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1 – 10 of 14The distinction between systemic banks (GSIBs) and non-systemic banks (non-GSIBs) is driven by policy reasons. This study aims to examine the behaviour of non-performing loans in…
Abstract
Purpose
The distinction between systemic banks (GSIBs) and non-systemic banks (non-GSIBs) is driven by policy reasons. This study aims to examine the behaviour of non-performing loans in European GSIBs and non-GSIBs from 2004 to 2013.
Design/methodology/approach
The author uses regression methodology to analyse the association between non-performing loans (NPLs) and the state of the economy.
Findings
The author finds that more profitable banks witness higher NPLs regardless of them being systemic or non-systemic. Secondly, GSIBs have fewer NPLs during economic booms and during periods of increased lending, while non-GSIBs experience higher NPLs during periods of increased lending. The author also observes that European non-GSIBs that exceed regulatory capital requirement also experience higher NPLs. In the post-crisis period, there is a significant and negative relationship between NPLs and the economic cycle for GSIBs in the post-financial crisis period and a significant and positive relationship between NPLs, loan supply and bank profitability for GSIBs in the post-financial crisis period; on the other hand, there is a significant and negative relationship between NPLs and regulatory capital ratios for non-GSIBs in the post-financial crisis period and a significant and positive relationship between NPLs and bank profitability for non-GSIBs in the post-financial crisis period. The findings have implications.
Originality/value
To the best of the author’s knowledge, the literature on the determinants of NPL has not empirically examined the behaviour of NPLs in European GSIBs and non-GSIBs. This paper examines this issue to provide insights to help policymakers and academics understand the peculiarities of NPLs in Europe.
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This chapter proposes a measure of systemic default interconnectedness between banks, non-banks, housing finance companies in India and globally systemically important banks based…
Abstract
This chapter proposes a measure of systemic default interconnectedness between banks, non-banks, housing finance companies in India and globally systemically important banks based on variance decompositions associated with a multiple variable vector autoregression of probability of default of the institutions. We call it the “vulnerability spillover index” (VSI). The vulnerability indices capture all the major macro and financial stress events in the Indian and global economy explaining the interconnections between sectors and underlying reasons for spillovers and potential for a systemic crisis. Thresholds of VSI are calculated which may enable prediction of financial stress events.
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Yanfei Sun and Yinan Ni
This paper aims to construct a measure of integration among global banks and examine its impact on bank insolvencies and bank crises.
Abstract
Purpose
This paper aims to construct a measure of integration among global banks and examine its impact on bank insolvencies and bank crises.
Design/methodology/approach
The authors apply principal component analysis to measure a bank’s degree of integration to the global banking market. Moreover, they test whether bank integration affects bank insolvency risk, in which they treat the equity of individual banks as a call option.
Findings
The authors find that the banking industry has become more globally integrated over the past two decades. At the individual bank level, results indicate that banks with higher integration levels have more assets, more nontraditional banking services and more interbank businesses. Overall, they find that a bank’s integration level is negatively associated with insolvency risk, which suggests that greater integration with global markets diversifies a bank’s risk. At the country level, banking systems with less integrated big banks, or more integrated smaller banks, are more stable and hence less likely to suffer a banking crisis.
Originality/value
The authors construct a novel measure of integration among global banks and examine its impact on bank insolvencies and bank crises.
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Rajesh Kumar Bhaskaran, K.S. Sujit and Saksham Mongia
This research study examines the impact of social and governance initiatives on financial performance of global banks. The study is significant in the context of massive changes…
Abstract
Purpose
This research study examines the impact of social and governance initiatives on financial performance of global banks. The study is significant in the context of massive changes in regulations, government policy, social attitudes and market development attributed to banking sector.
Design/methodology/approach
The source of data for this study was ESG database of Thomson Reuters. The study was based on 472 global banks. The research paper uses two-stage least square model and the study covered the five-year period 2015–2019.
Findings
Banks with high intensity of social and governance-related activities have positive market-based valuation effects. Adequately capitalized banks tend to invest more in social initiatives. Banks' governance initiatives directed toward the use of anti-takeover defensive mechanisms are skeptically perceived by markets. Riskier banks tend to have less investments in social initiatives.
Research limitations/implications
The findings are relevant in the context of expectations from policymakers, consumers and investors with respect to the role which banks ought to play in funding the development of a sustainable economy. The research finding that strong governance and social initiatives by banks are value-enhancing measures is a clear evidence of the significance of ESG initiatives as value-creating mechanisms as perceived by markets.
Originality/value
This study addresses the gap in the research, which examines the role of governance and social initiatives on value creation in the banking sector firms. The study examines the impact of different elements of governance and social initiatives on financial performance of banks.
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Colleen Baker, Christine Cummings and Julapa Jagtiani
Basel III and the capital stress testing introduced new requirements and new definitions while retaining the structure of the pre-2010 requirements. The total number of…
Abstract
Purpose
Basel III and the capital stress testing introduced new requirements and new definitions while retaining the structure of the pre-2010 requirements. The total number of requirements increased, making it difficult to determine which and how many constraints are binding. The purpose of this paper is to discuss the new financial regulations in the post-financial crisis period, focusing on the capital and liquidity regulations.
Design/methodology/approach
The authors explore the impact of financial regulations using various data sources – financial and accounting data from Y-9C Reports. Market data such as daily bond trading from TRACE through the Wharton Data Research Services and Treasury yield from the Bloomberg. The authors use regression analysis to examine the roles of capital adequacy and liquidity regulations.
Findings
The authors’ analysis in this paper suggest that Basel III, CET1 and Level 1 HQLAs requirements post-financial crisis have reshaped the balance sheets of large financial institutions, with some differential impacts on traditional versus capital markets banks. These changes appear to respond to the binding constraints (CET1 being a preponderance of required regulatory capital, Level 1 HQLAs a majority of required HQLAs and the expense of both) created by these new requirements, which also appear to have constrained asset growth at such institutions. Consistent with the authors’ view, their results suggest that the new requirements are less constraining for large traditional banks (such institutions show a rapid increase in CET1 capital to steady-state levels by 2012 and strong retail deposit rebuilding resulting in a relatively low required HQLA) and much more so, particularly the liquidity requirement, for the capital markets banks (such institutions show continuous building of CET1 capital over the post-crisis observation period, declines in the share of trading assets and increases in the share of HQLAs combined with efforts to increase retail deposits). Credit risk spreads rose dramatically during the financial crisis of 2008-2009. Although decreased, they remain higher and with greater dispersion (for both groups of banks) than pre-crisis. Preliminary regression analysis suggests that the market responds to changes in measured liquidity, rather than the regulatory capital ratios, when pricing bank risk (as reflected on bond spreads).
Research limitations/implications
The estimation is based on historical relationship in the data. We must be cautious in extrapolating the results in a different environment.
Practical implications
There appears to be an arbitrage between HQLA and retail deposits. Capital markets banks and traditional banks follow different business models as evident in the analysis in this paper.
Social implications
Market pricing suggests that the liquidity measures are more transparent and easier to understand. Capital ratios are not as easy to interpret.
Originality/value
Original research. To the authors’ knowledge, there is no paper that examines impacts of capital and liquidity regulations after the crisis at capital markets banks vs traditional banks – using both accounting data and market data.
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Ming Qi, Danyang Shi, Shaoyi Feng, Pei Wang and Amuji Bridget Nnenna
In this paper, the authors use the balance sheet data to investigate the interconnectedness and risk contagion effects in China's banking sector. They firstly study the network…
Abstract
Purpose
In this paper, the authors use the balance sheet data to investigate the interconnectedness and risk contagion effects in China's banking sector. They firstly study the network structure and centrality of the interbank network. Then, they investigate how and to what extent the credit shock and liquidity shock can lead to the risk propagation in the banking network.
Design/methodology/approach
Referring to the theoretical framework by Haldane and May (2011), this paper uses the network topology theory to analyze the contagion mechanism of credit shock and liquidity shock. Centrality measures and log-log plot are used to evaluate the interconnectedness of China's banking network.
Findings
The network topology has shown clustering effects of large banks in China's financial network. If the Industrial and Commercial Bank of China (ICBC) is in distress, the credit shock has little impact on the Chinese banking sector. However, the liquidity shock has shown more substantial effects than that of the credit shock. The discount rate and the rollover ratio play significant roles in determining the contagion effects. If the credit shock and liquidity shock coincide, the contagion effects will be amplified.
Research limitations/implications
The results of this paper reveal the network structure of China's interbank market and the resilience of banking system to the adverse shock. The findings are valuable for regulators to make policies and supervise the systemic important banks.
Originality/value
The balance sheet data of different types of banks are used to construct a bilateral exposure matrix. Based on the matrix, this paper investigates the knock-on effects of credit shock triggered by the debt default in the interbank market, the knock-on effects of liquidity effects, which is featured by “fire sale” of bank assets, and the contagion effects of combined shocks.
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Tonmoy Choudhury and Kevin Daly
This study aims to examine the systemic risk contagion in banks from 15 US states using extreme shocks in their distance to risk.
Abstract
Purpose
This study aims to examine the systemic risk contagion in banks from 15 US states using extreme shocks in their distance to risk.
Design/methodology/approach
The authors contemplate a model that inputs co-exceedances in the base US states’ banking sector as the dependent variable and the co-exceedances in other states’ banking sector (along with other underlying variables of a banking system) as the explanatory variables.
Findings
The authors find smaller states transmit and receive more systemic shocks than their larger counterparts and larger states exhibit a better shock-resisting capacity than their smaller counterparts. The authors also find that bigger shocks are more contagious than the smaller shocks.
Originality/value
This will be the first paper that will investigate the inner linkage of US states’ banking network using three different distance to risk methods, thus providing timely guidance for regulators.
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Using cross-country data on the 1,000 largest global banks for 2019, the paper aims to examine the response of bank risk and returns to the pandemic.
Abstract
Purpose
Using cross-country data on the 1,000 largest global banks for 2019, the paper aims to examine the response of bank risk and returns to the pandemic.
Design/methodology/approach
The author employs weighted least squares (WLS) techniques for the purposes of analysis.
Findings
The findings suggest that banks with Islamic windows increased their riskiness in response to the pandemic, although there was not much impact on profitability. Additionally, the author categorizes banks based on certain major characteristics and find that these findings are manifest primarily for well-capitalized and less liquid banks.
Originality/value
Research as to the impact of the pandemic on banks' balance sheets has been an unaddressed area of research. By focusing on a large sample of banks across countries with both Islamic and conventional banking presence, the analysis sheds light on the balance sheet response of banks to the pandemic, an aspect that has not been addressed earlier.
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INTERNATIONAL: Liquidity squeezes grow as rates rise