Bank Behavior Research Articles

Does ICT adoption influence the bank’s risk-taking behavior? Evidence from advanced, developing and emerging nations

PurposeThis is the first attempt to investigate the impact of information and communication technology (ICT) on the risk-taking behavior of banks.Design/methodology/approachThis study considers 74 advanced, developing and emerging countries in the period of 2010–2021. The study considers internet use, mobile subscriptions, broadband access and ATM availability as ICT indicators, while using bank Z_score as a proxy for risk-taking. To get comprehensive insights, pooled OLS, fixed effect models and generalized methods of moments (GMM) are applied.FindingsIt is found that ICT has a consistently positive influence on the risk-taking behavior of banks in advanced, developing and emerging countries. Notably, internet users and broadband access have a bigger impact in advanced economies, but mobile cellular subscriptions and ATMs are more significant in developing and emerging countries. Other factors, such as GDP growth and market capitalization, positively influence the bank’s risk-taking approaches, but the cost-to-income ratio and inflation have an inverse connection.Practical implicationsThis will provide useful advice to the government, bank executives, financial regulators, policymakers, regulators, academicians, technology developers and other relevant stakeholders who want to maximize the advantages of ICT in the banking sector while reducing related risks.Originality/valueThis is the first study to examine the impact of ICT on banks’ risk-taking approaches in advanced, developing and emerging countries.

The Carrot and the Stick: Bank Bailouts and the Disciplining Role of Board Appointments

We empirically examine the Capital Purchase Program (CPP) used by the US government to bail out distressed banks and its implications for regulatory policy. We find strong evidence that a feature of the CPP—the government’s ability to appoint independent directors on the board of an assisted bank that missed six dividend payments to the Treasury—had a significant effect on bank behavior. Banks were averse to these appointments—the empirical distribution of missed payments exhibits a sharp discontinuity at five. Director appointments by the Treasury were associated with improved bank performance and lower CEO pay. (JEL G21, G28, G32, G34, G35, G38, H81)

The impact of changes in macroeconomic factors on banks’ lending behaviour

Loans are a critical transmission channel for commercial banks as well as an important revenue source. Macroeconomic factors are not within the control of commercial banks, however, select factors are observed to have a direct impact on lending behaviour in studies around the world. This study examined the relationship between macroeconomic variables and the lending behaviour of banks in South Africa for the period ranging from 2001 to 2022. Quarterly time series data was employed using the Autoregressive Distributed Lag Model (ARDL). The empirical results of the paper revealed that there is a long-run relationship between the repurchase rate (repo rate), inflation, the real effective exchange rate (REER) and lending behaviour in South Africa. The REER and inflation were both found to have a positive relationship, whilst the repo rate had a negative relationship. In addition, Gross Domestic Product (GDP), the activity rate and sovereign credit rating (SCR) changes returned insignificant results. Overall, these findings show that select macroeconomic factors do influence lending behaviour in South Africa. Furthermore, the results suggest that monetary policy decisions have a direct influential effect on lending and the South African Reserve Bank (SARB) has implemented their policies effectively.

The empirical measurement of competition and digitalization for the banking sector of Kyrgyzstan: Impacts of efficiency, profitability, and stability

This study investigates the competitive dynamics and digitalization within Kyrgyzstan's banking sector. The study analyzes the interplay between bank competition, digitalization, profitability, and stability using the two-step Generalized Method of Moments. Banking competition is assessed from 2012 to 2022 via the Lerner Index and the Boone Indicator. Furthermore, a novel method is employed to estimate the bank digitalization index based on the System Dynamics Approach. Findings indicate a competitive landscape marked by monopolistic competition, where digitalization enhances operational efficiency and competitive advantage. However, increased market power inversely affects digital adoption, suggesting monopolistic banks innovate less than their competitive peers. Further, the study highlights that intensified competition and digital adoption may encourage riskier bank behaviors, aligning with competition-fragility theory. Digitalization improves profitability, advocating for banks to adopt innovations to surpass competitors and improve financial performance. Policymakers are advised to foster a balanced competitive environment that encourages innovation without compromising bank stability.

Does financial expertise influence Islamic bank risk-taking?

PurposeThis study investigated how the financial expertise of the board of directors, risk management committee (RMC), audit committee (AC) and Shariá Supervisory Board (SSB) influences the risk-taking of Islamic banks.Design/methodology/approachThe study utilized unbalanced panel data for a sample of 43 full-fledged Islamic banks from 15 countries over 12 years (2010–2021). We employed feasible generalized least squares (FGLS) and heteroskedastic panels corrected standard errors (HPCSE) regression regressions as the primary estimation methods and used a two-step system generalized method of moments (GMM) estimator for robustness checks.FindingsThe results indicate that board financial expertise decreases insolvency and credit risks. Similarly, AC financial expertise and SSB financial expertise reduce insolvency and portfolio risks but increase credit risk. In contrast, RMC financial expertise raises insolvency risk. The remaining relationships are statistically insignificant.Research limitations/implicationsDue to the lack of disclosure regarding the educational and professional background of the board and committee members in the annual reports of some Islamic banks, this research used a sample of only 43 full-fledged Islamic banks operating in fifteen countries from 2010 to 2021.Practical implicationsThe findings can assist both local and international regulators in revising corporate governance codes and risk management guidelines in such a way as to ensure that the financial experts appointed to the board, AC, RMC and SSB, are capable of controlling excessive risk-taking behavior in Islamic banks.Originality/valueThis study contributes to the literature by providing comprehensive empirical evidence that corporate governance financial expertise influences the risk-taking behavior of Islamic banks.

The impact of bank liquidity, monetary policy and global crises on bank risk-taking: evidence from Vietnam

PurposeThis paper aims to examine the impact of bank liquidity, monetary policy and global crises on bank risk-taking behavior of Vietnamese banks. It provides evidence for a risk-taking channel of monetary policy through bank liquidity and global crises.Design/methodology/approachThe study uses the data set of 572 observations from 35 banks operating in Vietnam between 2005 and 2022, using the GMM regression technique.FindingsThe findings indicate that banks with higher liquidity tend to take more risks in the long run. Additionally, expansionary monetary policies encourage banks to take on more risk. Bank liquidity and global crises, such as the global financial crisis and the COVID-19 pandemic, not only directly affect bank risk-taking but also indirectly through monetary policy.Originality/valueThis paper expands the existing literature by examining the effect of bank liquidity, monetary policy and global crises on bank risk-taking by using the GMM and two models of which the authors regress the impact with and without bank liquidity and global crises. New factors affecting risk-taking, including operating cost, financial crisis and the COVID-19 pandemic are added into the model.

Game Over? Assessing the Impact of Gamification Discontinuation on Mobile Banking Behaviors

Examines the removal of gamification from a financial services app and its impact on incentivized behaviors like bill payments.

Taxes, Leverage, and Profit Shifting in Banks

The goal of this research is to investigate whether taxation affects the leverage decisions of banks and if the response of leverage to tax increases depends on profit-shifting opportunities available to individual banks. This topic remains controversial since it is often believed that banking regulation is such an essential driver of leverage choices that little room is left for other considerations studied in the corporate finance literature. Using a difference-in-differences setup encompassing the period from 2006 to 2017, we exploit two exogenous income tax rate increases applicable to 225 Brazilian banks, employing novel identification strategies based on the intricacies of local taxation rules and on the distinctions between individual banks and financial conglomerates. We find stark differences in the behavior of banks around the two events, with a substantial increase in leverage following the first tax hike but no leverage response following the second. In addition, we find no evidence of heterogeneous effects based on the amount of profit-shifting opportunities available to individual banks. Regulatory concerns possibly became more relevant for leverage decisions during the period around the second tax hike because it coincided with the implementation of stricter capital requirements associated with the Basel III framework. Taken together, our results suggest that financial institutions balance considerations regarding the tax-shield benefits of debt against regulatory concerns specific to the banking industry when making capital structure choices.

Unveiling the drivers of banks' misconduct: Sanctions, signals, and the extent of unethical behaviour

This paper seeks to enhance our understanding of the drivers of misconduct in the banking sector. We propose several metrics of misconduct that allow for the identification of the occurrence, number and types of the breaches in the year in which they occur, rather than on the year in which the penalty is paid. Focusing on the US banking industry, our findings have important policy implications. We find that sanctions have a contemporaneous deterrent effect on misconduct. Large sanctions levied on large banks are also found to improve behaviour across the banking industry. The behaviour of larger banks acts as an informational signal for other banks, affecting their probability and intensity to misconduct.

Navigating crisis: marketing dynamics and resilience in the MENA’s dual-banking system amidst the SAR-COV-2 pandemic

In this paper, we investigate how market concentration and efficiency impact banks’ performance and stability during the SAR-COV-2 pandemic. There is a research gap in the empirical literature in understanding the specific impact of market concentration and efficiency on the profitability and risk-taking behavior of banks, particularly in the developing context of the Middle East and North Africa (MENA) region. To address this gap, we examine the relationship between market concentration, efficiency, and bank performance using a comprehensive dataset encompassing 575 banks across 20 MENA countries from 2006 to 2021. Specifically, we examine the market dynamics and performance of different banking systems co-existing in the MENA region. Our findings indicate that prior to the pandemic, both conventional and Islamic banks benefited from enhanced financial stability as a result of the increased market concentration and efficiency. However, during the pandemic, the positive effects of efficiency and concentration were primarily observed within the group of Islamic banks. Furthermore, we provide new evidence for the moderating effect of market concentration, with a significant negative impact suggesting that increased market competition reinforces the efficiency effect during the pandemic. Our findings are important for policymakers and regulatory authorities in the MENA region as they indicate the need for new policies that assign a more significant role to Islamic banking in the post-SAR-COV-2 recovery.

The repo market under Basel III: Effects of capital and liquidity regulations on market fragmentation

AbstractRegulatory requirements can affect banks' ability and willingness to intermediate in financial markets. Yet, evidence on how these requirements interact to affect bank behaviour is thin. We contribute by assessing the effects of Basel III regulatory ratios on financial market fragmentation using the UK repo market as an important case study. Using panel regressions with proprietary data on repo transactions and holdings backed by gilts and lower‐quality collateral, we find affirmative evidence of a fragmentation. The leverage ratio incentivises banks to net transactions which leads to a fragmentation across prices between netted and non‐netted trades. Central bank liquidity can ease market conditions during stress and benefit banks that use it and their counterparties via reduced prices. In addition, the liquidity coverage ratio incentivises banks to increase long‐term lending backed by gilts, but reduce lending backed by lower‐quality collateral. This results in a fragmentation across maturities.

Commercial bank NSFR adjustment and risk: Evidence from China

The net stable funding ratio (NSFR) is a critical monitoring indicator of bank liquidity risk introduced under the Basel III accord in 2009. This study used the partial adjustment model to analyze the NSFR adjustment behavior of Chinese commercial banks, leading to the following four findings. First, banks have been undertaking active liquidity adjustment while exceeding global and Chinese minimum standards. Second, the NSFR’s target level and adjustment speed are significantly higher than those of foreign banks. Third, the target NSFR gap is essential to the NSFR’s positive adjustment. Fourth, a higher target level and steady adjustment speed help reduce loss from systemic risk. This paper suggests establishing three liquidity risk firewalls, providing an essential reference for understanding NSFR adjustment in Chinese commercial banks. The study also provides practical significance for policy-level assessments regarding the impact of implementing NSFR supervision and establishing liquidity risk firewalls.

Uncovering Patterns of Fintech Behavior in Italian Banks: A Multidimensional Statistical Analysis

Fintech is changing the financial system and increasing the possibility of access to financial services. Considering the centrality of the banking world in providing financial services, this study aims to offer an analysis of banks' adoption of Fintech. Exploiting a sample of Italian listed banks, this study investigates their adoption of Fintech. Multiple correspondence analysis and hierarchical clustering classification are used to study Fintech factors in Italian banks, starting from significant variables highlighted by the literature: disclosure, financial investments, and collaborations in Sandboxes. Results show that different bank subgroups have specific Fintech features based on various structural characteristics. The implications are both academic and practical. On the one hand, we highlight how these measures make it possible to have homogeneous clusters. On the other hand, we have indications of policies and best practices.

Funding Liquidity and Risk-Taking Behavior of Banks in India

This study, utilizing bank-level data for India, investigates the relationship between funding liquidity and banks’ risk-taking behavior. The study uses two risk measures: risk-weighted assets (encompassing credit, market, and operational risk) and liquidity creation (encompassing intermediacy risk). Findings reveal that banks with higher funding liquidity exhibit higher risk-taking behavior. This risk-taking behavior is more pronounced during economic recuperation and expansionary monetary policy phases. Notably, during economic recuperation, banks display heightened intermediacy risk, contrasting with the absence of such evidence during expansionary monetary policy phases. Larger banks with higher deposit shares demonstrate lower risk-taking behavior. Additionally, banks with a return on equity (ROE) below the average ROE exhibit a proclivity for increased risk-taking. This study advocates for liquidity regulation as a crucial complement to bank capital regulation, offering empirical support for moderate risk-taking among highly liquid banks and fortify their balance sheets for a stable banking system in India. JEL Codes: E32, E52, G21, G28

A Review of Research on the Impact of Equity Investment on the Debt Financing of Invested Enterprises

To promote the theoretical and empirical research on the linkage of “stock loan debt insurance”, this paper summarizes the current situation of English and Chinese literatures research on the impact of VC/PE on the debt financing of invested enterprises. At present, the relevant research on the impact of VC/PE on the debt financing of invested enterprises in English literatures mainly focuses on the role and mechanism of third-party VC/PE, the role and mechanism of bank-affiliated VC/PE. The relevant research on the impact of VC/PE on the debt financing of invested enterprises in Chinese literatures mainly focuses on the direct role of third-party VC/PE and the mechanism of third-party VC/PE. From the relevant research results of English literatures and Chinese literatures, scholars generally believe that VC/PE has a positive impact on the debt financing of invested enterprises. The certification effect, corporate governance effect and ownership effect of VC/PE are the main mechanisms. In general, scholars’ research on ESG equity investment decisions of equity investment institutions for technology-based SMEs is relatively weak; in addition, scholars have rarely studied the impact of ESG equity investment intervention on the credit behavior of banks and technology-based SMEs. Under the concept of ESG, the academic research on the theoretical quantification and empirical estimation of the influence mechanism of ESG equity investment on the bank credit decision-making of technology-based SMEs needs to be carried out urgently.

Does being a responsible bank pay off? Evidence from the COVID-19 pandemic

We investigate whether banks’ initial responses during the first wave of the COVID-19 pandemic in supporting their customers, communities, and governments were perceived as value-enhancing by investors. Using a unique responsible banking measure for a sample of the largest US and European commercial banks, we find a negative relationship between responsible bank behavior and stock market performance, particularly in the first wave of the pandemic. We also find that riskier banks were affected more negatively if they behaved responsibly. Overall, our findings show that banks’ responsible behavior during a crisis reduces, or at best is not relevant to, shareholder value.

Political uncertainty, bank loans, and corporate behavior: New investigation with machine learning

This paper investigates how uncertain term length, a novel source of political uncertainty, affects the behaviors of banks and firms using a machine-learning approach. China's local authorities do not have a fixed term, creating an ideal environment for studying how economic agents react to their perception of political uncertainty without an actual political turnover. We implement a machine-learning method to predict the term length of city leaders by observing others with similar backgrounds. Combining this new measurement of political uncertainty and bank- and firm-level data, we find an inverted U-shaped relationship between city leaders' predicted remaining term length and bank loans, corporate liabilities, and investment, which matches the change of political uncertainty over the term. We also record the potential adverse consequences of the politically motivated loan and investment expansion, such as a loss of corporate efficiency and a disruption in market order.

The impact of Basel III regulations on solvency and credit risk-taking behavior of Islamic banks

PurposeThis study aims to examine the simultaneous effect of variations in the Capital Adequacy Ratio and Credit Risk of Islamic banks of the Gulf Cooperation Council under the influence of the Basel III regulations using an innovative approach.Design/methodology/approachThis approach highlights the critical importance of the Basel III reform in preserving the stability of the regional and international financial sector in the Gulf Cooperation Council and globally by examining the complex dynamics between Capital Adequacy Ratio and Credit Risk and their interaction under regulatory constraints. The annual reports and financial performance of 26 Islamic banks were analyzed over the period 2013–2021.FindingsThe findings highlight the critical importance of the Basel III reform in preserving the stability of the regional and international financial sector in the Gulf Cooperation Council and globally by examining the complex dynamics between Capital Adequacy Ratio and Credit Risk and their interaction under regulatory constraints. The annual reports and financial performance of 26 Islamic banks were analyzed over the period 2013–2021.Originality/valueThe insights from findings help define effective strategies to manage and mitigate Credit Risk while strengthening solvency under Basel III prudential supervision. Policymakers, regulatory authorities and banking institutions can optimize the management of Credit Risk and create a robust and stable financial environment for Islamic banks.

Quantitative easing and the functioning of the gilt repo market

We assess the impact of quantitative easing (QE) on the provision of liquidity and pricing in the UK gilt repo market. We compare the behaviour of banks that received reserve injections via QE operations to other similar banks in terms of the amounts lent and pricing. We also investigate whether leverage ratio capital requirements affected the amounts of liquidity supplied by broker-dealers and the spreads they charged. We find that QE interventions can improve liquidity provision and that their size determines how this is attained. QE can also reduce the cost of borrowing in the repo market unless it is associated with spikes in demand for liquidity. Our findings indicate that the leverage ratio supports the provision of liquidity during stress, as it prompts banks to become less leveraged. However, the larger capital charge repo transactions attract under the leverage ratio requirements reflects on the spreads these banks charge.

Experimental Study on the Effect of Flow Velocity and Slope on Stream Bank Stability (Part I)

The erosion of riverbanks is a significant and capricious national concern. The Al Muwahada channel in Iraq experiences instability in its banks, resulting in failure, retreat, and morphological alterations. These issues are mostly caused by factors such as the velocity of the flow, the angle of the slope, and type of soil. This study investigated the behavior of canal bank soil in response to erosion and variations in slope angle. Therefore, a physical model of a case study was established in the laboratory. Additionally, a slope angle of 26˚ is being utilized, which has not been previously studied in the laboratory. This angle will be tested with five different velocity values: 0.101 m/s, 0.116 m/s, 0.12 m/s, 0.13 m/s, and 0.135 m/s. The bank's deformation was measured for a period of 12 hours, which was divided into 4 equal intervals for each velocity. The study determined that a riverbank with a slope of 26˚ is more resistant to erosion when the velocity of the water is below 0.12 m/s. Velocities equal to or greater than 0.12 m/s have a substantial impact on the erosion of the riverbed. According to this study, a velocity of 0.12 m/s or higher leads to increased erosion of the riverbank. This is equivalent to a velocity of 0.804 m/s in the prototype channel. The section of the riverbank that has suffered the greatest damage due to erosion is the upper two-thirds. The used methodology supports global efforts to increase information about the behavior of river banks with unexplored rivers that have different flow velocities and bank slope angles. Doi: 10.28991/CEJ-2024-010-08-013 Full Text: PDF