this process can be characterised by a preliminary stage and two main phases. The preliminary stage dates back to the 1980s and early 1990s, and was mainly related to the Fund's research and technical assistance activities within the process of monetary and financial deregulation embraced by several member countries. The first ‘official’ phase of the Fund's involvement in FSS started in the aftermath of the Mexican crisis, and relates to the international call to include financial sector issues among the core areas of Fund surveillance. The second phase focuses on the objectives of bringing the coverage of financial sector issues ‘up-to-par’ with the coverage of other traditional core areas of surveillance, and of integrating financial analysis into the Fund's analytical macroeconomic framework. By urging the Fund to give greater attention to its member countries' financial systems, the international community's response to the global crisis may mark the beginning of a new phase of FSS. The Fund's financial sector surveillance, particularly on advanced economies, is of paramount importance for emerging market and developing countries, as they are vulnerable to spillover effects from crises originated in advanced economies. Emerging market and developing economies, which constitute the majority of the Fund's 187 members, are currently the recipients of over 50 programmes of financial support from the Fund (including those of a precautionary nature), totalling over $250 billion.

Details

The Impact of the Global Financial Crisis on Emerging Financial Markets
Type: Book
ISBN: 978-0-85724-754-4

Keywords

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Article
Publication date: 15 May 2019

Naoyuki Yoshino, Farhad Taghizadeh-Hesary and Farhad Nili

Deposit insurance is a key element in modern banking, as it guarantees the financial safety of deposits at depository financial institutions. It is necessary to have at…

Abstract

Purpose

Deposit insurance is a key element in modern banking, as it guarantees the financial safety of deposits at depository financial institutions. It is necessary to have at least a dual fair premium rate system based on creditworthiness of financial institutions, as considering singular premium system for all banks will have moral hazard. This paper aims to develop theoretical and empirical model for calculating dual fair premium rates.

Design/methodology/approach

The definition of a fair premium rate in this paper is a rate that covers the operational expenditures of the deposit insuring organization, provides it with sufficient funds to enable it to pay a certain percentage share of deposit amounts to depositors in case of bank default and provides it with sufficient funds as precautionary reserves. To identify and classify healthier and more stable banks, the authors use credit rating methods that use two major dimensional reduction techniques. For forecasting nonperforming loans (NPLs), the authors develop a model that can capture both macro shocks and idiosyncratic shocks to financial institutions in a vector error correction model.

Findings

The response of NPLs/loans to macro shocks and idiosyncratic innovations shows that using a model with macro variables only is insufficient, as it is possible that under favorable economic conditions, some banks show negative performance due to bank level reasons such as mismanagement or vice versa. The final results show that deposit insurance premium rate needs to be vary based on banks’ creditworthiness.

Originality/value

The results provide interesting insight for financial authorities to set fair deposit insurance premium rate. A high premium rate reduces the capital adequacy of individual financial institutions, which endangers the stability of the financial system; a low premium rate will reduce the security of the financial system.

Details

Studies in Economics and Finance, vol. 36 no. 1
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 11 July 2018

Gary W. Brester and Myles J. Watts

The safety and soundness of financial institutions has become a leading worldwide issue because of the recent global financial crisis. Historically, financial crises have…

Abstract

Purpose

The safety and soundness of financial institutions has become a leading worldwide issue because of the recent global financial crisis. Historically, financial crises have occurred approximately every 20 years. The worst financial crisis in the last 75 years occurred in 2008–2009. US regulatory efforts with respect to capital reserve requirements are likely to have several unintended consequences for the agricultural lending sector—especially for smaller, less-diversified (and often, rural agricultural) lenders. The paper discusses these issues.

Design/methodology/approach

Simulation models and value-at-risk (VaR) criteria are used to evaluate the impact of capital reserve requirements on lending return on equity. In addition, simulations are used to calculate the effects of loan numbers and portfolio diversification on capital reserve requirements.

Findings

This paper illustrates that increasing capital reserve requirements reduces lending return on equity. Furthermore, increases in the number of loans and portfolio diversification reduce capital reserve requirements.

Research limitations/implications

The simulation methods are a simplification of complex lending practices and VaR calculations. Lenders use these and other procedures for managing capital reserves than those modeled in this paper.

Practical implications

Smaller lending institutions will be pressured to increase loan sector diversification. In addition, traditional agricultural lenders will likely be under increased pressure to diversify portfolios. Because agricultural loan losses have relatively low correlations with other sectors, traditional agricultural lenders can expect increased competition for agricultural loans from non-traditional agricultural lenders.

Originality/value

This paper is novel in that the authors illustrate how lender capital requirements change in response to loan payment correlations both within and across lending sectors.

Details

Agricultural Finance Review, vol. 79 no. 1
Type: Research Article
ISSN: 0002-1466

Keywords

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Article
Publication date: 12 July 2021

Imran Abbas Jadoon, Raheel Mumtaz, Jibran Sheikh, Usman Ayub and Mohammad Tahir

The international institutions, policymakers and governments are promoting green growth as a policy objective for global financial stability (FS) without sound empirical…

Abstract

Purpose

The international institutions, policymakers and governments are promoting green growth as a policy objective for global financial stability (FS) without sound empirical investigation. Therefore, the purpose of this study is to investigate whether the green economy would be successful in achieving its main objective i.e. stabilizing the world financial system because the investment stakes are too high for this green transition.

Design/methodology/approach

The study used the two-step system generalized method of moments (GMM) methodology on panel data of 90 countries for 6 years from 2010 to 2015 to investigate the impact of green growth economy on FS.

Findings

The results of the current study revealed that overall green growth enhanced FS in the country for both the short and long run. However, the social inclusive dimension of green growth was irrelevant in creating FS.

Research limitations/implications

The results of the current study validate the growth-led finance hypothesis and encourage the policymakers to strengthen the policy initiative for green growth. Because green growth mitigates economic and environmental risk to create a stable financial environment. However, social inclusiveness needs to be explored through alternate paradigm in relevance to FS.

Originality/value

As per the author’s knowledge, it is a pioneer study to empirically investigate the impact of green growth on FS which would be useful in understanding the green growth and FS dynamics.

Details

Journal of Financial Regulation and Compliance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1358-1988

Keywords

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Book part
Publication date: 25 July 2019

Perry Warjiyo and Solikin M. Juhro

Abstract

Details

Central Bank Policy: Theory and Practice
Type: Book
ISBN: 978-1-78973-751-6

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