Bank Insolvency Risk Research Articles

Beyond Common Equity: The Influence of Secondary Capital on Bank Insolvency Risk

Banks must adhere to strict rules regarding the quantity of regulatory capital held but have some flexibility as to its composition. In this paper, we examine if bank insolvency (distance to default) is sensitive to capital other than common equity for a sample of listed North American and European banks. Decomposing tier 1 capital into tangible equity and non-core components reveals a series of heretofore unidentified non-linear links with insolvency risk. We assess the influence of binding capital requirements, finding that low regulatory capital buffers are associated with increased insolvency risk for banks holding greater quantities of non-core tier 1 and tier 2 capital. The links between insolvency and capital, evident when the latter is denominated relative to tangible assets or total regulatory capital, are found to be expunged when defined relative to risk-weighted assets.

Beyond common equity: The influence of secondary capital on bank insolvency risk

Banks must adhere to strict rules regarding the quantity of regulatory capital held but have some flexibility as to its composition. In this paper, we examine if bank insolvency (distance to default) is sensitive to capital other than common equity for a sample of listed North American and European banks. Decomposing tier 1 capital into tangible equity and non-core components reveals a series of heretofore unidentified non-linear links with insolvency risk. We assess the influence of binding capital requirements, finding that low regulatory capital buffers are associated with increased insolvency risk for banks holding greater quantities of non-core tier 1 and tier 2 capital. The links between insolvency and capital, evident when the latter is denominated relative to tangible assets or total regulatory capital, are found to be expunged when defined relative to risk-weighted assets.

The determinants of bank insolvency risk: evidence from Finland

Purpose This paper aims to contribute to the literature on the determinants of bank-specific insolvency risk. Design/methodology/approach By applying a dynamic two-step System GMM estimator on a novel, representative panel of 339 Finnish unlisted cooperative and savings banks over the period 2002-2018. Findings This study contributes to the literature on the determinants of bank-specific insolvency risk by applying a dynamic two-step System GMM estimator on a novel, representative panel of 339 Finnish unlisted cooperative and savings banks over the period 2002-2018. The key findings suggest that Finnish banks have become less fragile under the renewed EU banking regulation. In particular, the CRD IV has affected banks’ equity levels. This study also captures the detrimental effect of cost inefficiency as well as a positive relationship between the income diversification and insolvency risk. A negative relationship between the GDP growth rate and the insolvency risk is also reported although results suggest that the effect is not immediate. Originality/value This result is discussed together with other macroeconomic factors. The consequent conclusion underlines the fundamental significance of overall macroeconomic dynamics. From the perspective of regulatory harmonization, more research is needed to address the level of homogeneity of macroeconomic dynamics between different geographical and cultural regions.

Directors with multiple directorships and accounting conservatism: Evidence from banks in South Asia

This study investigates the effect of directors with multiple directorships on banks’ financial reporting conservatism in South Asia (Bangladesh, India, Pakistan, and Sri Lanka). The paper applied Basu (1997) asymmetric timeliness measure of conditional conservatism for a sample of 93 banks stock listed banks of the four countries. We find that the relationship between directors with multiple directorships and accounting conservatism is an inverse ‘U’ shape. That is, at a low level of multiple directorships, banks follow conservatism in financial reporting (reputation effect), then at a high level of multiple directorships reporting conservatism declines (busyness effect). We also find an optimal level of multiple directorships at which directors influence the most on financial reporting conservatism. In further analysis, the study finds evidence that directors with multiple directorships (DWMDs) in banks with high insolvency risk follow accounting conservatism. The findings of this study remain robust when we modify the definition of multiple directorships and control for multiple directorships by bank chairs and insolvency risk under alternative settings

Insolvency Risk: Issues and Challenges for Public Sector Commercial Banks of India

This paper thoroughly examined the insolvency risk of four major commercial banks of India namely, State Bank of India, Punjab National Bank, Bank of Baroda, and Canara Bank during the period from 2005-06 - 2017-18 and scrutinized whether the regulatory capital requirement as per the Reserve Bank of India norms was enough to insulate commercial banks from the potential threat of insolvency risk. Moreover, the impact of the main determinants on the parameter used to measure insolvency risk namely, Z-score was also analyzed. Our study clearly showed that the insolvency risk of all these banks increased significantly since the value of Z-score dipped substantially overtime. Further, the analysis also revealed that the current level of regulatory capital of the banks was not enough to overcome the potential threat of insolvency risk. Finally, percentage of nonperforming assets to total advances pertaining to the industrial sector was found to be an important determinant that aggravated the insolvency risk of banks. All these findings clearly highlighted that it is not the opportune time for the Reserve Bank of India to ease-off the regulatory capital norms regarding the capital risk adequacy ratio (CRAR). Besides, there is an urgent need for commercial banks to improve the quality of lending pertaining to the industrial sector of the economy along with stepping up their credit business regarding the personal loan segment. Moreover, too much government intervention distorts the automatic functioning of financial institutions. Rather, a mechanism should be devised to make these institutions more accountable.

Studi Empiris Kekuatan Stabilitas Keuangan Perbankan Syariah di Indonesia

The study aims to examine the stability of Islamic banking in Indonesia after the global financial crisis. This study is significant, considering the rapidly growth of Islamic banking in Indonesia and uniqueness of its operating systems and products. By using secondary data from the annual reports of the banking sector listed on the Indonesia Stock Exchange (IDX) for the period from 2013 to 2016, regression analysis with the ZSCORE function (insolvency risk) as the dependent variable and a number of predictor variables (firm-specific, macroeconomic and governance) are used as tools for achieving research objectives. To check the robustness of the research findings, a model with different specifications has been used. The results indicate that profitability and firm size have a significant influence on the insolvency risk (ZSCORE) of banks and empirical factors that influence these risks differ between Islamic banks and conventional banks.

The impact of Sukuk on the insolvency risk of conventional and Islamic banks

ABSTRACTThis paper investigates the impact of Sukuk market development on bank insolvency risk using a sample comprising 72 Islamic banks (IBs) and 145 conventional banks (CBs) spanning 15 countries over the 2003–2014 period. We measure bank insolvency risk using the z-score. Using the system-GMM estimator, we find that Sukuk market development adversely affects the insolvency risk of IBs, while that of the CBs remains unchanged. Moreover, our results point to a negative and significant effect of the size on the insolvency risk of both CBs and IBs, thus confirming the well-documented Too-Big-To-Fail hypothesis. This effect is more pronounced for IBs indicating that large IBs exhibit higher insolvency risk than their conventional counterparts. Finally, we show that the 2008 global financial crisis has exacerbated the negative effect of Sukuk market development on bank insolvency risk, as expected.

Market monitoring and influence: evidence from deposit pricing and liability composition from 1986 to 2013

We examine the monitoring and ex-post influence of depositors on risk-taking of U.S. bank holding companies (BHCs) from September 1986 to December 2013. As the basis for our empirical analysis, we develop a theoretical model which shows that under risky lending and deposit insurance, a bank’s liability and asset choices are interrelated through its probability of insolvency. Our empirical results are as follows. First, for the sub-sample of the ten largest (Top10) BHCs, deposit risk pricing only exists over some sub-periods prior to the 2007 financial crisis. However, interest rates on insured deposits and uninsured deposits for the Non-Top10 BHCs increase with bank risk over the whole sample period. Moreover, the growth rates of insured and uninsured deposits tend to decrease as bank risk increases for Non-Top10 BHCs over the entire sample period, but only in some sub-periods for the Top10 institutions. Second, although Top10 BHCs do not increase the insured deposits-to-liabilities ratio to weaken market discipline over the entire sample period, all other institutions engage in such regulatory arbitrage in some sub-periods. Third, higher risk premium embedded in current deposit interest rates is more likely to reduce future insolvency risk of troubled BHCs. This suggests that depositors monitor the riskiness of BHCs while also exerting strong ex-post influence on risk-taking of problem institutions. Fourth, in the post-Dodd-Frank Act/Basel III period, the interest rates, the shares, and the growth rate of insured deposits for the Top10 BHCs are significantly negatively related to bank insolvency risk. This could be due to strengthened regulatory oversight on the largest high-risk institutions and is consistent with a substitution relationship between depositor discipline and regulatory oversight.

Loan portfolio diversification, market structure and bank stability

This paper examines whether the choice of bank loan diversification and market concentration are associated with a bank's financial stability. This study also investigates how the effect of loan diversification on bank stability varies depending on the level of the concentration or the competitiveness of the banking market. We find that increased loan diversification has a positive impact on the bank's financial strength. We show that market concentration is negatively associated with bank insolvency risk, consistent with the “concentration-stability” view. The results using interaction terms between loan portfolio diversification and market concentration indicate that diversifying banks operating in highly concentrated markets are more financially stable compared to those in less concentrated markets.

Banking Sector Reform, Competition, and Bank Stability: An Empirical Analysis of Transition Countries

ABSTRACTThis study tests the impact of banking sector reform and competition on bank stability based on unbalanced data from 22 transition countries from 1998 to 2016. The initial results not only highlight the positive relationship between market power and bank fragility but also confirm the positive relationship between bank reform and stability. Our findings also show that both higher activity restrictions and more explicit guidelines for asset diversification increase bank stability, but this positive effect significantly weakens for banks with higher market power. More stringent capital requirements in combination with higher market power increase the risk of bank insolvency.

Peer-to-Peer Lending Platforms and the Stability of the Banking System

This study examines how the advent and the expansion of peer-to-peer(P2P) lending platforms affect financial stability, especially the soundness and the stability of banks and the banking system. We analyze the risks of various bank failures by comparing two cases of competition, a benchmark case in which only banks exist and no P2P lending platforms exist and the case in which the credit market is segmented and a P2P lending platform operates only in the low-credit score consumers’ markets. Our findings are as follows: (i) the insolvency risk of individual banks increases when they compete with the P2P lending platform in the low-credit score consumers’ markets, but (ii) the illiquidity risk of individual banks is reduced; and (iii) the systemic risk in the banking system triggered by individual defaults is also reduced. Our results imply that if the role of the P2P platforms and banks are properly differentiated so that P2P lending platforms focus on the provision of credits in the low-credit score consumers’ markets, and the banks concentrate more on high-credit score consumers’ markets and protected deposits business, the impact of spread of P2P lending platforms on the current banking system’s stability may be limited.

Beyond Common Equity: The Influence of Secondary Capital on Bank Insolvency Risk

Banks adhere to strict rules regarding the quantity of regulatory capital held, but have some flexibility as to its composition. In this paper, we examine bank insolvency risk (distance to default) for listed North American and European banks over the period 2002-2014, focusing on sensitivity to capital other than common equity. Decomposing tier 1 capital into equity and non-core components reveals a heretofore unidentified variation in risk reduction capacity. Greater non-core tier 1 capital is associated with increased insolvency risk for larger and more diversified banks, impairing the risk reducing capacity of aggregate tier 1 capital. Overall tier 2 capital is not linked with insolvency risk, although a conflicting relationship is isolated conditional on the level of total regulatory capital held. Finally, the association between risk and capital is weakened when the latter is defined relative to risk-weighted assets.

Credit Risk Transfer and Bank Insolvency Risk

The present paper shows that, everything else equal, some transactions to transfer portfolio credit risk to third-party investors increase the insolvency risk of banks. This is particularly likely if a bank sells the senior tranche and retains a sufficiently large first-loss position.

TIPS and the VIX: Spillovers from Financial Panic to Breakeven Inflation in an Automated, Nonlinear Modeling Framework

AbstractThis paper examines the determinants of the breakeven inflation rate (BEI) on U.S. Treasury Inflation Protected Securities. After controlling for several measures of liquidity, inflation expectations and inflation uncertainty; financial fear itself (proxied with the Volatility Index or VIX) remains a primary influence on BEI. To delve into the mechanism underlying this association, the VIX is decomposed, using intraday data, into conditional variance and the variance premium capturing risk aversion. Aside from the 2008 crisis, most of the effect emanated from the variance premium. Following the crisis, indicators of bank insolvency risk gain prominence as well. Lastly, an automated nonlinear model finds convex effects of variance, and diminishing returns to insolvency risk and liquidity.

Bank Insolvency Risk and Z-Score Measures: Caveats and Best Practice

We highlight caveats arising in the application of traditional ROA-based Z-scores for the measurement of bank insolvency risk, develop alternative Z-score measures to resolve these issues, and make recommendations for best practice for the US/Europe based on the experience of the financial crisis of 2007-2008. Using a probabilistic approach (i) our novel regulatory capital Z-score dominates traditional Z-score measures for both US/Europe; (ii) Z-scores computed with exponentially weighted moments dominate those with moving moments for the US sample, but not for Europe. For both US/Europe, using a multivariate logit approach (i) allows computation of augmented Z-scores that provide probabilities of distress that better discriminate between distressed/surviving banks than the probabilistic approach; (ii) suggests that the ROA-based Z-score using current values of the capital-asset ratio is best, calculated either with moving or exponentially weighted moments.

Ownership structure and bank risk-taking: empirical evidence from Tunisian banks

This paper investigates the impact of ownership structure on bank insolvency risk. Panel data regression analysis is applied to a sample of 18 Tunisian banks during the 2011-2015 periods. The results show that concentrated ownership and state ownership reduce banks' risk taking, while the presence of institutional investors and foreign ownership encourages banks to take more risk.

The determinants of credit and insolvency risk of European commercial banks: a dynamic panel data analysis

This paper investigates the impact of both bank-specific and macroeconomic determinants on banking risk. A dynamic panel data regression analysis is applied to a large sample of 280 commercial banks operating in the euro area during the period 2003-2013. The main empirical results are as follows: (i) Economic growth, inflation, regulatory quality, insurance coverage and bank size are inversely and significantly related to credit risk, while capitalisation and competition are positively and significantly related to credit risk. (ii) Economic growth, inflation, capitalisation and regulatory quality are positively related to insolvency risk, while bank size, competition and deposit insurance coverage are negatively associated to insolvency risk.

The determinants of credit and insolvency risk of European commercial banks: a dynamic panel data analysis

The determinants of credit and insolvency risk of European commercial banks: a dynamic panel data analysis

DIVERSIFICAÇÃO DAS RECEITAS E RISCO DE INSOLVÊNCIA DOS BANCOS BRASILEIROS

Este estudo teve por objetivo investigar a relação entre a diversificação das receitas dos bancos brasileiros e sua relação com o risco de insolvência. A amostra foi composta por bancos de capital aberto ou não no período de 1996 a 2013. Os resultados indicam que a diversificação das receitas dos bancos, medida pelo Índice Herfindahl-Hirschman e pelo número de setores nos quais cada instituição opera não influenciou o risco de insolvência dos bancos, medido pelo Z-score. Evidências indicam que o crescimento dos ativos aumenta o risco de insolvência, enquanto que o tamanho e a capitalização estão negativamente relacionados. O Z-score também foi considerado sensível a fatores como o crescimento do Produto Interno Bruto e a concorrência, onde o crescimento econômico sinaliza um menor risco, enquanto que a concorrência aumenta o risco individual destas instituições.

Nonstationary Z-Score measures

In this work we develop advanced techniques for measuring bank insolvency risk. More specifically, we contribute to the existing body of research on the Z-Score. We develop bias reduction strategies for state-of-the-art Z-Score measures in the literature. We introduce novel estimators whose aim is to effectively capture nonstationary returns; for these estimators, as well as for existing ones in the literature, we discuss analytical confidence regions. We exploit moment-based error measures to assess the effectiveness of these estimators. We carry out an extensive empirical study that contrasts state-of-the-art estimators to our novel ones on over ten thousand banks. Finally, we contrast results obtained by using Z-Score estimators against business news on the banking sector obtained from Factiva. Our work has important implications for researchers and practitioners. First, accounting for nonstationarity in returns yields a more accurate quantification of the degree of solvency. Second, our measure allows researchers to factor in the degree of uncertainty in the estimation due to the availability of data.