Canada’s role in the global banking system (1970s – early 2020s)

During the economic crisis of 2008, the global economic system came under tremendous stress due to unusually high activity in the risk spread and volatility in the financial asset valuation. The spread between the US T-bill rate and the London interbank offer rate (LIBOR), a proxy for perceived counterparty credit risk called the “TED spread,” also increased during the crisis period and impacted other economic variables. This study examines the impact of credit risk, as represented by the TED spread, on the daily returns of the ABAQ index, which represents community banks, and the KBW index, which represents the money center and other major banks. The findings, based on daily data from 2010–2020, are as follows: An increase in credit risk led to a decrease in returns for both community banks and money center banks; however, the significance of credit risk and its impact on the stock returns of community banks and money center banks diminished when controlled for other stock market movements. <b>Key Findings</b> ▪ The TED Spread is critical to investment valuation since it is an indicator of the price of money in the global banking system. ▪ As an indicator of the solvency of financial institutions, monetary liquidity, and perceived risk of the financial system, an increase in the TED spread impacts the daily returns of banks (community banks, money centers, and other major banks) negatively. ▪ An increase in the TED spread leads to the drying up of market liquidity that increases cost of funding and generates a negative reaction in the stock market. The study shows that stocks for both larger banks and community banks, while affected by the TED spread, are more impacted by general market movements.

During its 70‐year existence, China's modern banking system has typically been ill used by its government. Nevertheless, after the collapse of the Soviet Union, the Chinese government made effective use of ten years and a lot of capital to restructure its banks. And on the eve of the global financial crisis in 2008, China's principal banks had cleaned up their bad loans and received or raised large amounts of equity, in part by listing their shares internationally. In so doing, such banks may well have positioned themselves to face the crisis with the strongest balance sheets in the world.But since then, in the wake of the global financial crisis, China's banks have used securitization models—originating for the most part in the U.S.—to create products similar to the mortgage‐backed securities that nearly brought down the global banking system. The collapse of such securities in 2008 compelled China to undertake a massive stimulus program driven by bank lending. This stimulus has lasted nearly a decade, with a second recent and massive injection prompted by the COVID‐19 pandemic. The net effect of such stimulus is that China's total bank assets are now over 3.5 times national GDP—as compared to 1.0 in the U.S.—and more than twice the total level of U.S. banking assets in an economy just two‐thirds the size.But even with such an increase, reported non‐performing assets have remained at remarkably low levels—though the report itself has been received with near universal skepticism. Fueling this skepticism, the scale and balance sheet quality of these banks do not compute when one takes a closer look at the banks' main borrowers: largely local government entities with limited revenue bases. In China, local governments do not enjoy taxing authority and their budgets consistently exceed their revenue, with the funding gaps filled by ever more bank loans. As a consequence, most local governments are effectively bankrupt.How, then, given the financial condition of their borrowers, do Chinese banks continue to report superlative earnings and clean balance sheets? The author discusses in detail the two main methods banks have used to meet their accounting requirements while obscuring asset quality: (1) converting bank loans into bonds issued by the same borrowers; and (2) the creation of massive amounts of wealth management products (or WMPs), which are retail deposits backed not just by Treasuries and other liquid securities (as in the U.S.), but in significant part by illiquid assets that create troublingly large maturity mismatches. After pointing out the similarity of such WMPs to the mortgage‐backed securities used by American banks a decade ago, the author emphasizes the irony that, having used American banks as models for restructuring, China's government has forced its banks to continue to follow in their path to what at some point is highly likely to be a painful reckoning.

The urgency of the issue is due to the change of major banks functioning conditions in accordance with permanent risks, that global financial instability bears, fiscal and monetary regulation enforcement on national financial markets and from the side of supernational institutions of global financial market regulation. The aim of the paper is the research of overall efficiency of the major banks in the global financial instability. The comparative analysis of overall and individual meanings of bank products and services (earnings) sales values, net profit, assets volume, market value of major banks in researched years gave the possibility to find the tendencies of banks development taking into account global financial instability influence and institutional and regulatory foundations of national governments implementation, Financial stability council (created in Ukraine) and Basel Committee on Banking Supervision. The conditions of major global banks functioning are changing under the influence of financial supervision and institutional and regulatory requirements enforcement to banks activity financial parameters. Other factor that provokes global banks towards activity strategy change is the growth of competition both in bank sphere and non-banking institutions in connection to possibilities provided by financial innovations. The directions of further researches lie in global banking effectiveness finding in a whole from the point of view of not separate banks, or group of banks, but global banking system, which, to our mind, has already been formed. Keywords: global financial instability, effectiveness, major banks, global banking, bank efficiency. JEL Classification: F33, Е58, G21

The ongoing COVID-19 pandemic has led to not only the loss of enormous lives, but the dramatic impact on global financial markets. By considering 29 global systemically important banks from four regions (North America, Europe, China, Japan), we employ the proposed truncated D-vine dynamic mixed copulas model to investigate the evolution of the systemic risk of global banking system during the COVID-19 pandemic period. From empirical results, as a worldwide shock, the COVID-19 pandemic does have increased the systemic risk of the global banking system. Specifically, the systemic risk level of the global banking sector was moderate during the period when the COVID-19 pandemic burst only in China, and increased rapidly when the virus spread over the world, then cooling down when emergency actions were taken by countries. In addition, the systemic risk contribution of banks in most regions (like North America, Europe, and Japan) under the similar epidemic situation during the COVID-19 period, seem to be not impacted by the evolution of the panic (as well as the systemic risk level), while the systemic risk contribution of Chinese banks kept falling due to its opposite situation to others in this period.

Assessing systemic risk using interbank exposures in the global banking system

This paper contributes to the literature on systemic risk by examining the network structure of bilateral exposures in the global banking system. The global interbank market constitutes a major part of the global banking system. The market has a hierarchical network structure, composed of the national or jurisdictional area's local markets and the cross-border interbank market. First, we estimate the bilateral exposures matrix using aggregate financial data on loans and deposits from Bankscope and analyze the interconnectedness in the market using network centrality measures. Subsequently, for the model analysis, we apply the Eisenberg–Noe framework to a multi-period setting. In this framework, bank defaults are classified into stand-alone defaults and contagious defaults. The banks in our sample (i.e., the top 202 banks with more than $50 billion in total assets) comprise a major part of this global banking system. The main findings are as follows: The theoretical network analysis using network centrality measures showed that most of the banks designated as global systemically important banks (G-SIBs) play a central role in the global interbank market. The theoretical default analysis showed a few contagious defaults triggered by the basic defaults during and after the global financial crisis. Our stress test proved that many G-SIBs theoretically caused 1–6 contagious defaults. Our methodology would assist in the development of a monitoring system by the respective supervisory authorities as well as in the implementation of bank-internal stress tests of default contagion.

PurposeThis study investigated the impacts of the environment, social and governance (ESG) and its components on global bank profitability considering the COVID-19 outbreak.Design/methodology/approachThis study used a system generalized method of moments (GMM) proposed by Arellano and Bover (1995) to investigate the relationship between ESG and bank profitability using an unbalanced sample of 487 banks from 51 countries from 2006 to 2021.FindingsThe findings generally found that ESG activities may reduce bank profitability, thus supporting the trade-off hypothesis that adopting ESG standards could increase bank costs while lowering profitability. In addition, there is a U-shaped relationship between ESG and bank profitability, suggesting that ESG activities can help improve bank performance in the long term. Such an effect is the first time observed in the global banking sector. This study’s results are robust across different models and settings (e.g., developed vs. developing countries, different levels of profitability, and samples with vs without US banks).Practical implicationsThis study provides empirical evidence to support many countries' sustainable development policies. It also provides empirical incentives for bank managers to be more ESG-oriented.Originality/valueThis study provides a better understanding of the roles of ESG activity and its components in the global banking system, considering the recent crises.

The private finance-led development model, promoted by international financial institutions, has faced a number of challenges. A major criticism is that the model promotes shadow banking, a system vulnerable to cyclical changes in liquidity. I argue that these criticisms do not go far enough because they fail to challenge the dominant understanding of shadow banking as a system of credit intermediation. In this paper, I propose an alternative analytical framework of shadow banking as a system that facilitates high risk-adjusted returns for institutional investors. This framework better clarifies the accommodations emerging markets make to sustain financial flows of which I outline two: (1) the provision of high-yielding financial assets, primarily through the issue of local-currency denominated sovereign bonds; and (2) the liquidity and insurance central banks provide, by drawing on expensive foreign exchange reserves, that enable investors to reap high risk-adjusted returns. The paper argues that rather than facilitating finance (or patient capital) to meet development objectives, a private finance-led model, by promoting the integration of emerging markets into the global shadow banking system, facilitates financial accumulation for global investors.

The shock to the global financial system in 2020, caused by the coronavirus, provides is a test for the measures taken since the Global Financial Crisis of 2008. The coronavirus has caused a shock to the global economic system, disrupting both supply and demand, and this demands more direct government intervention than central banks are able to provide. Whereas the 2008 crisis was one centred on the global banking system that of 2020 was an event akin to a war, natural disaster, or a political revolution. In turn that had implications for the global financial system as it contained the potential to destabilize banks by threatening the solvency of those to whom they had made loans and extended credit. To forestall such an event central banks are called upon to act as lenders of last resort, particularly the Federal Reserve, as it was the only one capable of supplying the US$s on which all banks relied when making and receiving payments, and borrowing and lending, among themselves. From the outset that response appears to have learned lessons from the mistakes of the 2008 crisis, in terms of speed, scale, and co-ordination, while the global banking system is far more resilient.

The 2007 global financial crisis brought sharply into focus the need for macroprudential policy as a means of controlling systemic financial stability. This has become a focal point for policy-makers and numerous central banks, including the Bank of Canada, but it has its drawbacks, particularly here in Canada. As a counterbalance to microprudential policy, the idea of a macroprudential outlook reaches beyond the notion that as long as every banking institution is healthy, financial stability is assured. Macroprudential policy recognizes that all those financial institutions are linked, and that stability at the individual level may translate to fragility and uncertainty at the macro level. There are two approaches to macroprudential policy, and both come with downsides. One approach examines the network factor, in which banks are linked through their inter-connected financial transactions. A domino effect can thus be created; when one bank defaults, it causes a chain reaction down the line, creating instability in other banks in the network. The extent of this contagion of instability can be clearly observed through this model; unfortunately, it requires the use of detailed information typically available only to a limited circle of bank supervisors. The second approach gleans information from bank stock prices in a poorly performing market. This information is easily available and accessed, but the downside is the lack of clear understanding on how exactly these shocks travel through the complex links of the global banking system. Canada’s banking system is small and has only six major banks. However, it is important to understand how they are interconnected and how each individual bank can contribute to overall risk. Not only do banks need to be sufficiently capitalized in the normal business cycle, but it may be worthwhile for the sake of overall financial stability to create mechanisms, as regulators in some countries are doing, that require banks to hold more capital in good economic times so that they can use it as a buffer in case of a downturn. Another important macroprudential tool is to identify how much each bank contributes to systemic risk. This would entail identifying the banks that pose a greater threat to stability and having them hold extra capital. Assigning proper capital requirements is, however, not as straightforward as it may seem as the risk of the banking system changes when capital requirements change. One study has shown that when properly done such a requirement can reduce by one-quarter the probability of a financial crisis. Implementing macroprudential policy in Canada faces some challenges. With both housing prices and the level of Canadians’ personal debt high, sudden corrections to the financial system can create problems. Also, the interconnections between Canadian and foreign banks could result in the former being much more greatly influenced by financial-crisis spillover from the latter, something Canada generally avoided during the 2007 economic meltdown. There’s no consensus as yet on the objectives of macroprudential policy. However, it is a necessary complement to microprudential policy and provides a means of managing systemic risk with the goal of greater global financial stability.

The global banking system can be shown to be a Complex Adaptive System that exhibits phase transitions from time to time. These phase transitions can result in significant financial losses to the community that we estimate to be much more significant than losses occurring during “business as usual” periods. In this paper, we argue that the significant losses arising from phase transitions in the banking system requires a very different approach to regulation than the current Basel regime, and that there is a need to transition the Basel regime from a Federation of Systems to a System of Systems. We demonstrate that the World Health Organisation’s recent management system for pandemics is ideally suited for management of the global banking system and would have greater potential to control the phase transition losses than the current Basel system.

This study aims to examine the current state of information security policies and practices in the United States banking sector while drawing comparisons to global banking systems. The research specifically addresses risks, benefits, and future trends, providing insights for strengthening information security frameworks worldwide. The study adopts a qualitative research approach, utilizing secondary data sources, including scholarly journals, research articles, televised news, and online platforms. A systematic review was conducted using global databases such as Science Direct, Scopus, Web of Science, PubMed, DOAJ, and Google Scholar in alignment with the PRISMA 2020 guidelines. The research incorporated specific keyword phrases to identify relevant literature, with additional exclusion criteria applied to eliminate incomplete, inconsistent, or non-English publications. The final review included 125 papers and 20 reports. The findings highlight that the U.S. banking sector faces a dynamic landscape of cybersecurity risks, including phishing attacks, ransomware, regulatory non-compliance, and insider threats. Despite these risks, robust information security frameworks offer significant rewards, such as improved customer trust, fraud detection through AI and machine learning, and financial stability. The study underscores the regulatory landscape in the U.S., particularly frameworks like the Gramm-Leach-Bliley Act and collaboration initiatives such as the CISA and FS-ISAC, which enhance preparedness against emerging cyber threats. Comparative analysis with global banking systems revealed key challenges, including the evolving cyber threat landscape, compliance with international data privacy standards, and the need for cross-border cooperation. While the U.S. banking system demonstrates a strong regulatory foundation, the study identifies areas requiring improvement, such as proactive employee training, adoption of advanced cybersecurity technologies, and international cooperation. The study's implications emphasize the need for proactive risk management and continual innovation to address emerging threats. Recommendations include implementing multi-factor authentication, leveraging AI and blockchain technologies, and prioritizing cybersecurity awareness programs for employees. However, limitations include reliance on secondary data, which may omit recent developments, and a focus on the U.S. context, limiting global generalizability. Future research should incorporate primary data collection and expand the scope to include quantitative analyses of cybersecurity investments and outcomes. This research provides policymakers, banking regulators, and industry stakeholders with actionable insights to bolster information security resilience and adapt to the rapidly evolving financial landscape.

We construct a variety of social network measures within the global banking system, using the board connections from banks in 16 countries between 2000 and 2010. We show that connected banks partner more often in the syndicated loan market and that central banks in the network play dominant roles in various interbank transactions, indicating that social connections facilitate business connections. However, consistent with group-think concerns, we find that the more central banks in the network contribute significantly to the systemic risk of the global banking system, suggesting there may also be a downside to having a strong social network.

We analyse systemic risk in the global banking system using market price-based methods and the asset-liability network approach. For the latter we use the BIS consolidated data for exposures of 18 national banking systems to the banking sector debt of the same countries relative to their respective equity capital over the period 2005Q4- 2014Q4. The network based Systemic Risk Index (SRI) extends the spectral eigen-pair method of Markose (2012) and Markose et al. (2012), which treats network failure as a dynamical system stability problem. We also provide a comprehensive application in a cross-border setting of well known market price based SRIs, viz. MES (Marginal Expected Shortfall), ∆CoVaR, (Delta Conditional Value at Risk) and SRISK. In view of the large UK and European cross-border exposures to the US mortgage backed securities which led to widespread bank capital losses during the 2007 Global Financial Crisis (GFC), it is important to see if the SRIs can give early warning unlike paradoxical risk measures which were very low in the run up to the GFC when leverage was peaking. The network based eigen-pair method simultaneously gives early warning of instability of the global banking system in terms of tipping points identified by regulatory capital thresholds and also the centrality measures for both systemically important and vulnerable banking systems. Market price-based SRIs tend to be contemporaneous with the crisis and they are found to covary with standard risk management measures, such as VaR and betas.

Using a unique and comprehensive dataset, this paper develops and uses three distinct methods to quantify the risk of a systemic failure in the global banking system. We examine a sample of 334 banks (representing 80% of global bank equity) in 28 countries around 6 global financial crises (such as the Asian and Russian crises and September 11, 2001), and show that these crises did not create large probabilities of global financial system failure. First, we show that cumulative negative abnormal returns for the subset of banks not directly exposed to a negative shock (unexposed banks) rarely exceed a few percent. Second, we use structural models to obtain more precise point estimates of the likelihood of systemic failure. These estimates suggest that systemic risk is limited even during major financial crises. For example, maximum likelihood estimation of bank failure probabilities implied by equity prices suggests the Asian crisis induced less than a 1% increase in the probability of systemic failure. Third, we also obtain estimates of systemic risk implied by equity option prices of U.S. and European banks. The largest values are obtained for the Russian crisis and September 11 and these show increases in estimated average default probabilities of only around 1-2%. Taken together our results suggest statistically significant, but economically small, increases in systemic risk around even the worst financial crises of the last 10 years. Although policy responses are endogenous, the low estimated probabilities suggest that the distress of central bankers, regulators and politicians about the events we study may be overstated, and that current policy responses to financial crises and the existing institutional framework may be adequate to handle major macroeconomic events.