Banking Reform Research Articles

How Competitive and Stable is the Commercial Banking Industry in China after Bank Reforms?

This paper examines market concentration and its effect on competition in the Chinese commercial banking market. This study also investigates how changes in competition have affected the financial stability of Chinese commercial banks. To test the competitive conditions, we obtained the H statistic of the Panzar- Rosse model from a revenue function equation. The degree of financial stability is estimated by the Z-score formula. The Chinese banking industry has become an increasingly less concentrated market with an increased number of banks. Along with a decreased market concentration, competition in the Chinese banking industry has improved moderately. However, its market structure is still far from a competitive market. An individual bank’s ability to earn higher markup or charge a higher net interest margin contributes to its financial soundness, although a higher degree of market concentration may have negative effect on the financial stability of the entire banking system.

Tying hands and cutting ties: Explaining the divergence between the EU and the US in global banking reform since the crisis

In the implementation of banking regulations stemming from the Basel Committee, the EU and the United States have diverged sharply in the ways they have chosen to implement. In a significant break with past trends, the EU has shaped and re-defined the content of Basel III such that in several areas it is materially non-compliant with it. In contrast, the United States has in many cases gone over and above minimum standards. What explains this US-EU divergence? I focus on the potential causal role of the banking industry itself in bringing about this divergence. I argue that while advocacy by the banking industry is a natural culprit for this divergence, it is incorrect to assume that financial industry advocacy efforts in the EU were simply more powerful than their weaker US counterparts over global rules. The banking reform agenda, from the start, was characteristic of regulatory opportunism by the US regulators. While many advocacy efforts subsequent to Basel III’s formation were successful in the EU, their policy-shaping capacities were largely a function of the ability to ‘win back’ ground that was lost in earlier phases in Basel when US regulators were able to set the agenda. Thus, while the EU-US divergence we observe is real and important, it is not monocausally the result of stronger banking lobbies in Europe.

Bank reforms and efficiency in Vietnamese banks: evidence based on SFA and DEA

ABSTRACTThis study examines the cost efficiency of Vietnamese banks from 2000 to 2014 in the first stage, and the selection and dynamic effects of two governance reforms, foreign partial acquisition and listing on the stock exchange, on the efficiency in the second stage. Empirical results from the two-stage Stochastic Frontier Analysis (SFA) are highly consistent with those from the two-stage Data Envelopment Analysis (DEA) . Specifically, the first-stage efficiency estimation indicates that the cost efficiency shows a slightly upward trend over the period 2000–2014, with the cost efficiency score being 0.93 and state-owned banks outperforming joint-stock banks (JSBs). The mixed process seemingly unrelated regression estimator which controls the potential endogeneity of public listing and foreign acquisition in the second stage shows that selection effects occur in the Vietnamese banking system: banks selected by the strategic foreign investors for partial acquisition and banks selected for public listing are more cost-efficient than those not selected. The short-term and long-term dynamic effects of foreign partial acquisition are documented: the cost efficiency of the Vietnamese banks post-partial acquisition is lower than prior-partial acquisition, and it experiences a decreasing trend since partial acquisition. However, the short-term and long-term dynamic effects of public listing are not evidenced: the cost efficiency of the banks after public listing is not statistically different from that before public listing, and it also reveals an unclear trend since public listing.

Understanding Bona Fide Option Market Makers

This paper builds a uni ed theoretical framework under which the quoting and hedging strategies of a competitive option market maker are analyzed. I show that the option market maker trades fewer shares of the underlying stock and widens the bid-ask spread as trading the underlying stock becomes more costly. Then I model the option market maker as being involved in more than one market within the same option chain. The market maker adjusts bid and ask quotes in multiple markets simultaneously to encourage transactions that help him/her easily hedge the inventory. This paper has potential implications in the recent debate over structural banking reform.

Minsky at Basel: A Global Cap to Build an Effective Postcrisis Banking Supervision Framework

The global financial crisis shattered the conventional wisdom about how financial markets work and how to regulate them. Authorities intervened to stop the panic — short term pragmatism that spoke volumes about the robustness of mainstream economics. However, their very success in taming the collapse reduced efforts to radically change the “big bank” business model and lessened the possibility of serious banking reform — meaning that a strong and possibly even bigger financial crisis is inevitable in the future. We think an overall alternative is needed and at hand: Minsky’s theories on investment, financial stability, the growing weight of the financial sector, and the role of the state. Building on this legacy, it is possible to analyze which aspects of the post-2008 reforms actually work. In this respect, we argue that the only effective solution is to impose a global cap on the absolute size of banks.

The effectiveness of the Spanish banking reform application of Altman’s Z-Score

The recent financial crisis which causes bankruptcy around the world, Spain was placed at the top list because of the crucial state of its banking. This lead to a call to ensure adequate bank capitalization and reduce uncertainty regarding the strength of their balance sheets. In the light of recent event, the important of knowing the financial position of banks is imperative to shareholders. Thus, the aim of this study is to affirm the validity of Altman Z”-Score model as a predictors of the uncertainty regarding financial sector in Spain. This study takes into consideration two periods: before the banking reform and after the banking reform. It requires 30 financial institutions in Spain both big as well as small. Ratio analysis was carried out on the 30 banks before and after the reforms for five years prior to their bankruptcy or nationalisation as the Z” Score model has predictive power of up to five years before the reforms.

Impact of the joint-stock reform of commercial banks on the effectiveness of monetary policy in China

Over the past decade, the Chinese government has conducted the joint-stock reform of state-owned commercial banks. The joint-stock reform improves the marketization level of the ownership structure of commercial banks and consequently leads to impacts on the effectiveness of monetary policy. This paper first presents the impacting mechanisms of the joint-stock reform of commercial banks on the effectiveness of monetary policy and then constructs an empirical model to test those impacts. The empirical results show that the increasing degree of joint-stock reform of commercial banks enhances the effectiveness of expansionary monetary policy but weakens the effectiveness of contractionary monetary policy in China.

The impact of international financial reporting standards adoption and banking reforms on earnings management: evidence from Nigerian banks

This study examines stock market reaction and the impact of IFRS adoption on the Nigerian stock market. The paper also evaluates the effect of the Central Bank of Nigeria (CBN) reforms on earnings management of Nigerian banks. The result indicates no evidence of any significant effect on the market but a negative stock reaction in the medium term. Our finding highlights mixed impact of IFRS adoption on earnings management; but a significant decrease in earnings management in the post CBN reforms. Our study shows that adoption of IFRS was wrongly timed in Nigeria as the fragile investors' sentiment which was just recovering from the shock of the global financial crisis could have been weakened by the negative market returns. These results have signal effect on investors.

The impact of banking sector reforms and credit supply on agricultural sector: Evidence from Nigeria

Nigerian government embarked on various banking reforms over a period of three decades with the aim of enhancing competitiveness in financial services, promoting investment, and ensuring efficiency in resource allocation to the real sector and other sectors of the Nigerian economy. One sector of the Nigerian economy that has remained of paramount interest to the government is the agricultural sector. Since the country attained political independence in 1960, the agricultural sector has remained the mainstay of the Nigerian economy contribution significant to GDP and employment generation. Despite the increased role of the agricultural sector in providing the much-needed inputs and raw materials needed for improved productivity in other sectors of the economy, not much has been done in the area of tracking and evaluating the success of discretional credit allocation and commercial bank lending to the agricultural sector. This study examined the impact of the increased discretionary allocation of credit to the private sector due to the banking sector reforms and the various directed funding programs by the regulatory authority on agricultural output in Nigeria over the period of 1986-2013. The study used time series data sourced from World Bank and the Central Bank of Nigeria Statistical Bulletin. The method applied to test the impact of banking sector reforms and agricultural sector credit supply on agricultural sector output in Nigeria was the impulse response functions and the variance decomposition of Vector Error Correction Model (VECM). Impulse response function explains the reaction of an endogenous variable to one of the innovations while the variance decomposition gives information on the relative importance of each random innovation. The results revealed that both the banking sector reforms and credit supply to agricultural sector have positively affected agricultural output in Nigeria. However, the impact of agricultural credit supply on agricultural output proved to be very weak and insignificant. This study suggests that the discretionary allocation of credit particularly by the monetary authorities or the banking sector, may not necessarily achieve the goal of massive growth in the agricultural sector. There is an urgent need for the Federal Government to embark on institutional and infrastructural reform to remove the various credit supply bottlenecks and make the financing of the agricultural sector more productive.

The impact of international financial reporting standards adoption and banking reforms on earnings management: evidence from Nigerian banks

This study examines stock market reaction and the impact of IFRS adoption on the Nigerian stock market. The paper also evaluates the effect of the Central Bank of Nigeria (CBN) reforms on earnings management of Nigerian banks. The result indicates no evidence of any significant effect on the market but a negative stock reaction in the medium term. Our finding highlights mixed impact of IFRS adoption on earnings management; but a significant decrease in earnings management in the post CBN reforms. Our study shows that adoption of IFRS was wrongly timed in Nigeria as the fragile investors' sentiment which was just recovering from the shock of the global financial crisis could have been weakened by the negative market returns. These results have signal effect on investors.

Dynamics of scale effficiency of Indian banks: A deterministic frontier approach

Indian banking sector is characterized with intense competition, amongst the best regulated in the world and rapid growth. Indian banking sector have undergone rapid reforms and liberalization in last two decades, which resulted into advent of new and strong private sector banks, increased technology adoptions, rapid branch expansion, prudential regulations, focus on financial inclusion, market discipline of public sector banks and demanding customers. With Indian Banking system poised to become the world’s 3 rd largest by 2025 and owing to the dynamism in banking sector the paper examines the bank efficiency. Most past studies focused on the impact of some or other regulatory phase, some segments of banking and under constant return scale assumption. Our study is distinct to the extent that we examine the bank efficiency after the Phase III and IV reforms and subprime crisis, across all ownership segments of Scheduled Commercial Banks and under plausible assumption of variable returns of scale given the dynamic banking environment. We employ non-parametric Data Envelopment Analysis using intermediation approach under of variable return of scale. Our study period consist of 2008-2012 post reform and subprime crisis period and covers 26 public, 19 private and 21 foreign banks operating in India. We further examine the variation in efficiency across different ownership groups and small and large bank sizes over the period. Our findings indicate that Public sector banks’ average efficiency scores were better than that of private sector while foreign banks had the lowest efficiency score. Private sector banks had lower heterogeneity in efficiency compared to public sector banks. The smaller banks showed better efficiency compared to larger banks across the ownership groups. We find that the banking reforms have seen improvement in efficiency of public sector banks as compared to private and foreign banks. Thus our findings differ from studies on other emerging markets indicating efficiency improvement of foreign banks as compared to pubic banks. While banks have shown overall efficiency the lower technical efficiency indicate inefficiency in large banks probably due to sub optimal scale and scope efficiency. Our study point outs management of assets, branch rationalization and use of technology to improve the bank efficiency. The study suggests policy focus on reduction of non-performing assets and rationalization of staff and branches to obtain efficiency gain. Regulatory reforms in Indian Banking sector saw improvement in efficiency of public and private banks and efficiency scores differed across various ownership and large and small bank groups.

How Successful are Banking Sector Reforms in Emerging Market Economies? Evidence from Impact of Monetary Policy on Levels and Structures of Firm Debt in India

Many emerging markets have undertaken significant financial sector reforms especially in their banking sectors that have been quite critical for both financial development and real economic activity. In this paper, we investigate the success of banking reforms in India where significant banking reforms have been introduced since 1990s. Using the argument that well-functioning credit markets would reflect a bank channel for monetary policy at work, we test whether a change in monetary policy has predictable impact on borrowing behaviour of several types of firms, including business group affiliated, unaffiliated private firms, state-owned firms and foreign firms. The empirical results suggest that unaffiliated private firms have the most vulnerable to monetary policy stance during tight policy regimes. We also find that during tight monetary policy regimes, smaller firms are much more affected by monetary policy than large firms. In an easy money regime, monetary policy and the associated change in interest rate does not affect change in bank credit, change in total debt and the proportion of bank credit in total debt for any of the firms. We discuss the policy implications of the findings.

Dismantling Comprehensive Forest Bureaucracies: Direct Access, the World Bank, Agricultural Interests, and Neoliberal Administrative Reform of Forest Policy in Argentina

ABSTRACTBy the end of the 1980s, Argentina was in the middle of a severe economic crisis. In 1991, the Deregulation Decree, which steered the political economy toward a new neoliberal policy, dismantled the Argentine National Forestry Institute (IFONA), an autonomous bureaucracy responsible for forests. The aim of this study is to analyze the influence the World Bank exerted on domestic forest policymaking and bureaucratic reform in Argentina. We selected the interventions of the World Bank in the Argentinian forest and agricultural policy that started in the early 1990s and still continues today. We use a qualitative case-study design building on content analysis of policy documents. The World Bank interventions through funding figured prominently, in the form of new forest laws that, as a whole, benefited plantation forests and regulated soy production expansion. This policy was found to be supported by a coalition of the World Bank, agricultural interests, and private landowners.

Stabilizing Nominal Spending: An Emergent, Free Banking Perspective

Market Monetarists and free bankers tend to agree on the theoretical desirability of having a monetary system that stabilizes the flow of nominal spending in an economy. However, their ideas diverge on two related issues: (1) how should we conceive of the process in which total spending is generated, and (2) what are the best means for stabilizing the flow of total spending, however defined. In this paper, I argue that the free banking approach is superior on both accounts. Free banking theory brings to the forefront of its analysis the all-important role that individuals acting within naturally evolved monetary institutions play in facilitating microeconomic coordination. This coordination, in turn, has the unintended yet desirable consequence of producing a stable flow of spending. In this sense, free banking theory is more consistent with an “emergent-dynamic” approach to understanding macro-phenomena, as discussed in Wagner (2010, 2012). Although I argue that free banking is superior means of stabilizing the total flow of spending, I conclude that combining free banking reforms with a strict monetary rule that adjusted the supply of base money to stabilize the flow of spending in the economy as Market Monetarist propose would serve as an effective remedy for the potential problems in a free banking system stemming from changes in the demand for base money.

Understanding Domestic Savings in Chile

This paper constructs time series data on savings per type of agent for Chile during the period 1960-2012. It is found that the economy's average savings rate increased by 11 percentage points in the period 1985-2012 compared to 1960- 1984, with particularly pronounced growth in corporate savings. The evidence suggests that this increase was driven largely by the following measures: i) pension reform that introduced mandatory savings and private sector management, ii) banking reform, iii) tax reform, iv) capital markets reform and v) privatizations.

The impacts of risk and competition on bank profitability in China

Several rounds of banking reforms in China have aimed to increase the competitive condition and further enhance stability in the Chinese banking sector, while the joint effects of competition and risk-taking behaviour on the profitability in the banking sector have not been studied well enough so far in the literature. The current study contributes to the empirical literature by testing the impacts of risk and competition on profitability in the Chinese banking industry (state-owned, joint-stock and city commercial banks) over the period 2003–2011 under a one-step Generalized Method of Moments (GMM) system estimator. The results do not show any robust finding with regards to the impacts of competition and risk on bank profitability, while it is found that Chinese bank profitability is affected by taxation, overhead cost, labour productivity and inflation. The study provides policy implications to the Chinese banking industry and different ownership types of Chinese commercial banks.

Quasi‐Nationalisation in the UK Banking Crisis: A Problematic Policy Option

AbstractThe systemic banking crisis in 2008 led to the quasi‐nationalisation of two UK listed banks: The Royal Bank of Scotland and Lloyds Banking Group (National Audit Office, 2010). Using property rights and agency theory as the theoretical frameworks, this paper analyses whether the quasi‐nationalisation of these banks has been successful. It is argued that as a rescue mechanism, quasi‐nationalisation was a positive development. However, questions arise over its effect as an instrument of banking reform. The State's arm's length approach to management represents a lost opportunity to change the culture of profitability over people that contributed to the banking crisis.

Do consolidation and foreign ownership affect bank risk taking in an emerging economy? An empirical investigation

Purpose – The purpose of this paper is to examine the effect of bank consolidation and foreign ownership on bank risk taking in the Egyptian banking sector. Design/methodology/approach – Following prior studies (e.g. Yeyati and Micco, 2007; Barry et al., 2011), this study uses pooled Ordinary Least Squares regression models under two main analyses to test the relation between concentration and foreign ownership on one hand and bank risk-taking behavior on the other hand, where observations are pooled across banks and years for the 2000-2011 period. The reform plan was launched in 2004 and resulted in various restructuring activities in the banking system. Thus, to control for the effect of implementing the financial sector reform plan on bank insolvency and credit risk, this study includes a reform dummy variable (RFM) for the post-reform period in models testing the association between consolidation, foreign ownership and bank risk. Therefore, this categorical variable identifies whether bank risk is related to the reform activities that have been observed during the post-restructuring period, 2005-2011. Moreover, to accommodate the possibility that effects of bank concentration and foreign ownership on bank risk differ due to the implementation of the reform plan, the author create two interaction terms: one uses the product of the reform dummy variable and concentration measures, while the other uses the product of the reform dummy and foreign ownership variables to capture interactions. These interaction terms and the dummy variable provide ample room to capture the effect of bank concentration and foreign ownership on bank risks during the post-reform period. Findings – This study provides empirical evidence that bank concentration is associated with low insolvency risk and credit risk as measured by loan loss provisions (LLP) in the post-reform period. These results are consistent with the “concentration-stability” view, suggesting that concentration of the banking sector will enhance stability. Moreover, evidence shows that while a higher presence of foreign banks reduces bank credit risk in the post-reform period, it appears to increase insolvency risk. These results are robust to using alternative measures. These findings imply that regulators in emerging countries should support foreign investments in banks to transfer better managerial skills and systems. However, government-owned banks are found to be more prone to insolvency and credit risks; thus, their ownership should not be encouraged. Finally, policy makers should reinforce bank consolidation, be prudent in determining the capital adequacy ratio (CAR) and monitor intensively less profitable, well-capitalized and small-sized banks. Practical implications – Consolidation of the banking sector decreases insolvency risk and credit risk, as measured by LLP in the post-reform period. This study proposes that bank supervisors implement prudent polices in determining the bank CAR, and monitor intensively less profitable, well-capitalized and smaller banks, as they have incentives to increase risk. In addition, regulators should encourage foreign investment in the banking sector and facilitate their operations in Egypt. Social implications – Bank supervisors should intensely monitor banks with high-CARs that exceed mandatory requirements because they may be more likely to engage in more risk-taking activities. Originality/value – It provides empirical evidence from a country-specific, emerging market perspective, in which restructuring events affect the national economy. Egypt, similar to other emerging countries in Africa, pursues an institutionally based (bank-based) system of corporate governance, where banks are the primary sources of finance for firms. Therefore, restructuring banks and other financial institutions and supervising their operations ensure the soundness and stability of these institutions, which represent the nerve of emerging economies. Because emerging countries tend to share common characteristics and economic conditions, and the reform of their financial systems is significant for economic development, the Egyptian banking reform and restructuring program should be of interest to other emerging countries to capitalize on this experiment. While international studies on these relationships are mostly cross-country or focus on US banks, firm-specific studies are scant. Furthermore, the findings of this study should be of interest to Egyptian regulators, bank supervisors and policy makers studying the implications of bank reforms.

Banking Reforms: The Nigerian Corporate Governance Perspective and New Challenges

Banking and corporate governance reform is an ongoing phenomenon which has received intense global attention after the 2008 global financial crisis. This is particularly true of Nigeria where banks constitute a dominant position of the financial sector. It has compelled many financial and non-financial regulators in Nigeria such as the Central Bank of Nigeria and the Securities and Exchange Commission to revise the codes of best practices for banks and other public companies overtime with a new single code of corporate governance [the national code of corporate governance] set to be released by the Financial Reporting Council of Nigeria.This paper makes a contribution to the existing literature on the state of corporate governance development in the Nigerian banking and non-banking sector, the impacts of the banking regulations and the efforts put in place at ensuring that banks are well governed. It also addresses the issue of compliance, disclosure and harmonisation of codes in Nigeria. It argues that while standards and codes are being enacted and revised by the CBN, the SEC and now FRCN, there is greater need for the Nigerian internal and external environments (such as the socio-political, economic and cultural systems) to support the reforms. There is also need for better enforcement, a renewed transparency and total compliance to the spirit and letter of the code in Nigeria.

English

The study investigated empirically the effect of banking sector reforms on the output of manufacturing sector in the Nigerian economy between 1970 and 2011 with a view to examining the extent of the impact of banking sector reforms on the manufacturing sector. The study employed annual secondary time series data from 1970-2011, sourced from the Central Bank of Nigeria’s statistical bulletin and annual report and statement of accounts, National Bureau of Statistics final accounts and IMF International Financial Statistics (IFS) using the methodology of Cointegration analysis and Error Correction Mechanism (ECM). The empirical results showed that the effects of Bank assets, Lending rate, Exchange rate and real rate of interest on manufacturing output were positively significant but with very low impact. On the other hand, the financial deepening and interest rate spread negatively and significantly impacted on the output growth of manufacturing sector in Nigeria. Overall, the conclusion that emerged from the findings suggests that the effects of banking sector reforms on the output growth of manufacturing sector were significantly low in the Nigerian economy. However, the findings indicated that the impacts of the various banking reforms could vary widely on the economy depending on the time lags involved. Consequently, the policymakers must be prepared to initiate proper counter- cyclical banking reforms that will serve as buffer measures to lessen or abort the negative impacts of any banking reforms on the manufacturing output growth. Thus a flexible accommodating banking reform regime is advocated for Nigeria. Key words: Banking sector reforms, Error Correction Mechanism (ECM), manufacturing sector, and Cointegration analysis.