Search results

Directors help determine the strategic direction of a corporation and are responsible for ensuring the institution has a good system of internal control. Banking institutions without a strategic direction emphasizing sound lending practices that promote the long-run financial health and viability of the institution will be sued more frequently than peer institutions. Institutions that do not have a good system of internal control will also be sued more frequently. Hence, legal expense is a bank corporate governance measure. We compare the performance of bank legal expense and a widely cited corporate governance index in a regression framework to determine which better predicts bank performance. The regressions indicate legal expense is a much better predictor, hence a better measure of bank corporate governance. Regulators should require legal expense reporting and rank institutions by the ratio of legal expense to assets to help identify institutions with weak governance. Seven case studies illustrate the role of legal expense in corporate governance.

Banking sectors in central, eastern and southeastern European (CESEE) countries have gone through a transformation from state-ownership and central planning to private ownership and market-oriented decision making during the first decade of the 21st century. However, financial markets in these countries are still developing and the private sector is highly exposed to changes in exchange rates, especially in terms of the balance sheet channel. The fact that these banking sectors are predominantly owned by eurozone banks makes them vulnerable to macroeconomic tensions in the European union. This analysis investigates macroeconomic determinants of the realisation of credit risk in the loan portfolio of banks in Serbia using a panel data set covering the period from 2008Q3 to 2012Q2. Three different panel methods were applied separately for loans to households and loans to enterprises. The results indicate that a deteriorating business cycle and exchange rate depreciation led to the worsening of the quality of banks’ loan portfolio in Serbia in the period under review. In addition, statistical evidence indicates that the CPI inflation additionally affected the quality of loans. Furthermore, we find that household loan portfolios are also sensitive to changes in the short-run interest rates. As for policy implications, the importance of international cooperation between regulators is rising. A very important topic for such cooperation should be the risk-taking channel between countries with significant differences in interest rates and degree of riskiness. The interrelationship between the exchange rate and credit risk should be a major focus of both domestic macro- and micro-prudential policy – banks should be motivated to pay more attention to the possible negative spillovers when making credit decisions. Also, further development of the domestic primary and secondary T-bills market would help reducing unhedged FX risks.

The Greek sovereign debt crisis had a substantial impact on the real economy and the Greek banking sector. From a period of growth in the economy and high levels of profitability, Greek banks experience a major decrease in demand in the local market, and a large increase in non-performing loans. This had a negative effect on the financing of the Greek firms and households, especially after the PSI and the recapitalisations of the Greek Banks. The Greek banking system has been restructured into four large systemic banking groups and after a long time of depression, the efforts are now being directed into restarting the economy through the financing of firms and individuals. However, the recent and on-going experience with substantial volumes of non-performing loans and strategic defaults, poses many challenges. The same can be said for stricter regulation that was introduced in the aftermath of the financial crisis, business model transformation, developments in the fintech and IT arena, and most recently COVID-19 pandemic, all introducing challenges to bank managers. This chapter provides an overview of these issues.

The comparison between economic growth and the character of monetary policy is one of the most frequently studied issues in policymaking. However, the number of studies incorporating a dynamic time warping approach to analyse the similarity of macroeconomic variables is relatively small.

The study aims at assessing the mutual similarity among various variables representing the financial sector (including the monetary policy by the central bank) and the real sector (e.g. economic growth, industrial production, household consumption expenditure), as well as cross-similarity between both sectors.

The analysis is based on the dynamic time warping (DTW) method, which allows for capturing various dimensions of changes of considered variables. This method is almost non-existent in the literature to compare financial and economic time series. The application of this method constitutes the main area of value added of the research. The analysis includes five variables representing the financial sector and five from the real sector. The study covers four countries: Czechia, Hungary, Poland and Romania and the 2010–2022 period (quarterly data).

The results show that variables representing the financial sector, including those reflecting monetary policy, are weakly correlated with each other, whereas the variables representing the real economy have a solid mutual similarity. As regards individual variables, for example, GDP fluctuations show relatively substantial similarity to ROE fluctuations – especially in Czechia and Hungary. In the case of Hungary and Romania, CAR fluctuations are consistent with GDP fluctuations. In the case of Poland and Hungary, there is a relatively strong similarity between the economy's monetisation and economic growth. Comparing the individual countries, two clusters of countries can be identified. One cluster includes Poland and Czechia, while another covers Hungary and Romania.

Over the last decade, foreign currency indebtedness in Hungary has become a systemic financial problem, and its crippling impact on the real economy has been aggravated by its significant constraints on economic policy. In international comparative terms, however, there are certain specific features relating to Hungary which make this issue particularly problematic, and during the financial crisis both exchange rates and interest rates were important factors in increasing the burden on individual households. We present here a case study whereby our research focuses on the causes and determining factors of the pricing of Swiss franc-denominated mortgage loans. Our empirical exercise examines four potential price shocks which might have affected the pricing decisions of credit institutions: foreign currency interest rates, the country risk premiums (measured by Credit Default Swap (CDS) spread), the deteriorating quality of the loan portfolio and the taxes levied on banks. The questions which arise concern the relationship of these costs to the changes in interest rates and the extent to which these cost shocks were passed on by banks to their clients. Empirical evidence based on Vector Error Correction Model (VECM) shows a significant long-run relationship between cost factors and CHF denominated mortgage loans interest rates — with a reasonable sign and magnitude of parameters, but also with moderate forecasting power. Finding a tractable solution to the foreign currency debt trap is only possible if a fair distribution of burdens is achieved, and this should be supported by empirical facts. At the end of the day, all three affected parties (debtors, banks, and the Hungarian State) had made their contribution, but how fair and reasonable the distribution was remains an open issue for further research.

The COVID-19 pandemic deteriorated the economic situation and raised the issue of the quality of banks’ assets and, in particular, the growth of non-performing loans (NPLs). The study approaches a topical subject that is of interest to banks and society at large, as credit availability is likely to be reduced. Over the last 10 years, the Baltic countries’ banking sector has significantly improved its risk management policies and practices, increased capital ratios on its balance sheets, and created risk reserves. The current chapter examines the factors affecting NPLs in the Baltic States based on advanced econometric modelling applied to data extracted from the International Monetary Fund (IMF) and Eurostat. The study results show that credit risk management in the Baltic States has significantly improved compared to the period before the global financial crisis (GFC), the capitalisation of credit institutions is one of the highest in the European Union (EU), and banks are liquid and profitable. Lending recovered from the downturn in the first phase of the pandemic, and credit institutions have taken advantage of the European Central Bank’s (ECB) long-term funding programme ITRMO III to improve the liquidity outlook. Although the credit quality of commercial banks has not deteriorated, as the exposures of credit institutions in the most affected sectors are insignificant and governments have provided fiscal support to businesses and households, some challenges remain. The increase in credit risk is expected due to rising production prices as well as the rebuilding of disrupted supply chains. The findings allow conclusions to be drawn on the necessary actions to mitigate the credit risk of the banking sector.

Islamic financial institutions (IFIs) have gained popularity recently in the Islamic countries and countries with mixed religious practices. Due to its profit–loss sharing partnership contracts and integrated social and risk management practices, IFI can finance financially distressed firms, and firms with specialized sectors, better than the traditional development financial institutions (DFIs). Should they need large amount of financing, both existing financially unsuccessful industries and new development initiatives can be financed with Sukuk issuance. This chapter investigates the growth of these two industries – IFIs and DFIs, with respect to various indicators, compares the initiatives that establish the dominating character of IFIs over the DFIs, discusses the reasons behind such turnaround, and the future of DFIs. IFIs have been enjoying a superior growth in assets and deposits, asset quality, risk management, and profitability over the DFIs in Malaysia. Among many, the study identifies regulatory incentives to IFIs, inefficient management of DFIs, and most importantly, a paradigm shift through Islamic finance as primary reasons behind gradual disappearance of DFIs. The next generation of IFIs will emerge as the Islamic Development Financial Institutions and may takeover the role that is played by the DFIs most recently.

Purpose – This chapter investigates the effect of capital requirement regulations, both national and those issued by the Basel Committee on Banking Supervision, on banks’ interest rate margins between loans and deposits. Higher capital requirements lead to higher margins, as banks pass this additional cost to consumers.

Methodology – To estimate this effect, we use yearly data from a cross section of countries and fixed/random effects regressions. Our results exhibit a stronger statistical significance when we focus on a cross section of 20 transition economies from Central and Eastern Europe between 2000 and 2008.

Findings – Once we include institutional factors, as well as banking system and macroeconomic-related variables, we are able to explain more than 60% of the variation in interest margin across countries. We find that the banking capital to asset ratio positively and significantly impact the margin: we estimate that a 1 percentage point increase in capital requirements leads to a 20 basis point increase in the interest rate margin. The banking system liberalization index has a strong and significant impact on margin, with a higher degree of liberalization bringing about lower margins. The impact of a one-step increase (1/3 on a scale of 1 to 4) is a reduction in the margin by 1.25 percentage points. Other variables that influence the margin are real interest and inflation, both with a positive sign.

Implications/value of chapter – National banking authorities should not impose higher capital requirements than those recommended by the Basel Committee, as this would increase local borrowing costs. Romania's 15% capital requirements (vs. 10% required by Basel rules) have increased the interest rate margin by at least 1.5 percentage points.