Risk-taking Behavior Of Banks Research Articles

The Effects of Interest Rates on Bank Risk-Taking in South Africa: Do Cyclical and Location Asymmetries Matter?

We examine the nonlinear relationship between interest rates on bank risk-taking behavior in South Africa between 2008:q1 and 2022:q3 using nonlinear autoregressive distributive lag (NARDL) and quantile autoregressive distributive lag (QARDL) models. Whilst the preliminary estimates from linear ARDL produce results adhering to conventional theory, the NARDL and QARDL analysis shows that the relationship between the variables is more complex. On one hand, the NARDL model shows that the phase of monetary policy (cyclical asymmetries) is important in determining the pass-through effects of interest rates on bank risk behavior. We find that both contractionary and expansionary monetary policy increases long-term risk through decreased liquidity for the former and increased non-performing loans for the latter. On the other hand, the QARDL model shows that the level of bank risk behavior (location asymmetries) is also important in determining the impact of interest rates on bank risk behavior. We find that interest rates affect bank risk behavior in ‘medium-to-high risk environments’ for unsecured loans and lending and in ‘medium-to-low risk environments’ for liquidity. Overall, these results enable us to recommend ways in which the SARB can strengthen its monitoring mechanisms given the multifaceted impact of interest rates on bank risk-taking.

Banking Sector Development and Bank Risk-Taking Behaviour: Evidence from Commercial and Non-commercial Banks in Tanzania

This study investigates the effect of banking sector development measured by domestic credit provided by banks to private sector as percentage of GDP on risk-taking behaviour of the banks in Tanzania, measured in terms of bank capitalization ratio. The relationship was observed using annual country-level and bank-level data from commercial and non-commercial banks operating in Tanzania from 2012 to 2021. A system GMM estimation technique was employed in the investigation. Our results found that the effects of banking sector development on bank risk measured in terms of bank capitalization ratio is homogeneous across commercial and non-commercial banks. This means the development in banking sector measured as credit to the private sector by banks percentage of GDP in Tanzania has significant positive effect on bank capitalization ratio. Hence, reduce bank risk of default. Nonetheless, the findings reveal further that the profitability of bank and bank size factors are significant positive and negative respectively in relation to bank capitalization ratio. The results are further robust to bank ownership status dummy variable (DOSF) and for country of originality of the banks (DCOF) used to investigate whether there will be significant change in the result or not. The results of the robustness test indicate that banking sector development has insignificant effects on capitalization ratio when banks categorized as domestic and foreign banks as well as when banks categorized as private and state-owned banks.

Get advanced or retreat: well-informed board and bank risk-taking

Purpose This paper aims to examine the relationship between board structure and risk-taking, exploring how this association is influenced by advanced technologies in the banking sector. Design/methodology/approach This study uses a panel sample of 22 Pakistani banks from 2011 to 2018. To test the authors’ hypothesis, the authors use regression analysis with two-way cluster robust standard errors. Further, the authors also check the robustness of the authors’ findings using alternate proxies of board structure and bank risk-taking behavior. To address endogeneity concerns, the authors use the two-stage least square technique. Findings In the era of the Fourth Industrial Revolution, Pakistani banks’ digitalization is modeled by the presence of Temenos-T24/Oracle as their core banking system (software providing end-to-end operational integration). Its interactional effect with corporate governance is evaluated to implicate informed risk-taking by the board as a result of improved information access and analysis. The authors find that board size has a positive association with risk-taking, and the use of modern technology reshapes this association in the banking sector. Originality/value The contribution of this paper is twofold. First, the impact of board structure on bank risk-taking has not been extensively researched in Pakistan – a highly volatile and unpredictable economy. Second, the evaluation of the role of technology on bank risk is being researched for the very first time – a uniqueness of this paper.

The ramification of competition and concentration on bank risk-taking behavior and stability: corroboration from South Asian Association for Regional Cooperation

PurposeThe study investigates the impact of competition and concentration on bank risk-taking behavior and stability in the South Asian Association for Regional Cooperation (SAARC) region.Design/methodology/approachData from 100 banks from 2013 to 2021 was analyzed using dynamic and static measures by using dynamic system GMM.FindingsResults showed that higher competition reduces stability, while concentration in the banking sector produces stability and reduces risk-taking behavior. The findings suggest that regulatory agencies should take different actions based on the degree of banking market concentration to enhance banking sector stability in the SAARC area.Practical implicationsThe research helps regulators and decision-makers establish capital requirements at levels that would prevent banks from increasing their risk-taking in order to boost profits and, therefore, reduces hazardous practices that might increase the risk.Originality/valueThe research helps establish capital requirements to prevent banks from increasing risk-taking to boost profits and avoid hazardous practices that could increase nonperforming loans and bank failure risks.

The Impact of Derivatives and CEO Overpower on Bank Risk-Taking Behavior: Evidence from Vietnam

The Impact of Derivatives and CEO Overpower on Bank Risk-Taking Behavior: Evidence from Vietnam

Monetary policy, macroprudential policy, and bank risk-taking behaviour in the Indonesian banking industry

ABSTRACT There is a growing consensus on the translation of monetary policy actions into changes in credit demand on account of changes in interest rates. The study investigates monetary policy, macroprudential policy, bank-specific and macroeconomic determinants of bank risk-taking from 2010–2022 in Indonesia. The study aims to address a gap in the literature because most previous studies have focused on advanced markets. First, three POLS and fixed effect models are estimated. However, the Durbin Wu-Hausman test indicated endogeneity issues with the estimated models. The second stage uses a system GMM estimation to investigate the impact of central bank rates and macroprudential policy on bank risk-taking. Dynamic-GMM estimations find that, partially the central bank rate and macroprudential policy have a positive impact on bank Z-Score. Furthermore, when central bank rate and macroprudential policy are included in a model, we still find a positive impact of both policies on bank Z-Score.

The impact of management performance on risk-taking behavior in a dual banking system: A cross-country analysis

In an era defined by global economic uncertainty, the role of management performance in influencing bank risk-taking has become pivotal. This urgency stems from the evolving dynamics of the banking sector and the need for robust risk management strategies. This study investigates the relationship between management performance and banks’ risk-taking behavior, drawing data from 248 banks across eight countries comprising Indonesia, Malaysia, Bangladesh, Pakistan, Saudi Arabia, Oman, Bahrain, and the United Arab Emirates spanning 2013–2021 using panel data analysis. The study reveals that management performance measured by a cost-to-income ratio (β = –0.44, p < 0.01) has a negative and significant relationship with bank risk-taking behavior. In essence, a bank with superior management performance, indicated by a lower cost-to-income ratio, tends to have greater financial stability, as evidenced by a higher Z-score. Notably, external factors like the financial crisis and institutional development as moderating variables do not significantly alter the relationship between management performance and banks’ risk-taking behavior. The study also discovers that Islamic banks (β = 0.31, p < 0.01) outperform their conventional counterparts in risk management and management performance. However, it is worth noting that the results of regional analysis demonstrate variations across the Southeast, South, and Middle East regions. After conducting several robustness check tests, the findings of this study remain consistent, offering valuable implications for both policymakers and bank management. These insights emphasize the importance of formulating appropriate regulations and frameworks to enhance management performance at the banking level. AcknowledgmentThe authors gratefully acknowledge the support from Direktorat Penelitian dan Pengabdian Masyarakat (DPPM) Universitas Islam Indonesia No: 006/Dir/DPPM/70/Pen.Unggulan/III/2023 for providing a research grant to this study.

Ownership structure and bank performance: the impact of market competition

ABSTRACT This paper investigates whether and how ownership concentration, as an intearnal mechanism of corporate governance, and market competition, as an external mechanism of corporate governance, interact to influence bank performance. In other words, we test whether ownership concentration and competition are complementary or substitutes. To do so, we use a unique hand-collected database covering commercial banks based in 17 Western European countries from 2006 to 2019. Consistent with previous studies, we find that ownership concentration and market concentration increase the profitability and risk-taking behaviour of banks. Furthermore, no evidence of non-linearity of competition is found for our sample of European banks. Regarding the interaction effect, our results indicate that market competition seems to foster the profitability of banks with concentrated ownership. In addition, we find that risk-taking behaviour of banks with controlling shareholders increases when they operate in competitive markets. These results suggest that ownership concentration and market competition are complementary, and hence banks may benefit differently from these corporate governance mechanisms to improve their performance.

Local religious beliefs and bank risk-taking

This study investigates whether the heterogeneity in religious attributes between Catholics and Protestants reflects in bank risk-taking behavior. We find that banks located in areas with higher concentrations of Catholics relative to Protestants take less risks. The result is robust to several alternative specifications. Further analyses reveal that the result is driven primarily by local banks that operate in only one county. For such banks, local investors are economically more important. We show that these banks make safer investments, which results in fewer write-downs. They also generate less revenue from nontraditional banking activities, which are unsteady revenue sources.

How macroprudential regulation and board effectiveness interact to shape bank risk-taking behavior

This study aims to investigate how macroprudential policies and corporate governance interact to curb bank risk-taking behavior for a sample of 915 publicly listed commercial banks in 53 countries over the 2011–2020 period. Excessive risk-taking by global financial institutions was singled out during the global financial crisis of 2007–2009. We first use a fixed-effects OLS panel model. Then, to address endogeneity concerns, we apply a two-step system GMM estimation. Our results show that the impact of board attributes on risk-taking depends critically on MPP’s policies. We find that MPPs can enhance the supervisory power of a board characterized by high independence, and a CEO who performs a dual function. However, a large board size appears to increase bank risk when multiple macroprudential policies are in place, which can result in managerial policies that may increase bank risk-taking. The supervisory role of women on the board is only effective in the presence of tight macroprudential policies. Bank regulators should consider the interaction between corporate governance and macroprudential policies when designing more effective bank regulations.

Liquidity creation and bank risk-taking: Evidence from a transition market

This study contributes to the banking literature by examining the effect of bank liquidity creation on bank risk-taking behaviors in Vietnam - a transition economy. Our data sample comprises 367 observations of 33 Vietnamese commercial banks from 2009 to 2020. We employ the Bias-corrected Least-Squares with Dummy Variables (LSDVC) estimation, which performs better than other dynamic estimators in small and unbalanced panel samples. In this research, bank risk primarily represents non-performing loans (NPLs). Empirical results show that bank liquidity creation significantly reduces NPLs. Otherwise, bank funding diversification significantly increases NPLs in Vietnamese commercial banks. Our findings are robust to alternative measurements of liquidity creation and bank risk. Additionally, we show the moderating role of bank scale in the effects of liquidity creation and funding diversification on bank risk-taking in Vietnamese banks. Our paper is the first research investigating the influence of liquidity creation on bank risk-taking in the specified situation of a transition economy. Besides, it provides empirical evidence to fill the existing research gap. Further, this study provides a list of implications for bank managers and policymakers to manage credit risks and improve the stability of the Vietnamese banking system.

Quantitative Easing and bank risk-taking behavior

In this paper, we examine the effect of reserve creation due to the Federal Reserve's Large-scale Asset Purchase programs on bank lending and risk-taking behavior. In particular, we test the existence of a risk-taking channel that induces banks with higher reserve accumulation due to the Fed's policy to increase the share of riskier loans. Exploiting the heterogeneity in the exposure to such asset purchase programs, as measured by relative mortgage-backed securities holdings in the banks' portfolios, we use difference-in-differences analysis to study the effect of the Fed's policies on the supply of total loans and the share of riskier loans such as real estate, commercial and industrial, and consumer loans. We find that the first and third round of Quantitative Easing (QE) policies led to an increase in both the total loans and the share of riskier loans within the banks' portfolios, supporting the risk-raking channel. The second round of QE on the other hand, had no significant impact on banks' lending behavior.

Do national culture and economic freedom affect bank risk-taking behavior? Evidence from GCC countries

PurposeThe global financial crisis of 2008 has put greater doubt on the bank risk-management effectiveness around the world. As a part of the response to such doubt, the Gulf Cooperation Council (GCC) region is formulating some feasible approaches to manage bank risk. In this regard, an understanding of the role of the region’s culture and economic freedom will provide immense input into this risk management approach. This study examines the impact of national culture and economic freedom on bank risk-taking behavior.Design/methodology/approachData on bank risk measures, culture and economic freedom are obtained from the FitchConnect, World Bank database, Hofstede’s insights and Heritage Foundation. Generalized least squares and two step-system generalized method of moments are then used to examine the risk-taking behavior of the region.FindingsBanks of the GCC region operating in the low power distance, high collectivism, masculine and low uncertainty avoidance cultures are susceptible to assuming more operational and insolvency risks. Furthermore, banks’ overall risk-taking inclination is positively increased once the region has considerable business and monetary freedom.Practical implicationsThe governments and bank regulatory bodies may benefit from the study findings by developing the best economic freedom index and national culture that enriches risk management practices and curves excessive risk-taking inclination.Originality/valueTo the best of the authors’ knowledge, this study is the first attempt to address the interplay among culture, economic freedom and bank risk to ensure constructive risk-taking behavior for the GCC banking industry.

Audit committee attributes and Islamic bank risk-taking behavior

PurposeThis study aims to investigate the relationship between audit committee (AC) attributes and the risk-taking behavior of Islamic banks.Design/methodology/approachThe study used data generated from the annual reports of 43 full-fledged Islamic banks operating in 15 countries between 2010 and 2020.FindingsThe findings indicate that AC size, AC independence and the proportion of AC members from foreign countries have a significant negative relationship with the risk-taking of Islamic banks. However, AC meetings, AC gender diversity and the proportion of AC members with doctorate degrees have insignificantly influenced the risk-taking of Islamic banks.Research limitations/implicationsThe study used only six AC attributes out of corporate governance mechanisms likely to affect the insolvency risk of full-fledged Islamic banks between 2010 and 2020.Practical implicationsThe study sheds light on the effects of AC attributes on the risk-taking of Islamic banks. The findings could allow policymakers and regulators to provide policies and regulations that could improve AC’s oversight role in constraining Islamic banks from excessive risk-taking. Besides, this study can guide the board of directors in appointing AC members who can prevent Islamic banks from taking excessive risks.Originality/valueThis study provides clear and adequate empirical evidence showing how key audit committee attributes influence the risk-taking behavior of full-fledged Islamic banks.

Board risk committee composition and risk-taking of deposit money banks in Nigeria

Risk oversight by bank boards has become complex due to the evolving nature of risk and thus the need for risk committees to effectively and adequately monitor bank risktaking. The risk taking capability of a financial institution is largely a function of its risk management committee composition. While studies have examined the effect of risk committee dynamics on several organisational variables, few studies examined the relationship between risk committee composition and the risktaking behaviours of banks. However, these few studies are limited to examining the effect of the existence of a standalone risk committee. Hence, the main purpose of this study is to examine the effect of banks’ board risk committee composition on the risktaking behaviour of deposit money banks in Nigeria. The study used a sample of twelve deposit money banks listed on the Nigerian Exchange Group (NGX) from 2009 to 2020. Data were analysed using DriscollKraay’s Robust Standard Errors for Panel Regressions with Cross-Sectional Dependence (SCC) model to address heteroskedasticity and cross-sectional dependence. The results showed that risk committee independence and financial expertise reduce risk-taking. It, therefore, showed that the independence and financial expertise of the risk committee provide the needed competency and independence to effectively monitor risk-taking. The study, therefore, recommends, among others, the review of the composition of the board risk committee to reflect independence and expertise. The study differs from other studies by examining risk committee composition rather than its existence.

The Role of Fintech on Bank Risk-Taking: Mediating Role of Bank’s Operating Efficiency

Fintech revolutionized the traditional banking business models in emerging countries. The effect of fintech on banks’ operating efficiency and risk-taking behavior is still inconclusive. The study is aimed at exploring the effect of fintech products on banks’ operating efficiency and risk-taking behavior. The study used a quantitative research approach by collecting secondary data from annual reports of 50 commercial banks from emerging countries, namely, China, India, Pakistan, and Bangladesh, for the period 2014 to 2021. The study used panel data for path analysis and structural equation modeling (SEM) to test the theoretical mediation model by using STATA. The results show that the fintech product reduces the bank’s risk-taking behavior by enhancing the bank’s operating efficiency. The path analysis results show that operating efficiency mediates the relationship between fintech products and bank risk-taking behavior in emerging countries. The paper offers useful recommendations for central bank and commercial bank policymakers. The study is also beneficial for commercial banks that use fintech solutions to increase operational effectiveness and reduce risk. The study is the first empirical investigation into the connection between the growth of fintech products, bank operational effectiveness, and risk-taking behavior in developing nations.

MACRO-FINANCIAL DETERMINANTS OF DEFAULT PROBABILITY USING COPULA: A CASE STUDY OF INDONESIAN BANKS

We investigate the default probability of Indonesian banks using the copula approach and analyze the macro-financial factors that drive them. We use quarterly data comprised of 80 banks from 2005 to 2019. We find empirical evidence that Common Equity Tier 1 (CET 1) ratio, inefficiency ratio, and deposit ratio have negativelyimpacted the bank’s default probability. We also find that macroeconomic variables such as policy rate, real exchange, economic growth, and unemployment reduce the default probability. Our study suggests that regulators should focus on capital and deposit management policies to reduce bank risk-taking behaviour. Additionally, the policy rate effectively anticipated the banks’ default risk.

Does Corporate Governance Matter for Bank Performance and Risk-taking?

Purpose: This study empirically examines the linkages of corporate governance with the performance and risk-taking of Nepalese banks. Methods: The study uses balanced panel data collected from annual reports [2010-2018] of the selected nineteen banks, including seven foreign-owned banks and twelve domestic banks. The study employs a descriptive and causal-comparative research design with the Ordinary Least Square (OLS) regression approach. Results: The results reveal that a greater number of board meetings and audit committee meetings leads to better performance and lower risk. The independent sample t-test results show that foreign-owned banks significantly differ from domestic banks using corporate governance mechanisms except for board size and audit committee size. Cohen's d results reveal that the number of board-level committees has a medium effect and all other corporate governance variables have a lesser effect on domestic banks than on foreign-owned banks. Implications: The study has policy-level implications for the regulators to emphasize the provisions relating to board size, audit committee size, and their respective meetings for enhancing financial stability. Similarly, the study findings also facilitate bankers to look after and make changes to corporate governance practices prudently. Originality: This study uses Tobin's Q to measure bank performance and employs a Z-score to measure bank risk-taking behavior, which makes it one of the very few studies that explain the impact of corporate governance on bank performance and bank risk-taking.

The influence of market power on bank risk-taking in the Euro area countries during the inter-crises period

The European debt crisis affected the global economy, and banking stability became fragile. The economy was recovering from a difficult situation, and a new threat in the form of COVID-19 had emerged. Using a sample of 405 banks in 19 Euro area countries between 2010 and 2019, we explore the relationship between market power and bank risk-taking behaviour and verify the presence of competing paradigms. We use panel data analysis considering linear regression models and testing the potential U-shaped curve to analyse banks' market power and risk-taking behaviour. We consider various dimensions of bank risk measures (default risk, leverage risk, operational risk, liquidity risk and interest rate risk), while the market power is expressed through the Lerner index. We also examine the impact of bank-specific and macroeconomic variables on bank stability. The main findings reveal that higher market power decreases banks' risky behaviour, confirming the competition-fragility paradigm.

Comparative Analysis on Liquidity and Risk-Taking Behaviour between Islamic and Conventional Banks in MENA Region

We compare the effect of liquidity on risk-taking between Islamic and conventional banks in the MENA region over the period 2005-2017. Using the fixed effect panel model with panel-corrected standard error, we found that funding liquidity in both Models significantly affects conventional banks' risk-taking behaviour, but the effect on the Islamic counterpart is insignificant. However, liquidity risk and bank activities represented by loans significantly affect Islamic bank risk-taking behaviour but show no significant effect on conventional banks. However, the effect varies with risk-taking proxies and the size of banks. This entails liquidity and bank risk-taking behaviour that differs with the type of banking system and the countries’ peculiarities. Thus, liquidity regulation should be implemented with the consideration of other region and their peculiarities.