Balance Sheet Structure Research Articles

Total loss-absorbing capacity and minimum requirement for own funds and eligible liabilities: Impact of bail-in rules on balance sheet management and funding

This paper looks at the impact of the new resolution regime, especially the bail-in tools, on balance sheet management and the implications for internal liquidity risk management as well as funding. Minimum Requirement for own funds and Eligible Liabilities (MREL) and total loss-absorbing capacity (TLAC) should be key indicators for total bank management. Due to costintensity, the paper advises optimising the balance sheet structure and the resolution strategy. A prudent funding strategy has to find a balance between the firm-specific funding capacity, continuous market access and limiting costs. The paper also looks at an efficient way to allocate the specific costs within the bank.

PROVISION OF INNOVATIVE DEVELOPMENT BASED ON IMITATIVE VARIATIONS OF FINANCIAL SUSTAINABILITY

Purpose: In order to strengthen the financial sustainability of an economic entity, it is necessary to optimize the balance sheet structure based on relative values, most of which have generally accepted regulatory restrictions. The coefficients that do not have such standard values are estimated by the dynamics relative to previous periods, as well as similar enterprises of the relevant sector of the economy.
 Methodology: To achieve the study objectives, specific methods were used in the work: a comparative analysis of approaches to the algorithms for calculating relative indicators of financial sustainability, a simulation methodology for the optimal balance sheet structure, taking into account the objective function - the financial sustainability coefficient under the established regulatory limitations of the key features of financial development. The main provisions of the study are presented in the form of analytical tables, algorithms, and figures.
 Result: The research results showed that, on the basis of the objective function and the limitations of the main financial indicators, it is possible to optimize the balance sheet structure, depending on the planned value of the financial sustainability coefficient established by the business entity, taking into account industry features and a specific reporting period.
 Applications: This research can be used for universities, teachers, and students.
 Novelty/Originality: In this research, the model of the Provision of Innovative Development Based on Imitative Variations of Financial Sustainability is presented in a comprehensive and complete manner.

Stock Market's Assessment of Monetary Policy Transmission: The Cash Flow Effect

We show that firm liability structure and associated cash flow matter for firm behavior, and that financial market participants price stocks accordingly. Looking at firm level stock price changes around monetary policy announcements, we find that firms that have more cash flow exposure see their stock prices affected more. The stock price reaction depends on the maturity and type of debt issued by the firm, and the forward guidance provided by the Fed. This effect has remained intact during the ZLB period. Importantly, we show that the effect is not a rule of thumb behavior outcome and that the marginal stock market participant actually studies and reacts to the liability structure of firm balance sheets. The cash flow exposure at the time of monetary policy actions predicts future net worth, investment, and assets, verifying the stock pricing decision and also providing evidence of cash flow effects on firms' real behavior. The results hold for S&P500 firms that are usually thought of not being subject to tight financial constraints.

Mathematical model of optimizing the balance sheet structure of the Russian banking system with allowance for the foreign exchange risk levels

Mathematical model of optimizing the balance sheet structure of the Russian banking system with allowance for the foreign exchange risk levels

Liquidity, the Government Balance Sheet, and the Public Sector Discount Rate

This paper provides a review of the modern finance literature examining how liquidity affects the private sector demand for real assets and financial securities. This literature shows that when firms evaluate risky investments they distinguish fundamental earnings risk and liquidity risks, and choose discount rates that link the discount rates they use to the liquidity and structure of their balance sheets. The government can mimic their behaviour by adopting a procedure that (i) ranks projects by discounting their expected costs and benefits by a low ‘fundamental earnings’ discount rate, perhaps 4–5 percent; and (ii) imposes a second ‘liquidity’ discount based on the government’s balance sheet structure and debt objectives that simultaneously determines the quantity of investments. By more closely copying private sector practice, this approach will directly link the quantity of investments that a government makes to the discount rates it uses. It will also enable the New Zealand government to reduce the discount rates it uses to evaluate long horizon investments without compromising its aim of ensuring the public and private sectors adopt a common method of evaluating investment projects.

Importance of balance sheet composition in stress test estimates

The stress tests are based on macroeconomic variables for the estimations of the results. However, there are other factors that may influence them. This paper studies the influence of the balance sheet structure in the NPL and the loss caused by the NPL using econometric models. The objective is to research how they affect the aggregates in the balance sheet to the delay in payment and the the provision for impairment, distinguishing these effects according to the economic cycle, so that can be applied to the stress test. The results show that the Balance sheet structure is important in delinquency and losses caused by it, especially in respect of stockholders’ funds, ECB resources and the account Non-current assets held for sale. It also highlights the influence of the economic cycle and the different behavior of the NPL and the losses due to default with respect to the same explanatory variables.

Behind the Scenes of the Beauty Contest: Window Dressing and the G-SIB Framework

This paper illustrates that systemically important banks reduce a range of activities at year-end, leading to lower additional capital requirements in the form of G-SIB buffers. The effects are stronger for banks with higher incentives to reduce the indicators, and for banks with balance sheet structures that can more easily be adjusted. The observed reduction in activity may imply an overall underestimation of banks' systemic importance as well as a distortion in their relative ranking, with implications for banks' ability to absorb losses. Moreover, a reduction in the provision of certain services at year-end may adversely affect overall market functioning. JEL Classification: G20, G21, G28

Early French and German Central Bank Charts and Regulations

In some recent studies, the question of the origins of central banking has been revisited, suggesting that beyond Swedish and British central banking, a number of earlier European continental institutions would also have played an important role. However, it has often been difficult to access the charters and regulations of these early central banks – in particular in English. This paper contributes to closing this gap by introducing and providing translations of some charters and regulations of six pre 1800 central banks in France and Germany. The six early public banks displayed varying levels of success and duration, and qualify to a different degree as central banks. An overview table maps the articles of the early central banks’ charters and regulations into key central banking topics. The texts also provide evidence of the role of central banking legislation, and of the distinction between, on the one side, the statutes and charters of the banks, and on the other side the operational aspects which tend to be framed by separate rules and regulations. Finally, the texts provide evidence of the policy objectives of early central banks, including in particular those of a monetary nature. To put these documents into context, the objectives, balance sheet structure, achievements and closure of each central bank are briefly summarised. JEL Classification: E32, E5, N23

Stock Market's Assessment of Monetary Policy Transmission: The Cash Flow Effect

We show that firm liability structure and associated cash flow matter for firm behavior, and that financial market participants price stocks accordingly. Looking at firm level stock price changes around monetary policy announcements, we find that firms that have more cash flow exposure see their stock prices affected more. The stock price reaction depends on the maturity and type of debt issued by the firm, and the forward guidance provided by the Fed. This effect has remained intact during the ZLB period. Importantly, we show that the effect is not a rule of thumb behavior outcome and that the marginal stock market participant actually studies and reacts to the liability structure of firm balance sheets. The cash flow exposure at the time of monetary policy actions predicts future net worth, investment, and assets, verifying the stock pricing decision and also providing evidence of cash flow effects on firms' real behavior. The results hold for S&P500 firms that are usually thought of not being subject to tight financial constraints.

Default cascades and systemic risk on different interbank network topologies

This paper examines the relationship between the topology of interbank networks and their ability to propagate localized, idiosyncratic shocks across the banking sector via banks’ interbank claims on one another. We begin by creating a wide variety of networks and heterogeneous balance sheet structures using a generative algorithm capable of replicating key characteristics of real-world interbank networks. On each network, we run a standard financial contagion model with cascading defaults. Our modeling framework differentiates between random and targeted shocks of varying magnitude. Interbank contagion comprises a direct channel via banks’ cross-exposures and an indirect channel due to liquidity effects and external asset fire sales. Last, we develop an empirical model to test which global features of the network, aggregate banking sector balance sheet and shock properties drive contagion dynamics. Our results show a strong stabilizing role played by system leverage across all specifications. Among the global network measures, average path length, network density and assortativity are shown to drive the number of failures in a manner consistent with their definition. Similarly, the centralities of the shocked banks (across all definitions) play a significant role in the default cascade. By contrast, allowing for liquidity effects diminishes the explanatory power of the network on both global and local scales. However, taking the change in asset price (primarily driven by liquidity effects) as the dependent variable reestablishes the link between the network structure and the extent of financial contagion.

Оптимальна структура балансу як передумова фінансової стійкості підприємства

Оптимальна структура балансу як передумова фінансової стійкості підприємства

Macroeconomics with heterogeneous agent models: fostering transparency, reproducibility and replication

This paper provides a detailed description of the Eurace@Unibi model, which has been developed as a versatile tool for macroeconomic analysis and policy experiments. The model explicitly incorporates the decentralized interaction of heterogeneous agents across different sectors and regions. The modeling of individual behavior is based on heuristics with empirical microfoundations. Although Eurace@Unibi has been applied successfully to different policy domains, the complexity of the structure of the model, which is similar to other agent-based macroeconomic models, makes it hard to communicate to readers the exact working of the model and enable them to check the robustness of obtained results. This paper addresses these challenges by describing the details of all decision rules, interaction protocols and balance sheet structures used in the model. Furthermore, we discuss the use of a virtual appliance as a tool allowing third parties to reproduce the simulation results and to replicate the model. The paper illustrates the potential use of the virtual appliance by providing some sensitivity analyses of the simulation output carried out using this tool.

Problems polyene innovation activities of enterprises heat supply in the region

The paper considers the main trends and ways to improve the innovative activity of enterprises of heat supply in theIvanovoregion. The main problems hindering the dynamic development of innovative activity of enterprises of thermal power industry in the region are considered. The hierarchy of the basic levels of infrastructure of heat power engineering of economic system is offered. For each level of heat power infrastructure of the region certain tasks providing the necessary level of efficiency of functioning of system have to be solved. One of the most important tasks of thermal power enterprises is the introduction of energy saving and innovative technologies, energy efficiency, analysis of the balance sheet structure, economically justified tariffs and the introduction of new mechanisms for the implementation of innovation and investment programs. The key objectives and principles for the effective functioning of the infrastructure of the power system. The key tasks of thermal power companies are their technical controlling and audit, allowing timely detection of defective areas, reducing energy efficiency in the industry and creating the possibility of risk situations that can cause damage to the organization. A limiting factor in the interactions between the elements of the infrastructure are the consumers of heat energy, which include industrial enterprises and enterprises of sphere of services, social services, state enterprises, marketing and management companies, private persons etc. An important condition for solving many of these problems in the infrastructure of heat power industry in the region is to improve the efficiency of its innovation and increase the responsibility of management for the state of process equipment and heating networks. The most important component of this increase is the formation of an innovative environment, as a result of which there is a transformation of the methods of organizing and managing the infrastructure of the heat power industry of the region, an update of the technological base, the introduction of advanced technologies in production and management is achieved.

Some Pre-1800 French and German Central Bank Charters and Regulations

In some recent studies, the question of the origins of central banking has been revisited, suggesting that beyond Swedish and British central banking, also a number of earlier European continental institutions would have played an important role. However, it has often been difficult to access the charters and regulations of these early central banks – in particular in English. This paper contributes to closing this gap by introducing and providing translations of some charters and regulations of six pre-1800 central banks in France and Germany, namely of the Nurnberg bank project of 1498, the Hamburger Bank of 1619, the Leipzig Bank of 1698, the Banque Generale of John Law of 1716, the Prussian Royal Bank of 1766, and the Caisse d’Escompte of 1776. In addition, the 1652 outline and motivation of the Stockholm Banco by Johan Palmstruch, which was written in German, is included as a key link between the continental and Swedish central banking history. The six early public banks were of heterogeneous success and duration, and qualify to a different degree as central bank. The texts in any case provide important insights into the genealogy, objectives and design of early central banks, providing further evidence of the role of institutions located in what would emerge in 1999 as the euro area. The Hamburger Bank balance sheet of 1619 can also be regarded as the oldest origin of today’s Eurosystem balance sheet, as it was transferred in 1875/1876 via the Prussian Bank into the Reichsbank, which itself made it, via the monetary disruptions of 1923/24 and 1945/48, eventually into the Bundesbank and therefore Eurosystem balance sheet. An overview table maps the articles of the early central banks’ charters and regulations into key central banking topics. To illustrate the universality of these topics over time, some key ECB legal provisions are also mapped into this table. The texts also provide evidence of the reliance of central banking on public legislation, and of the distinction between on one side the statutes and charters of the banks, from their more operational aspects which tend to be framed by separate rules and regulation. Finally, the texts provide evidence of the policy objectives of early central banks, including in particular monetary ones. To put the texts into context, the objectives, balance sheet structure, achievements and ending of each central bank are briefly summarized.

Cyclical investment behavior across financial institutions

This paper contrasts the investment behavior of different financial institutions in debt securities as a response to past returns. For identification, I use unique security-level data from the German Microdatabase Securities Holdings Statistics. Banks and investment funds respond in a procyclical manner to past security-specific holding period returns. In contrast, insurance companies and pension funds act countercyclically; they buy when returns have been negative and sell after high returns. The heterogeneous responses can be explained by differences in their balance sheet structure. I exploit within-sector variation in the financial constraint to show that tighter constraints are associated with relatively more procyclical investment behavior.

Maturity transformation risk factors in Islamic banking

Purpose Maturity transformation risk is one of the leading causes of the global financial crisis. While endorsing the new Basel III liquidity reforms, the Islamic Financial Services Board has suggested a modified NSFR ratio as a structural measure for the maturity transformation function of Islamic banks, allowing for their unique balance sheet structure. The purpose of this paper is to analyze various firm-specific and macroeconomic factors that may significantly affect the maturity transformation risk of these banks. Design/methodology/approach Using an annual data set of 55 full-fledged Islamic banks from 11 different countries over a period from 2006-2015, this study utilizes a two-step system generalized method of moments estimation technique on an unbalanced panel data. Findings The empirical results reveal bank size, capital, less-risky liquid assets, risky liquid assets, external funding dependence and market power as significant bank-specific factors in determining maturity transformation risk. However, the authors find no evidence for the effect of bank credit risk on maturity transformation risk in Islamic banking system. Originality/value This is the first study that focuses on the measurement of maturity transformation risk and its determinants in Islamic banks in a cross-country context, with regards to new liquidity regulatory requirements as proposed by Islamic Financial Services Board (IFSB) in conjunction with Basel III.

Does Capital Structure Influence Company Profitability?

AbstractEvery company has a different structure of balance sheet. Some of the companies have more liabilities than equity. Considering the industry or debt-to-equity ratio, the balance sheet structure affects the company profitability measured by DuPont system. The main objective of the paper is to analyze the structure of balance sheet and to identify some optimal levels in order to increase company profitability. The DuPont returns like ROA (return on assets) and ROE (return on equity) will be used to measure the company profitability, while the debt-to-equity ratio will be used as a measure (reflection) of capital structure. The samples consist on the most profitable non-financial companies ranked in Fortune Global 500. The companies will be grouped in clusters (based on industry or debt-to-equity ratio) in order to identify the signification of the correlation between the profit and the balance sheet structure. The main results of the paper refer to the company profitability that can be increased by using an optimal structure of liabilities and equity.

Ülke Risk Primi Şokunun Bankacılık Sisteminin Sağlamlığına Etkisi: SVAR Modeli Çerçevesinde Türkiye Örneği

Turkiye ekonomisi icin Ocak 2004-Haziran 2015 donemini kapsayan bu calismada, yapisal vektor otoregresyon (SVAR) modeli kullanilarak, ulke risk primi soklarinin bankacilik sisteminin saglamligi uzerindeki etkileri incelenmektir. Etki-tepki analizinin sonuclarina gore ulke risk primindeki bir standart sapma yapisal sok karsisinda (i) Turk Lirasi (TL) deger kaybetmekte, finansal hisse senedi fiyatlari dusmekte, bankalar arasi para piyasasi gecelik faiz orani yukselmekte, bankacilik saglamlik endeksi (BSI) dusmekte ve sonucta kredi mevduat faiz farki yukselmektedir. Ancak, (ii) kredi-mevduat faiz farki ulke risk primi sokuna diger degiskenlerden daha uzun sure tepki vermektedir. Bu bulgu bankacilik sektorunun bilânco yapisinin ulke risk primi soku karsisinda guclu oldugunu ve bankacilik sektorunun sokun olumsuz etkilerini artan kredi-mevduat faiz farki araciligiyla reel ekonomiye yansittigini ortaya koymaktadir. Etki-tepki analizinin sonuclari varyans ayristirmasi bulgulari tarafindan desteklemektedir.

How Do Macroeconomic and Bank‐specific Variables Influence Profitability in the Austrian Banking Sector? Evidence from a Panel Vector Autoregression Analysis

We examine the determinants of the net interest margin (NIM) and the net fee and commission income ratio (NFCIR) of Austrian banks as well as their interrelationship and whether portfolio separation between loan and deposit categories holds. We describe a conceptual framework for the profit optimization problem faced by banks as a Bertrand game with differentiated products and intrafirm product interactions. We contribute to the literature by factoring in banks’ business models in terms of their balance sheet structure. We empirically assess the implications of our conceptual framework using a unique supervisory data set of around 48,000 observations between 1998 and 2014. We estimate two panel vector autoregression models with a novel panel vector autoregression code. Apart from quantifying the contributions of the determinants (e.g., risk weighted assets, leverage ratio, loan loss provision ratio) to NIM and NFCIR, the empirical results show that interest income and fee and commission income should be regarded as strategic complements within a bank. We further conclude that portfolio separation between different loan and deposit categories does not hold.

The Z-Score is Dead, Long Live the Z-Score! A New Way to Measure Bank Risk

This paper raises questions about the consistency of the Z-score, which is the most applied accounting-based measure of bank risk. In spite of its main advantage, namely the concept of risk on which it relies, the traditional formula is precisely inconsistent with this concept. The Z-score is deduced from the probability that bank’s losses exceed its capital, but under the very unrealistic assumption of normally distributed returns on assets. Consequently, we propose a structural approach to determine this bank risk measure. It consists to define the default event when banks’ profit is lower than a default threshold level, which is based on the balance-sheet structure of banks and on new prudential regulation requirements.