Bank-dominated Financial System Research Articles

The Impact of COVID-19 on Stock Market Returns in Vietnam

This paper studies the impacts of COVID-19 on the performance of the Vietnamese Stock Market—a rapidly growing emerging market in a country that has to date successfully controlled the disease outbreak. The study uses a random-effect model (REM) on panel data of stock returns of 733 listed companies on both HOSE (the Ho Chi Minh Stock Exchange) and HNX (the Hanoi Stock Exchange) from 2 January 2020 to 13 December 2020. The study shows that the number of daily COVID-19 confirmed cases in Vietnam has a negative impact on stock returns of listed companies in the market. The impacts were more severe for the pre-lockdown and second-wave period, compared to impact for the lockdown period. The impacts also differed across sectors, with the financial sector being the most affected. With significant government control and influence over the bank-dominated financial system, the financial sector was expected to absorb some of the negative shocks hitting the real sector. Such expectations were reflected in the stock market movement during the pandemic.

Synergistic Effects between Financial Development and Improvements in New-type Urbanization: Evidence from China

ABSTRACT In this paper, we use the combination weight of game theory to evaluate a comprehensive index of new-type urbanization and then dynamic panel data for Chinese provinces over the period 2001 to 2016 to investigate the synergistic effects between financial development and improvement in new-type urbanization. Our results are based on system-generalized method of moments, and estimators indicate that the financial development variable measured by each dimension has different impacts on the level of new-type urbanization, respectively. The level of financial deepening measured by the total loan balance of all financial institutions divided by gross domestic product has the maximum impact on urbanization, and the financial structure has a minimal effect, confirming that a bank-dominated financial system supports improvement in new-type urbanization at the current stage. From the perspective of time periods, small- and medium-sized enterprises (SMEs) have a more obvious effect in the post-crisis period than the period 2001 to 2008. The stock market’s promotion effect on new-type urbanization also increased; thus, it is playing a greater role. These results imply that policies such as improving SMEs efficiency, optimizing the financial structure, and relaxing restrictions on private investment are likely to promote further improvement in new-type urbanization in China.

Combining environmental taxation, spill-over effects and community-based financing in development of renewable energy projects in Asia

Asian economies are often characterized as having bank-dominated financial systems and underdeveloped capital markets, in particular with regard to venture capital. In economies that banks are the main source of funding, the main obstacle for financing infrastructural projects including renewable energy (RE) projects is lack of access to long-term finance. The second obstacle for development of RE energy projects is their lower rate of return comparing to fossil fuel projects as more subsidies are globally going to fossil fuels. For larger RE projects insurance and pensions are sustainable financing alternatives. Pension funds and insurance companies hold long-term savings, so these institutions could be a proper alternative for financing mega-size RE projects. In addition, utilizing the spillover effects originally created by energy supplies in form of tax revenues refund to RE projects will increase their rate of return and make them interesting for private investors. For smaller-size RE projects, the paper provides a theoretical model for combining utilisation of carbon tax and a new way of financing risky capital, i.e., Hometown Investment Trust Funds (HITs). The paper theoretically shows that by environmental taxation and allocating these tax revenues to HITs, RE projects will become more feasible and more interesting for private investors; hence the supply of investment money to these funds will increase.

Modeling the impact of Basel III regulations on loan demand

PurposeThe purpose of this study is to provide an econometric modeling of demand for bank credit and not only offer useful insights to the decision-makers in the public and private sector but also support researchers and analysts in recognizing the determinants of lending in a major dynamic economic context.Design/methodology/approachThis study addresses the “supply-versus-demand-puzzle” by using a demand relationship and model loan demand as a function of interest rates and economic activity that may also capture supply effects. Loan demand modeled as a function of interest rates and economic activity not only represents a demand relationship but also captures supply effects. Using the generalized methods of moments estimation, the estimations are made robust to heteroskedasticity and/or autocorrelation of unknown form. GMM–Time series (HAC) option extends the robustness by using the weighting matrix that is robust to the contemporaneous correlation of unknown form to the autocorrelation of unknown form.FindingsIn a bank-dominated financial system like India, lending rates play a significant role in the transmission of monetary policy, as well as triggering and controlling loan demand and thereby exercising a pervasive effect on the output in the economy. The estimates indicate that the elasticity of loan demand is largely determined by the lending rate (0.6) and the economic activity (0.688). For one percentage point increase in capital ratio, the loan spread would rise by 31.4 basis points, which in turn would cause an increase of 18.8 basis points in loan demand assuming that risk-weighted assets are unchanged.Originality/valueThis is the first of its kind studying a banking system dominated emerging economy. Second, this study is based on a rich data set covering the period from 1979 to 2012, than other papers did, to capture the long-run association involving credit booms and busts and, thus, helps in avoiding the problem of estimation spanning the dominance of either boom or the bust alone. With a newer approach for quantification of the impacts of new regulatory standards, this study offers novel insights for the estimation of lending spreads.

Assessing the Inter Bank Disparity in Non-Performing Assets (NPAs) Management in Indian Public Sector Banks

In a bank-dominated financial system like India, the strength of the overall financial system or financial stability highly depends on the soundness of banks. Indian Banking system proved to be strong and resilient during the global financial crisis of 2008. But of late, there has been increased concerns about the continued deterioration in the stability of the banking sector. Financial stability report of RBI confesses to the fact that the risks to Indian banking sector have been increasing in the post-recession period particularly the risk of accumulating NPAs. This study attempts to analyse the trend in profitability, NPAs, and the effectiveness of recovery mechanisms and interbank disparity in NPA management with respect to public sector banks. We found that the profitability of public sector banks is declining in the post-crisis period and the amount of NPA has been on the rise. Further, the recovery mechanisms have proved to be ineffective in containing the problem of bad debts.

Institutional Set-Up and Mandates of Macroprudential Authorities:International Experience and Benchmarks for Ukraine

Defining macroprudential authority is one of the key steps in ensuring financial stability. Within the framework of general principles defined by international institutions lie various versions of macroprudential architectures realized by individual countries. Such solutions were shaped by the level of the financial system’s sophistication, the government’s role, and the central bank’s mandate. Yet the dominating trend is to entrust the macroprudential mandate to a central bank, especially if it already has a wide mandate for supervision and regulation of the financial sector. This is especially typical for emerging markets. In most of the reviewed countries, central banks apply macroprudential instruments. The analysis of specificities of the Ukrainian bank-dominated financial system as well as of international practices points to the most rational solution: to affirm legally the National Bank’s macroprudential mandate in the nearest future. Cooperation within the Financial Stability Council should also be further enhanced.

Analytical framework on credit risks for financing small and medium-sized enterprises in Asia

Small and medium-sized enterprises (SMEs) account for the major share of employment and dominate the Asian economies. These economies are often characterized as having bank-dominated financial systems and underdeveloped capital markets, in particular venture capital. Hence, offering new methods for financing SMEs is crucial. Hometown investment trust funds are a form of financial intermediation that was started recently and has since been adopted as a national strategy in Japan. In the present paper, the authors explain the importance of SMEs in Asia and describe hometown investment trust funds. They then provide a scheme for credit rating of SMEs, employing two statistical analysis techniques, principal component analysis and cluster analysis to analyse the credit risks of a sample of Asian SMEs by using their financial variables. This comprehensive and efficient method would enable banks, to group their SME customers based on their financial health, adjust interest rates on loans and set lending ceilings for each group. Moreover, this method is applicable to hometown investment trust funds around the world.

Institutional Quality, Trade Openness, and Financial Sector Development in Asia: An Empirical Investigation

ABSTRACTWe examine the determinants of financial sector development in Asia and the Pacific from 1995 to 2011. In terms of economic growth, over the last twenty years the region has outperformed other parts of the world and has also experienced major developments in its traditionally bank-dominated financial system since the 1997 Asian financial crisis. We apply the dynamic generalized method of moments to a panel data set of twenty-six economies in the region. The estimations were done for the whole panel as well as for subpanels of developed and developing economies. We find that better governance and institutional quality foster financial sector development in developing economies while economic growth and trade openness are key determinants of financial depth in developed economies.

Role of the Credit Risk Database in Developing SMEs in Japan: Lessons for the Rest of Asia

Small and medium-sized enterprises (SMEs) play a significant role in Asian economies as they contribute to high shares of employment and output. However, SMEs generally have limited access to finance compared to large enterprises. Given the bank-dominated financial systems in Asia, banks are the main source of financing for SMEs. For financial institutions, it is crucial to distinguish sound SMEs from non-healthy ones in order to avoid the accumulation of non-performing loans. Information asymmetry in this sector can be reduced by using accumulated data on SMEs and by employing credit analysis techniques, allowing lending institutions to recognize healthy SMEs. It is crucial for governments to collect SME data and prepare rich databases, such as the Credit Risk Database (CRD) of Japan. This will also help governments to formulate economic policies. In this paper we define and describe in detail the role and characteristics of Japan’s CRD in SME development and explain how it can be an example for other Asian economies to establish similar soft infrastructure that can make important contributions to SME development and boost economic growth.

Analysis of Credit Ratings for Small and Medium-Sized Enterprises: Evidence from Asia

In Asia, small and medium-sized enterprises (SMEs) account for the major share of employment and dominate domestic economies, yet providing these companies with access to finance is a challenge across the region. Asian economies are often characterized as having bank-dominated financial systems and underdeveloped capital markets, in particular with regard to venture capital. As a result, banks are the main source of financing for SMEs. It is crucial for banks to be able to distinguish healthy from risky companies. If they can do this, lending and financing SMEs through banks will be easier. In this paper, we explain the importance of SMEs in Asia. Then, we provide a scheme for assigning credit ratings to SMEs by employing two statistical analysis techniques—principal component analysis and cluster analysis—applying 11 financial ratios of 1,363 SMEs in Asia. If used by the financial institutions, this comprehensive and efficient method could enable banks and other lending agencies around the world, and especially in Asia, to group SME customers based on financial health and adjust interest rates on loans and set lending ceilings for each group.

Hometown Investment Trust Funds: An Analysis of Credit Risk

In Asia, small and medium-sized enterprises (SMEs) account for a major share of employment and dominate the economy. Asian economies are often characterized as having bank-dominated financial systems and underdeveloped capital markets, in particular venture capital markets. Hence, looking for new methods of financing for SMEs is crucial. Hometown investment trust funds (HIT) are a new form of financial intermediation that has now been adopted as a national strategy in Japan. In this paper, we explain the importance of SMEs in Asia and describe about HITs. We then provide a scheme for the credit rating of SMEs by employing two statistical analysis techniques, principal components analysis and cluster analysis, and applying various financial variables to 1,363 SMEs in Asia. Adoption of this comprehensive and efficient method would enable banks to group SME customers based on financial health, adjust interest rates on loans, and set lending ceilings for each group. Moreover, this method is applicable to HITs around the world.

The differential impact of the bank–firm relationship on IPO underpricing: evidence from China

This study investigates the impact of the bank–firm relationship on IPO underpricing in China, an emerging economy with a bank-dominated financial system. Utilizing a hand-collected loan data for 902 Chinese IPO firms from 2004 to 2011, we document that the bank–firm relationship reduces the degree of IPO underpricing. Both the lender's and the borrower's firm characteristics affect the signal quality of the bank–firm relationship, resulting in differential impacts on IPO underpricing. The relationship between firms and banks with high credit quality or the relationship between politically unconnected firms and banks has a more positive impact on mitigating IPO underpricing.

Macroprudential regulation and the monetary transmission mechanism

The paper presents a simple dynamic macroeconomic model of a bank-dominated financial system that captures some of the key credit market imperfections commonly found in middle-income countries. The model is used to analyze the interactions between monetary and macroprudential policies, involving, in the latter case, changes in reserve requirements. In addition to a qualitative analysis, a calibrated version is used to study numerically the transitional dynamics and steady-state effects of an increase in the reserve requirement ratio, under alternative parameter values. The analysis shows that understanding how these tools operate is essential because they may alter, possibly in substantial ways, the monetary transmission mechanism.

Competition between Banks and Bond Markets: Hardly Impacted or Softly Complemented

Finance systems being extremely bank-centric, which meant that most of the financial risks were being concentrated in the banking system, there is a need for alternate channel of intermediation that could be used if the banks once again encountered difficulty. Moreover, bonds are increasingly supplementing bank lending as a source of finance for the private sector. On the other hand, the relative unimportance of the corporate bond market in Europe was mirrored by the corresponding dominance of the banking sector. Although there is no definitive evidence that either a market-based or bank-dominated financial system is better, arguments, that a more diversified financial system would mitigate its vulnerab ility to systemic risk, are made. With the instruments of comparative analysis, underdeveloped bond markets and dependence on bank finance are topics of concern of this paper as well as an aim to examine other competing factors on impacts of banking on bond markets, banking substitution and mixed market models are argued.

Banks, Markets, and Financial Stability

In a theoretical model of the Diamond-Dybvig style, in which deposit-taking banks and financial markets coexist, bank behavior is analyzed taking into account a positive ex-ante probability of a future financial crisis. We focus on the role of the interaction of market liquidity and banks' funding liquidity in the propagation of shocks in the financial system. Our findings suggest that in particular bank-dominated financial systems are prone to contagious bank runs due to asset price deteriorations as a consequence of fire sales of assets in financial markets. Nevertheless, banks only prefer holding liquidity buffers to weather future crises if the ex-ante crisis probability exceeds a certain threshold. Moreover, central bank interventions are shown to have destabilizing effects because they reduce banks' incentives to hold liquidity buffers. This can be interpreted as a justification for prudential regulation in terms of minimum liquidity buffer requirements.

Credit Cycles and Business Cycles in Twenty EU Economies

Given that EU has been frequently described as having bank-dominated (or hybrid) financial systems, an understanding of the particularities of the flows of credit and their interferences with shifts in the business cycle (either boom or bust phases) is essential not only for policymakers but also for market participants. In this context, this research offers a fresh view by performing an econometric analysis on the credit cycle and business cycle in twenty advanced and developing EU economies, with the purpose of better understanding their behavior and the impact of the interactions between them. It analyses, on the one hand, the short-term dynamics of the relationships between credit expansion and economic growth; and, on the other hand, it investigates the cyclical components of the two variables by performing statistical analysis on the medium-term relationships between them (volatility, amplitude, persistence, correlation, spill-over effects).

Banking System Resilience and Financial Stability - An Evidence from Indian Banking

This paper while emphasising the importance of the concept of financial stability in wake of recent global financial crisis in particular and other (banking and financial) crises in general attempts to highlight the significance of the soundness of banking sector in emerging economies where banking sector constitutes a lion’s share in the financial system. This study examines banking sector stability by constructing a micro vector auto regressive (VAR) model and establishes the significance of the interrelatedness of the bank-specific variables such as; Liquidity, Asset Quality, Capital Adequacy and Profitability. Further, the paper offers a substantive review of literature on the concept of financial stability in backdrop of the ongoing definition debate for financial stability. A significant contribution of this study is that, by employing the most appropriate key determinants of banking sector soundness, the paper constructs a recursive micro VAR model to explain the interdependence and comovement of the banking stability covariates in a bank-dominated financial system that aids in understanding the dynamics of financial stability of emerging economies

The Differential Impact of the Bank-Firm Relationship on IPO Underpricing: Evidence from China

This study investigates the impact of the bank-firm relationship on IPO underpricing in China, an emerging economy with a bank-dominated financial system. With loan data from 902 IPO firms from 2004 to 2011, we document that the bank-firm relationship reduces the degree of IPO underpricing. Both the lender’s and the borrower’s firm characteristics affect the signal quality of the bank-firm relationship, resulting in differential impacts on IPO underpricing. The relationship between firms and banks with high credit quality or the relationship between firms without political connections and banks has a more positive impact on IPO underpricing.

The Evolution of Financial Structure in the G-7 Over 1997–2010

As background for this special issue of the Review, this article provides an overview of recent developments in financial structure in the major industrial countries using national flow of funds balance sheet data. We focus in particular on changes in the size and composition of the balance sheet for the major sectors — households, companies, general government, foreign and financial as well as banks and institutional investors separately. Two recent subperiods are distinguished, namely the ‘great moderation’ of high growth and low inflation from roughly 1997–2006 and then the crisis period 2007–10. We discern elements of convergence — notably in corporate leverage — but also some continuing contrasts — such as household debt — between market- and bank-dominated financial systems, while highlighting that short-run changes arising from the conjuncture may blur longer-term trends in financial structure. Looking ahead, the data highlight common challenges from public and household debt, albeit to an extent that varies markedly between countries. Bank deleveraging and recapitalisation appear slow, while a subsector including shadow banks continues to grow except in the US. There are contrasts between France and Italy on the one hand and Germany on the other which underline the vulnerability of the former in the ongoing Euro Area crisis.

Asian Financial System: Development and Challenges

Postcrisis policy responses tilted in favor of strengthening the global regulatory system and financial stability have limited the attention paid to the role of finance in supporting sustained economic growth and development. This has special implications for Asia which, despite being the new engine of growth to the world economy, continues to be challenged by the persistent gap between developments in its financial and real sectors. This paper examines how Asia’s financial and economic landscapes have improved under the wave of regional macroeconomic and financial management reform, yet continue to be beset by highly bank-dominated local financial systems, financial infrastructures anemic in proper legal and regulatory frameworks, and shallow regional financial markets. The situation compromises Asia’s ability to respond to the financial needs of its vast small and medium enterprise sector, infrastructure deficits, and poor households, constraining prospects for sustained high growth, development, and poverty reduction. The paper concludes that the financial development policy agenda in developing Asia should be focused on: (i) supporting economic growth and development, (ii) promoting financial inclusion, (iii) balancing regulation and innovation, and (iv) strengthening crisis prevention and management mechanisms.