Risk Of Bank Failure Research Articles

Predicting failure in the U.S. banking sector: An extreme gradient boosting approach

Banks play a central role in developed economies. Consequently, systemic banking crises destabilize financial markets and hamper global economic growth. In this study, extreme gradient boosting was used to predict bank failure in the U.S. banking sector. Key variables were identified to anticipate and prevent bank defaults. The data, which spanned the period 2001 to 2015, consisted of annual series of 30 financial ratios for 156 U.S. national commercial banks. Identifying leading indicators of bank failure is vital to help regulators and bank managers act swiftly before distressed financial institutions reach the point of no return. The findings indicate that lower values for retained earnings to average equity, pretax return on assets, and total risk-based capital ratio are associated with a higher risk of bank failure. In addition, an exceedingly high yield on earning assets increases the chance of bank financial distress.

River bank erosion opposite to transverse groynes

Long series of groynes are built from both river sides to narrow river channels and prevent bank erosion with the aim to improve the conditions for inland navigation and prevent lateral channel migration. Single groynes or short series of groynes are built to impede local bank erosion, deviate the water flow, free an intake or fix the position of migrating bars at certain locations. These structures divert the flow towards the opposite river side where channel bed erosion increases the risk of bank failure. Flow and river bed adaptation have been extensively studied, especially for long series of groynes. Instead, studies dealing with opposite bank erosion caused by single or short series of groynes are still lacking. We investigated this phenomenon in the laboratory and using 2D numerical models with LES. This paper shows some preliminary results.

Sectoral Loan Concentration and Bank Performance (2001-2014)

Sectoral loan concentration is an important factor in bank performance. We develop a measure of sectoral loan concentration and study how community bank performance and the size-performance relationship vary with loan concentration and changes in loan concentration. The size-profitability relationship varies with concentration in the residential real-estate (RRE) sector. Higher RRE concentration is associated with lower returns especially for larger community banks — banks with assets totaling a billion or more. Concentration in other sectors, such as agriculture and commercial real estate (CRE), is significantly associated with risk of bank failure or acquisition. Results for changes in concentration appear to be driven by the boom in CRE. Large positive (negative) changes in CRE concentration are both preceded and followed by large increases (decreases) in overall returns. Banks that switch specializations increase the hazard of failure but decrease the odds of being acquired.

PROBABILITY OF DEFAULT, INTEREST MARGIN, AND BANK EFFICIENCY: EMPIRICAL TEST OF MERTON MODEL IN INDONESIAN BANKING

Measurement of bank failure risk is still a challenging research problem. This study is aimed to measure the Indonesia banks probability of bankruptcywith Model Merton which has the better predictive power and is based on a far stronger financial theoretical frameworkcompared to the popular bankruptcy prediction model which is categorized by Sundaresan (2013) as a theoretical model such as Altman Z-score model and Ohlson 0 score more popular. The study also examine the relationship of bank efficiency and market power with its probability of default. The test results demonstrate that bank efficiency significantly affects the dynamics of bank’s default risk.

Optimal Dynamic Capital Requirements

We characterize welfare maximizing capital requirement policies in a quantitative macro-banking model with household, firm and bank defaults calibrated to Euro Area data. We optimize on the level of the capital requirements applied to each loan class and their sensitivity to changes in default risk. We find that getting the level right (so that bank failure risk remains contained) is of foremost importance, while the optimal sensitivity to default risk is positive but typically smaller than under Basel IRB formulas. Starting from low levels, savers and borrowers benefit from higher capital requirements. At higher levels, only savers prefer tighter requirements.

Morphological dynamics of gully systems in the subhumid Ethiopian Highlands: the Debre Mawi watershed

Abstract. Gully expansion in the Ethiopian Highlands dissects vital agricultural lands with the eroded materials adversely impacting downstream resources, for example as they accumulate in reservoirs. While gully expansion and rehabilitation have been more extensively researched in the semiarid region of Ethiopia, few studies have been conducted in the (sub)humid region. For that reason, we assessed the severity of gully erosion by measuring the expansion of 13 selected permanent gullies in the subhumid Debre Mawi watershed, 30 km south of Lake Tana, Ethiopia. In addition, the rate of expansion of the entire drainage network in the watershed was determined using 0.5 m resolution aerial imagery from flights in 2005 and 2013. About 0.6 Mt (or 127 t ha−1 yr−1) of soil was lost during this period due to actively expanding gullies. The net gully area in the entire watershed increased more than 4-fold from 4.5 ha in 2005 to 20.4 ha in 2013 (> 3 % of the watershed area), indicating the growing severity of gully erosion and hence land degradation in the watershed. Soil losses were caused by upslope migrating gully heads through a combination of gully head collapse and removal of the failed material by runoff. Collapse of gully banks and retreat of headcuts was most severe in locations where elevated groundwater tables saturated gully heads and banks, destabilizing the soils by decreasing the shear strength. Elevated groundwater tables were therefore the most important cause of gully expansion. Additional factors that strongly relate to bank collapse were the height of the gully head and the size of the drainage area. Soil physical properties (e.g., texture and bulk density) only had minor effects. Conservation practices that address factors controlling erosion are the most effective in protecting gully expansion. These consist of lowering water table and regrading the gully head and sidewalls to reduce the occurrence of gravity-induced mass failures. Planting suitable vegetation on the regraded gully slopes will in addition decrease the risk of bank failure by reducing pore-water pressures and reinforcing the soil. Finally, best management practices that decrease runoff from the catchment will reduce the amount of gully-related sediment loss.

Deep into the mud: ecological and socio-economic impacts of the dam breach in Mariana, Brazil

We review the ecological and socio-economic impacts of the catastrophic dam failure in Mariana, Brazil. Tailing management practices by Samarco mining company ultimately caused a dam breach that abruptly discharged between 55 and 62millionm3 of tailings into the Doce River watershed. On November 5th, 2015, a tsunami of slurry engulfed the small district of Bento Rodrigues, loading the Doce River and its estuary with toxic tailings along a 663.2km trajectory, extending impacts to the Atlantic coast. Acute ecological impacts will adversely affect livelihoods of more than 1 million people in 41 riparian municipalities by reducing local access to fisheries resources, clean water, crop production sites, hydroelectric power generation and raw materials. The threats to riverine human communities are particularly critical for the disadvantaged populations from remote areas that rely on subsistence agriculture and fisheries, and are uniquely vulnerable to long-term heavy metal exposure. At the landscape scale, we predict multiple negative impacts, ranging from alterations of the genetic diversity of fish populations to long-term vegetation loss and poor regeneration in contaminated areas. Consequently, compromised soil stability and runoff control will increase the risk of further geomorphologic disturbance, including landslides, bank failure and mass movements. We propose spatially explicit long-term monitoring frameworks and priority mitigation measures to cope with acute and chronic risks. We posit that, from a national perspective, disastrous impacts like that of Doce River may become more frequent, given the recent regulatory changes that undermine both institutional governance structures and enforcement of environmental regulation.

Sectoral Loan Concentration and Bank Performance (2001-2014)

Sectoral loan concentration is an important factor in bank performance. We develop a measure of sectoral loan concentration and study how community bank performance and the size-performance relationship vary with loan concentration and changes in loan concentration. The size-profitability relationship varies with concentration in the residential real-estate (RRE) sector. Higher RRE concentration is associated with lower returns especially for larger community banks—banks with assets totaling a billion or more. Concentration in other sectors, such as agriculture and commercial real estate (CRE), is significantly associated with risk of bank failure or acquisition. {{p}} Results for changes in concentration appear to be driven by the boom in CRE. Large positive (negative) changes in CRE concentration are both preceded and followed by large increases (decreases) in overall returns. Banks that switch specializations increase the hazard of failure but decrease the odds of being acquired.

Cross-Border Banking in Regulated Markets: Is Financial Integration Desirable?

We set up a two-country, regional model of trade in financial services. Competitive firms in each country manufacture untraded consumer goods in an uncertain productive environment, borrowing funds from a bank in either the home or the foreign market. Duopolistic banks can choose their levels of monitoring of firms and thus the levels of risk-taking, where the risk of bank failure is partly borne by taxpayers in the banks’ home countries. Moreover, each bank chooses the share of its lending allocated between domestic and foreign firms, but the bank’s overall loan volume is fixed by a capital requirement set optimally in its home country. In this setting we consider two types of financial integration. A reduction in the transaction costs of cross-border banking reduces aggregate output and increases risk-taking, thus harming consumers and taxpayers in both countries. In contrast, a reduction in the costs of screening foreign firms is likely to be beneficial for banks, consumers, and taxpayers alike.

The pricing of deposit insurance in the presence of systematic risk

Based on the Merton (1977) put option framework, we develop a deposit insurance pricing model that incorporates asset correlations, a measurement for the systematic risk of a bank, to account for the risk of joint bank failures. Estimates from our model suggest that actuarially fair risk-based deposit insurance that considers only individual bank failure risk is underpriced, leaving insurance providers exposed to net losses. Our estimates also capture the size premium where big banks are priced with higher deposit insurance than small banks. This result is particularly relevant to the current regulatory concerns on big banks that are too-big-to-fail. Above all, our approach provides a unifying framework for integrating risk-based deposit insurance with risk-based Basel capital requirements.

Do loan loss reserves behave like capital? Evidence from recent bank failures

Regulatory capital guidelines allow for loan loss reserves to be added back as capital. Our evidence suggests that the influence of loan loss reserves added back as regulatory capital (hereafter referred to as “add-backs”) on bank risk cannot be explained by either economic principles underlying the notion of capital or accounting principles underlying the recording of reserves. Specifically, we observe that, in sharp contrast to the economic notion of capital as a buffer against bank failure risk, add-backs are positively associated with the risk of bank failure during the recent economic crisis. Furthermore, the positive association of add-backs with bank failure risk is concentrated among cases in which the add-backs are highly likely to increase a bank’s total regulatory capital. The evidence cannot thus be fully explained by accounting principles either, since the role of loan loss reserves according to those principles does not depend on whether the reserves generate a regulatory capital increase. Additional analysis suggests that the observed influence of loan loss reserves on bank failure risk may be an unintended consequence of their regulatory treatment as capital.

Do Loan Loss Reserves Behave like Capital? Evidence from Recent Bank Failures

Regulatory capital guidelines allow for loan loss reserves to be added back as capital. The evidence in this paper suggests that the influence of loan loss reserves added back as regulatory capital (hereafter referred to as “add-backs”) on bank risk cannot be explained by either economic principles underlying the notion of capital, or accounting principles underlying the recording of reserves. Specifically, we observe that in sharp contrast to the economic notion of capital as a buffer against bank failure risk, add-backs are positively associated with the risk of bank failure during the recent economic crisis. Further the positive association of add-backs with bank failure risk is concentrated among cases in which the add-backs are highly likely to increase a bank’s total regulatory capital. The evidence cannot thus be fully explained by accounting principles either, since the role of loan loss reserves according to those principles does not depend on whether the reserves generate a regulatory capital increase. Additional analysis suggests that the observed influence of loan loss reserves on bank failure risk may be an unintended consequence of their regulatory treatment as capital.

Reforming Banks Without Destroying Their Productivity and Value

Government‐protected banking systems tend to blow up, imposing huge losses on taxpayers. In a recent much‐publicized book, The Bankers' New Clothes, Anat Admati and Martin Hellwig propose to fix this problem by forcing banks to maintain 25% of their assets in the form of equity rather than debt. But this author argues, the book overstates the benefits and understates the costs of the proposed reform, while also failing to identify additional necessary reforms.Because bank equity is not true equity, and equity must be evaluated only in relation to risk, increasing required book equity ratios will not necessarily reduce the risk of bank failure significantly.Raising equity requirements is also socially costly because it reduces banks' willingness to lend. When banks need to raise their equity‐to‐asset ratios, they often choose to do so by cutting back on new loans, rather than paying the high costs of raising new equity. The reduction in loan supply that comes from raising equity ratios can be substantial, and is not just a one‐time cost. Balancing the costs and benefits of higher equity implies a much lower required equity ratio than the 25% posited in The Bankers' New Clothes.Finally, because equity ratios relative to risk should be the focus of prudential regulation, additional regulatory policy reforms that strengthen incentives for more effective risk management are needed in addition to higher capital ratios.

International Financial Reforms: Capital Standards, Resolution Regimes and Supervisory Colleges, and their Effect on Emerging Markets

This paper focuses on the relevance to emerging economies of three major financial reforms following the global financial crisis of 2007–2009: (1) the improved capital requirements intended to reduce the risk of bank failure (“Basel III”), (2) the improved recovery and resolution regimes for global banks, and (3) the development of supervisory colleges of cross-border financial institutions to improve supervisory cooperation and convergence. The paper also addresses the implications of these regulatory reforms for Asian emerging markets. JEL Classification: G2, G28, O16 ADBI Working Paper 402 Alford

Bank failure risk: Different now?

Motivated by the debate over similarities between the current and previous financial crises, logit estimates reveal significantly changed linkages between observable financial ratios and probabilities of subsequent bank failure using US data from the 1980s and 2008.

International Financial Reforms: Capital Standards, Resolution Regimes, and Supervisory Colleges and Their Effect on Emerging Markets

This paper focuses on the relevance to emerging economies of three major financial reforms following the global financial crisis of 2007–2009: the improved capital requirements intended to reduce the risk of bank failure ('Basel III'), the improved recovery and resolution regimes for global banks, and the development of supervisory colleges of cross-border financial institutions to improve supervisory cooperation and convergence. The paper also addresses the implications of these regulatory reforms for Asian emerging markets.

Does Competition Reduce the Risk of Bank Failure?

A large theoretical literature shows that competition reduces banks' franchise values and induces them to take more risk. Recent research contradicts this result: When banks charge lower rates, their borrowers have an incentive to choose safer investments, so they will in turn be safer. However, this argument does not take into account the fact that lower rates also reduce the banks' revenues from non-defaulting loans. This paper shows that when this effect is taken into account, a U-shaped relationship between competition and the risk of bank failure generally obtains.

Lembaga Keuangan Mikro dan Pengentasan Kemiskinan: Kasus Lumbung Pitih Nagari di Padang

This study explores the advent of microfinance institution that has been an important development in recent years. Through case study on one microfinance institution namely lumbung pitih nagari located in Padang, West Sumatra, Indonesia, this study found that the existence of the micro credit institute has been influenced by several factors such as state regulations. In 1997, the central bank of Indonesia (BI) carried out regulatory reforms in order to reduce the risk of bank failures. This regulation in fact has weakened the role of microfinance institutions in giving financial services to small-medium enterprises (SMEs). However, in the reformation era, many local microfinance institutions emerge as the Ministry of Cooperation and Small-Medium Enterprises has officially given support for the betterment of SMEs through soft loan mechanism. LPN has been one of its kind which is able to run profitably and at the same time to facilitate credit for SMEs in the region.

Profitability and Liquidity Stress in Indian Commercial Banks: 1979-2008

It is widely accepted that the failure of many commercial banks was the trigger for the current global financial crisis. In this context a study of the reasons for liquidity failures of banks assumes considerable significance. If policymakers can identify the factors responsible for liquidity stress in banks they could minimize the propagation of systemic bank failure risk. This paper models the liquidity stress of the Indian commercial banking system. The period covered s 1979 to 2008. I work with extant models of profitability and profit stress used in previous studies. Further, I analyze liquidity stress using a multinomial logit model in order to understand the factors behind such stress in Indian banks. Several policy conclusions are drawn from the analysis.

Systemic Risk in Banking: New Approaches Under the Current Financial Crisis

In the context of the current financial crisis, the stability of the financial system becomes a priority on the agenda of the national monetary authorities. Since “systemic risk” is widely accepted as the fundamental underlying concept for the study of financial instability, this paper attempts to highlight the new dimensions of the concept in the pursuit of effective crisis management. Today, the potential for increased systemic risk is particularly related to combinations of structural trends. The increasing use of credit risk transfer (CRT) instruments and other financial innovations have changed the nature of systemic risk in banking activity. Moreover, as banks have become broad-based financial institutions engaging in a full spectrum of financial services including investment banking, brokerage services, asset management or proprietary trading, their risk exposures have become considerably more complex and interdependent. Thus, the risk of bank failure triggering a chain reaction and generating negative externalities for the whole financial system is significantly grown. Consequently, there is a stringent need for appropriate regulation and for macro-prudential supervision.