Bank Capital Research Articles

Risk-taking in banks: does skin-in-the-game really matter?

AbstractThe belief that bank capital helps improve stability takes for granted the idea that increases in capital are an incentive to reduce risk-taking because bank owners would have more to lose (skin-in-the-game) if their banks fail. Nevertheless, given the higher cost of capital as compared to debt, it is also possible that increases in capital would lead to higher risk-taking due to the need for banks to boost their returns. In light of these contradictory possibilities, we exploit exogenous variations of capital to empirically investigate the actual effects of capital on risk-taking. Our analyses based on a sample of nearly 1900 US Banking Holding Companies in the 1990–2020 period indicate that increasing capital actually leads to higher risk-taking, which contradicts the skin-in-the-game hypothesis. We show evidence that this relationship could be explained by the consequent increase in funding costs that creates pressure for better returns, which is normally achieved by means of taking higher risk. Our main findings are robust to a number of alternative model and sample specifications.

Beyond Size: How ESG Factors Shape Bank Value in India & China

Objective: This study examines the impact of ESG (environmental, social, and governance) factors on the market capitalization of banks in India and China. Specifically, it analyses the relationship between total assets, female board representation, social and environmental disclosures, and market capitalization.
 Methods: A comparative analysis of leading banks in India and China is conducted using 10 year (2013–2023) data using structural equation modelling (SEM) on market capitalization, total assets, ESG disclosures, and female board representation.
 Results: A positive and significant relationship is found between total assets and market capitalization in both India and China, indicating that investors value larger banks. In India, female board representation doesn't significantly impact market capitalization, while in China, a higher proportion may lead to lower market capitalization, requiring further research. A positive and significant relationship is found between social and environmental disclosures and market capitalization in both countries. However, the effect is stronger in India, indicating that Indian investors place greater value on banks with robust sustainability practices.
 Conclusions: This study highlights the growing importance of ESG factors in the banking sector, with varying degrees of emphasis depending on the country. While both Indian and Chinese investors value larger banks, Indian investors seem to place more weight on female board representation and social-environmental disclosures, while Chinese investors appear to prioritize other factors. Further research is needed to explore the underlying reasons for these differences and the complex interplay between various ESG factors and market performance.

ASSESSMENT OF THE CONNECTION BETWEEN THE BANK'S CAPITALIZATION LEVEL AND THE COUNTRY'S MACROECONOMIC STABILITY

A well-capitalized banking system is crucial for maintaining macroeconomic stability, preventing financial crises, and bolstering the economy's resilience to shocks. Governments often strive to ensure adequate bank capitalization to foster stable economic growth. This article aims to assess the relationship between bank capitalization and macroeconomic stability in 34 European countries from 2010 to 2021, based on World Bank statistics.The study utilizes the principal components method to identify relevant indicators of bank capitalization and macroeconomic stability, canonical analysis and regression analyses to detail the interconnections between these blocks. The canonical analysis confirms a link between bank capitalization and macroeconomic stability indicators with a coefficient of determination of 0.617 signifying that 61.8% of the variance in macroeconomic stability is explained by fluctuations in bank capitalization.The article presents one fixed-effect and two random-effect regression models detailing the directions and strength of influence of independent variables (NPL, ROA, ROE - indicators of the bank capitalization level) on dependent variables (INFLATION, UNEMPL, GINI - indicators of macroeconomic stability). The Wald criteria and a p-value less than 0.05 indicated that the models with random effects (UNEMPL, GINI) were statistically significant.The results reveal that a 1% increase in non-performing loans correlates with a 0.25% rise in the unemployment rate, and a 1% increase in return on assets leads to a 0.08% increase in the unemployment rate. Additionally, a 1% increase in non-performing loans raises the Gini index by 0.05%, while a 1% increase in return on equity decreases the Gini index by 0.03%. Notably, the impact of return on assets on the unemployment rate and the Gini coefficient is not statistically significant (p-value greater than 0.05).These results can inform the forecasting of national indicators, the development of tools to ensure sufficient bank capitalization, and the formulation of effective macroeconomic policies, taking into account fluctuations in banks' capitalization levels as key financial intermediaries.

Corporate social responsibility and bank value: evidence from bank capital

PurposeThis study aims to examine the effect of corporate social responsibility (CSR) on banks’ capital, value and risk by investigating its impact on capital inflows and asset quality. The authors aim to investigate the value-protective characteristics of socially responsible performance.Design/methodology/approachThis study uses a two-stage least squares approach with instrumental variables, with bank and year fixed effects to address concerns regarding endogeneity, specifically reverse causality and unobservable factors.FindingsThe results confirm a positive association of CSR with capital adequacy, including higher quality Tier 1 Capital. The authors find strong evidence that banks with higher CSR scores are associated with greater bank value and lower risk. The extended analyses find that the improvement in capital is from annual growth in capital and lower risky assets.Originality/valueThe research advances the field by providing new empirical evidence of a positive association between CSR and capital, including high-quality Tier 1 Capital. This study complements the prior research by simultaneously examining the dynamic links between CSR and capital, bank risk and bank value. The findings are consistent with the view that there is a dynamic link in which CSR affects the operations of banks.

Bank capital and liquidity creation in Sub-Saharan Africa: the role of quality institutions

PurposeThis study investigates the relationship between bank capital and liquidity creation and further examines the effect that institutional quality has on this relationship in Sub-Saharan Africa (SSA).Design/methodology/approachThe data comprise 41 universal banks in nine SSA countries from 2010 to 2022. The study employs the two-step system generalized methods of moments and further uses alternative estimators such as the fixed-effect and two-stage least squares methods.FindingsThe empirical results show that bank capital has a direct positive and significant effect on liquidity creation. In addition, the positive effect of bank capital on liquidity creation is enhanced, particularly in a strong institutional environment. The results imply that nonconstraining capital regulatory policies bolster bank solvency, improve risk-absorption capacity and increase liquidity creation.Practical implicationsThis study has several policy implications. First, it provides empirical evidence on the position of banks in SSA on the financial fragility and risk-absorption hypothesis of bank capital and liquidity creation debates. This study shows that the effect of bank capital on liquidity creation in SSA countries is positive and supports the risk-absorption hypothesis. Second, this study highlights that a country's quality institutions can complement bank capital to increase liquidity creation. In addition, this study highlights that nonconstraining capital regulatory policies will bolster bank solvency, improve risk-absorption capacity and increase liquidity creation.Originality/valueThe novelty of this study is that it introduces the country's quality institutional environment into bank capital and liquidity creation links for the first time in SSA.

Political Influence, Bank Capital, and Credit Allocation

Political influence on bank credit allocation is often viewed as being necessary to address social problems like income inequality. We hypothesize that such influence elicits bank capital responses. Our hypothesis yields three testable predictions for which we find supporting evidence. First, when banks observe election outcomes that suggest greater impending political credit-allocation influence, they reduce capital to increase fragility and deter political influence. Second, banks subject to greater political influence nonetheless increase lending that politicians favor, and household consumption consequently increases. Third, these banks exhibit poorer post-lending performance. Our study has implications for the interaction between politics, household consumption, and bank risk through a specific channel—the interplay between credit-allocation regulation and bank capital structure. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.04056 .

Analisis penerapan penguatan permodalan oleh Otoritas Jasa Keuangan di PT. Bank SulutGo

This study is based on of the latest policy by the Financial Services Authority through POJK No. 12/POJK.03/2020 concerning Commercial Bank Consolidation to maintain the stability of the financial and banking sector from the impact of the economic and monetary crisis. The object of this study is PT. Bank SulutGo as a bank of North Sulawesi Province in Indonesia. This POJK regulates the increase in Minimum Core Capital for Commercial Banks which will be carried out in stages from 2020 to 2022 amounting to IDR 3 trillion and for Regional Development Banks (BPD) until 31 December 2024. This research uses a qualitative research method which explains descriptively the analysis of the phenomenon of banking development, especially PT. Bank SulutGo due to the implementation of OJK new regulations using data in the form of narratives and Banking Financial Performance Reports. The shareholders over the last three years have made efforts to deposit capital and increase their share ownership, but it is predicted that until 2024, PT. Bank SulutGo has not been able to meet the bank's minimum core capital of Rp. 3 trillion. In order not to be affected by the OJK's exit policy, PT. Bank SulutGo can choose a consolidation strategy for going concern, the consolidation strategy is appropriate for PT. Bank SulutGo in complying with OJK regulations is forming a Joint Business Group (KUB).

Research on the Coordination of Bank Capital Adequacy Ratio and Monetary Policy

Capital adequacy ratio and monetary policy are important control measures of financial supervisory authority and monetary authority, respectively. The effective coordination of the two has greatly affected the effectiveness of monetary policy. The article selects the annual data of 16 listed commercial banks in China from 2003 to 2018, and studies the impact of capital adequacy ratio on monetary policy transmission by constructor. listed commercial banks in China from 2003 to 2018, and studies the impact of capital adequacy ratio on monetary policy transmission by constructing a panel regression model. The results show that large state-owned commercial banks play a major role in bank credit channels for monetary policy, and banks with higher capital adequacy ratios are more likely to have a higher capital adequacy ratio. The results show that large state-owned commercial banks play a major role in bank credit channels for monetary policy, and banks with higher capital adequacy ratios are more vulnerable to monetary policy shocks. In addition, the external capital constraint of minimum capital adequacy will cause a multiplier effect when monetary policy is transmitted through credit channels. The multiplier effect produced by joint-stock commercial banks is much smaller than that of large state-owned banks. The multiplier effect produced by joint-stock commercial banks is much smaller than that of large state-owned banks. Therefore, financial supervisory departments must fully consider the interference caused by the capital adequacy ratio on monetary policy, strengthen policy coordination, and unblock the transmission mechanism of Therefore, financial supervision departments must fully consider the interference caused by the capital adequacy ratio on monetary policy, strengthen policy coordination, and unblock the transmission mechanism of monetary policy.

The Effect of Credit Risk, Liquidity Risk, and Bank Capital on Bank Profitability During the COVID-19

This research aims to examine the impact of credit risk, liquidity risk, and bank capital on profitability banks in Indonesia and Malaysia during the global economic crisis of Covid-19 using panel regression analysis methods by E-views software. The research sample was 232 observational data for Indonesian banking and 64 observational data for Malaysian banking that were gained with purposive sampling method from 2020-2021 quarterly. The results of this study: are credit risk has a significant and negative impact on the profitability of Indonesian banks but has no effect on the profitability of Malaysian banks; liquidity risk has a significant and positive impact on the profitability of Indonesian banks but has no effect on the profitability of Malaysian banks; and bank capital does not affect the profitability of Indonesian and Malaysian banks.

Bank Resources, Interest Margin and Long-Term Bank Financing in Franc Zone

The aim of this study is to determine the impact of bank resources and interest margin on the long-term bank lending in the countries of the franc zone over the period 2006-2016. We adopted a static panel data model and the random effects estimator. We used a static panel data model with random effects and the generalized least squares (GLS) estimation method. Our results show that basic bank capitalization and long-term savings positively and significantly impact the supply of long-term bank loans within this area. Only equity negatively and significantly affects the granting of long-term bank loans. We also find that the bank interest margin negatively and significantly influences the granting of long-term bank loans.

Bank capital and liquidity creation: Evidence from the Russian experience

In this paper we examine the relationship between regulatory bank capital and liquidity creation. We test the “financial fragility‐crowding out hypothesis” and the “risk absorption hypothesis” on the sample of 885 Russian banks over the 2010–2019 period. Inspired by Berger and Bouwmanʼs (2009) approach, we develop a liquidity creation measure that simultaneously considers the category and maturity of secondary accounts. After conducting several robustness checks, we report that bank capital is negatively related to liquidity creation which supports the “financial fragility‐crowding out hypothesis”. We also show that this relationship is independent of the bank size and the economic cycle. Our findings suggest that the Central Bank of Russia faces a trade‐off between financial stability and liquidity creation by the banking system, as tougher regulatory capital requirements decrease banks’ abilities to finance the real sector of the economy.

Bank capital, institutional quality and bank stability: international evidence

Bank capital, institutional quality and bank stability: international evidence

Bank capital, institutional quality and bank stability: international evidence

Bank capital, institutional quality and bank stability: international evidence

EFFECTS OF FINANCIAL MARKET DEVELOPMENT ON BANK CAPITALIZATION RATIO: EVIDENCE FROM COMMERCIAL AND NON-COMMERCIAL BANKS IN TANZANIA

Financial market development in many developing countries is a series of financial market reforms aimed at improving the market and the financial system in general. Theoretically, major reforms that improve the stock market are expected to increase bank performance by reducing bank risk of default by increasing the bank capitalization ratio. This results in stability in the financial market and banking sector. Nonetheless, empirical literature in addition shows that the quality of the financial market may be at high risk following the reforms process because of the integration effects of the markets across the countries or regions. A good example of this is the global financial crisis of 2007/2008. Based on this background, the present study investigates the extent to which the financial market development in Tanzania influences the bank's capitalization ratio (commercial and non-commercial banks). Employing a two-step system GMM technique in a dynamic panel dataset regression model for the investigation for a period of 2012 to 2021, while macroeconomic and bank-specific variables have been used as control variables. We proxy financial market development as stock market development. This study finds that stock market development in Tanzania measured in terms of stock market turnover ratio improves bank capitalization ratio with the goals of enhancing the financial market and maintaining stability in the banking sector.

Differences Between Liquidity, Capital, and Profitability of Small and Middle Rural Banks

This research aims to examine the differences between liquidity, capital, and profitability of small and middle rural banks (BPR). This quantitative research with a comparative research type compares small rural banks (BPR) and medium rural banks (BPR) in West Nusa Tenggara Province. Data for this research are secondary data from rural banks’ financial reports and other publications. The data were analyzed with a comparative test (comparative analysis), namely the 2-sample independent t-test distinguishing the characteristics based on total assets, then compared in terms of liquidity, profitability, and capital. The result of the previous research with at-test revealed that the 29 rural banks in West Nusa Tenggara have two categories, i.e., small rural banks (23 banks) and middle rural banks (6 banks). The results of this study show there are no differences in bank soundness between small and middle rural banks in terms of liquidity, capital, and profitability.

Functioning of banks with foreign capital in the context of ensuring the financial security of Ukraine

The article examines modern features of the functioning of banks with foreign capital from the point of view of ensuring the financial security of Ukraine. It was established that banks with foreign capital play an important role in the development of the country's financial sector: in 2019–2023, they formed more than a quarter of the volume of net assets, liabilities and net profit of the domestic banking system. At the same time, according to the results of the analysis of the trends of changes in the specific indicators of infrastructure, net assets, liabilities and profit, a reduction in the presence of banks with foreign capital in the Ukrainian financial market was recorded due to the worsening of the geopolitical situation in the country. The declining nature of the rate of growth of lending by banks with foreign capital to individuals and legal entities was noted. At the same time, it was emphasized that the less rapid fall in the volume of lending to business entities compared to lending to individuals is due to several stimulating measures by the Government and the National Bank of Ukraine regarding the more active participation of banks in lending programs of the real sector of the economy. The change of priorities in the activity of banks with foreign capital towards the investment direction is also noted. Based on the analysis of the dynamics of the share of foreign capital in the authorized capital of Ukrainian banks, it was revealed that the level of concentration of foreign banking capital in the national financial system has decreased by almost four times. Conclusions were made about the probability of additional financial risk and the threat of deterioration of the economic situation in the country due to the reduction of access channels to foreign investments. In this regard, it is proposed to increase the competitiveness of domestic banks by actively implementing the principles of sustainable development. It is emphasized that for the implementation of ESG approaches, there is a need to improve the organizational culture of banks, to establish effective interaction with society and state authorities. It is noted that the high positions in the ratings of banks with foreign capital confirm the possibility of forming a positive reputational impact based on the effective management of ESG risks of banking activity, which contributes to increasing the volume of assets and profits of banks.

Contingent Convertible Bonds (CoCo bonds) and their market development in Albania

Convertible Contingent Bonds are important financial instruments for the stability of the banking and financial system in general. The role of innovative financial instruments is crucial to help address the challenges posed by these critical situations. One of these reintroduced instruments with ambitions to enhance the stability of the banking sector is the “Contingent Convertible Bond,” abbreviated as “CoCo.” This paper aims to explore the impact of the use of Convertible Contingent Bonds (CoCo) in financial crisis situations and their effect on avoiding the domino effect of a bank failure. Starting from the critical factor of the stability of the financial system, this analysis aims to shed light on the potential of these innovative instruments in improving the stability of the banking sector as well as the need for their modeling in the Albanian banking sector, considering the lack of treatment particular of these instruments in the current legislation. The analysis of the possibilities for their application in the Albanian banking system shows that, if implemented successfully, they can increase the regulatory capital of banks, strengthen financial stability and reduce the risk of government intervention in cases of crises. In conclusion, the use of CoCo bonds in Albania should be accompanied by the improvement of legislation and the encouragement of financial institutions’ investments in these instruments, to create a safer and more stable environment in the country’s banking sector. Keywords: Contingent Convertible Bonds (CoCo bonds), Basel III, resolution, financial crisis.

Efekti pandemije COVID-19 na ljudski kapital i finansijske performanse - slučaj bankarskog sektora Srbije

Human capital holds significant importance for banks, as it includes specific knowledge and skills. It serves as a crucial determinant of financial performance. However, human capital is susceptible to various factors that can exert negative effects. The COVID-19 stands as one such factor, necessitating bank restructuring and potentially resulting in a depreciation of human capital value and subsequent performance decline. The objective of the research is to investigate the influence of the COVID-19 pandemic on the human capital of banks in the Republic of Serbia and evaluate its implications on financial performance. The research spanned across all banks operating in the Republic of Serbia throughout the period of 2019 to 2021. The Wilcoxon Signed Rank test was employed to assess the difference in human capital value over the observed period. Furthermore, the regression analysis was implemented to investigate the impact of human capital on ROA, ROE, and NPM. Results showed that COVID-19 pandemic has led to a decrease in the value of human capital in banks in the Republic of Serbia. The financial performance of banks is positively influenced by human capital in the short term. However, over the long term, the value of human capital depreciates, resulting in a diminishing impact on financial performance.

Central Bank Capital and Shareholder Relationship

Central Bank Capital and Shareholder Relationship

Buying Insurance at Low Economic Cost – the Effects of Bank Capital Buffer Increases Since the Pandemic

Buying Insurance at Low Economic Cost – the Effects of Bank Capital Buffer Increases Since the Pandemic