Risky Banks Research Articles

Are Risky Banks Disciplined by Large Corporate Depositors?

AbstractWe analyze depositor discipline using auctions of unsecured money market deposits of firms to banks. In each auction, only the firm observes the banks and their interest rate bids. We observe that deposit interest rate bids increase with bank risk. Conditional on the same interest rate bid and firm–bank relationship, depositors select less risky banks. Banks reduce their risk after their deposit offers are less often selected. Risky banks eventually exit the market, and reenter when they become safer. This has important implications for banks’ access to unsecured corporate funding, financial stability, and our understanding of market discipline more broadly.

Do creditors punish weak banks? Evidence from Indian urban cooperative banks’ failure

This study empirically assesses two critical hypotheses related to market discipline: (i) Do depositors penalize underperforming banks by withdrawing their deposits? and (ii) Do well-informed peer banks reduce lending to weak banks? Based on the annual standalone balance sheet data of urban cooperative banks in India from 1990 to 2020, our findings suggest that: (i) the behaviour of savings and current depositors is not significantly affected by the bank risk; (ii) the risk-taking behaviour of the banks significantly influences term deposits; and (iii) other informed peer banks and financial institutions do respond to the riskiness of peer banks. Additionally, our research revealed a positive association between the size of assets and the deposit growth rate, indicating that depositors are responsive to the influence of the “too-big-to-fail” phenomenon. Moreover, depositors are sensitive to banks’ non-interest expenditures. Banks with higher non-interest expenditures pay a higher interest rate to retain depositors, thus suggesting the presence of weak market discipline.

Does being a responsible bank pay off? Evidence from the COVID-19 pandemic

We investigate whether banks’ initial responses during the first wave of the COVID-19 pandemic in supporting their customers, communities, and governments were perceived as value-enhancing by investors. Using a unique responsible banking measure for a sample of the largest US and European commercial banks, we find a negative relationship between responsible bank behavior and stock market performance, particularly in the first wave of the pandemic. We also find that riskier banks were affected more negatively if they behaved responsibly. Overall, our findings show that banks’ responsible behavior during a crisis reduces, or at best is not relevant to, shareholder value.

Bail-in in action

In the aftermath of the European sovereign debt crisis, the question of who should bear the burden of banking crises has been a cornerstone of the new supervisory framework in Europe. We evaluate the bail-in regulation (BRRD) for bank bond holdings using a proprietary database covering holdings of all euro-denominated securities. We focus on hard-to-value bailinable bank bonds and show that banks increased their holdings of bailinable bank bonds while households and non-financial corporations reduced their holdings of bailinable bonds issued by riskier banks.

Bank regulation and supervision: A symbiotic relationship

Supervisory assessments such as stress-tests gauge banks’ riskiness and allow regulators to impose bank-specific capital regulation. This can improve welfare. Yet, regulation based on noisy supervision can decrease welfare by mis-classifying banks, distorting incentives, and crucially, leading to greater risk taking. Regulation should not be bank-specific in such cases. When bank defaults are costlier, supervision should strive for lower probability that riskier banks go undetected, i.e., reduce false-negatives even if this causes more false-positives. When the supervisor can incur a cost to optimally reduce both false-positive and false-negative rates, the regulator should make capital requirements more bank specific.

Responsible risk-taking and the CSP-financial performance relation in the banking sector: A mediation analysis

In this study, a mediation analysis is conducted using data for 394 banks listed in 54 countries from 2002 to 2017 with the aim to investigate the role of bank risk-taking as a mediation channel to explain the CSP–financial performance relationship in the banking sector. Results show that stronger CSP is associated with improved financial performance and this relationship is partially mediated by bank risk-taking, with CSP increasing financial performance through the reduction of bank risk. Adopting more prudent—less risky or speculative—banking practices is a key method through which banks can embody social responsibility, given the systemic importance of bank stability. However, such banks tend to be more financially successful. The empirical results are consistent across various robustness checks, thereby supporting to the notion that corporate social responsibility (CSR) engagement helps banks to achieve a “win-win” situation—more profitable yet more responsible and less risky banks.

PENGARUH PROFITABILITAS DAN PERBEDAAN OPINI INVESTOR TERHADAP KINERJA HARGA SAHAM

This research aims to empirically test the influence of profitability and differences in investor opinion on share price performance in banking companies. The research phenomenon explains that at the start of the Covid-19 pandemic, the banking sector experienced a decline in share price performance because investors were suspected of having concerns about investing in the risky banking sector due to the pandemic. The research wants to prove whether profitability factors and differences of opinion during the pandemic influence stock price performance. The research sample was 40 banking companies registered on the IDX in 2020. The method used is multiple linear regression analysis. The results of this research show that an increasing profitability value will be followed by an increase in company stock returns. This shows that profitability has a direct relationship with stock returns. The research results also show that high differences in investor opinion reduce stock price performance, and low differences in investor opinion will increase stock price performance. The results of this research support the signal theory.

Lending and risk controls for BHCs after the Dodd–Frank act

AbstractWe investigate the impact of the Dodd–Frank Act (DFA) on the credit risk behavior of complex bank holding companies (BHCs). Specifically, we assess the effectiveness of the DFA in reducing the credit riskiness of complex banks. Consistent with the moral hazard hypothesis, we find that complex BHCs affected by the DFA increase their credit risk. We argue that possible explanations are that BHCs decreased their lending portfolio quality, loan monitoring, and strength and independence of the risk management function after the DFA. The results are robust to endogeneity concerns, different sample selection criteria, various model and treatment specifications, and placebo tests.

Bank-specific factors, market conditions and the riskiness of Islamic and conventional banks: evidence from recent quantile approaches

PurposeThe purpose of this paper is to investigate how bank-specific factors affect the riskiness of conventional and Islamic banks in response to shocks in major financial indices as market conditions change.Design/methodology/approachThe authors use a multivariate quantile model using daily equity returns data to analyze financial risk spillovers in the values at risk that may occur between major financial indices and the equity prices of conventional and Islamic banks worldwide. Then, using both quantile and quantile-on-quantile models, the authors examine the effects of bank-specific variables such as leverage ratio, bank size, return on equity and capital adequacy ratio on the initial impact of shocks in major global financial indices on bank equity price returns at different quantiles of shocks and bank-specific variables.FindingsThe findings reveal that major financial indices can predict bank stock returns. Moreover, the authors find that the effect of bank-specific factors on the riskiness of banks is heterogeneous in that it depends on the bank type (Islamic vs conventional), the level of banking variable (high vs low) and, more importantly, market conditions.Originality/valueTo the best of the authors’ knowledge, this is the first study that compares the dual banking system with stock market performance while considering bank-specific variables as market conditions change. The results of this study reveal that the effect of bank-specific variables on bank performance varies according to different quantiles of shocks and bank-specific variables. Islamic banks may echo or differ from conventional banks depending on the specific factor under investigation.

Fiscal multipliers within the euro area in the context of sovereign risk and bank fragility

This work quantifies the size of fiscal multipliers in an economy with sovereign and bank default risks. The paper presents an estimated two-region dynamic stochastic general equilibrium model with financial frictions for the euro area, where the interplay of corporate, bank, and sovereign solvency risk affects the transmission of government spending. Sovereign bonds carry a credit risk premium that is particularly sensitive to government indebtedness in some regions of the currency union. The banking system is fragile due to its direct and indirect exposure to sovereign risk and limited loss absorption capacity. By calibrating the model on sovereign and bank riskiness reminiscent of the euro area Sovereign Debt Crisis, we show that adverse financial channels may significantly depress the transmission of expansionary government spending shocks. The modeling approach also enables assessing the scope for monetary and regulatory policies to mitigate financial setbacks and restore the effectiveness of fiscal interventions.

Governing FinTech for performance: the monitoring role of female independent directors

PurposeThe use of digital technologies in the financial service industry has brought new complexities to the corporate governance in banks. Relying on the agency perspective of the shareholder, debtholder and societal governance in banks, this research examines the impact of financial technology innovation (FinTech) on banks' performance by enlightening the monitoring role of female independent directors.Design/methodology/approachRelying on a sample of Italian banks observed during the period 2016–2020, the authors hand-collected data on the use of FinTech by considering (1) the in-house provisions of FinTech solutions, (2) the collaboration with external FinTech firms and (3) a combination of both measures. The authors run a panel data regression analysis with fixed effects, measuring bank performance through bank competitiveness and bank riskiness.FindingsThe authors find that FinTech increases bank competitiveness in gathering money from depositors and that independent women on board mitigate the negative relationship between FinTech and the riskiness of banks' assets, ameliorating the conflicting interests among shareholders, debtholder and societal governance.Originality/valueThis study emphasizes the complexities of bank governance when dealing with FinTech in the wider perspective of equity governance, debt governance and the societal governance spotlighting the importance of appointing female directors in independent positions to enhance the bright sides of financial innovation. The authors enrich the literature on FinTech with a finer understanding of the drivers and implications of in-house provisions of FinTech solutions versus the collaboration with external FinTech firms.

Gendered language and board diversity: Evidence from European banks

AbstractBased on a sample of EU banks covering the period 2007 to 2021, I explore the impact of gendered language on bank board diversity policies. I find that gendered language negatively affects banks' gender diversity practices, especially after the passage of board reforms. Further, I find that rule of law and government efficiency explain the relationship, suggesting that these are useful mechanisms to reduce the negative effect of language gender‐marking orientation on banks' gender diversity practices. However, results do not show a statistically significant effect of board gender diversity on riskiness of banks operating in countries with higher language gender orientation. My study provides a timely contribution to the literature by filling the gap regarding the importance of language gender‐marking orientation in explaining banks' diversity practices and suggesting that regulators and institutions should take stronger actions aimed at reducing such cross‐country heterogeneity. It also provides useful insights for EU regulators following the passage of the mandatory “Women on Boards” Directive in 2022.

The Effects of the Interactions Between Agro-Production, Economic, and Financial Development on Bank Sustainability

The Sub-Saharan African region encounters a deficiency in agricultural financing, which can be attributed to its constraints in accessing international investments in general and the low engagement of bank risk-taking in particular. This situation leads to underproduction, which exacerbates poverty and malnutrition in the region. Thus, this study investigates the impact of the interaction effects between agricultural production, economic development (ED), and financial development (FD via FDI and DC) on bank stability ratios across 40 countries, encompassing 350 operational banks, during the period covering 2010 to 2019. The research employs the Generalized Method of Moments (GMM) technique and verifies its consistency with Two-Stage Least Squares (2SLS) and the Z-Score Approach. The results highlight two findings: first, the interaction effects between economic development, agricultural production, and financial development factors have significantly greater impacts on bank sustainability than their individual effects without interactions. Secondly, these interaction effects sustain significantly bank stability in two ways: on the one hand, they increase bank returns (through both ROE and ROA), while on the other hand, they reduce bank riskiness (via negative effects on NPL and positive effects on LLR). The study concludes that those interaction effects significantly sustain the stability of the African banking system. The SS African states (via their central banks) should promote farming finance services and enforce a minimum ratio of farming loans for each commercial bank’s credit portfolio as a solution to the investment deficiency in the sector. Hence, this can solve food production level issues, ensure food security, and effectively sustain both the banking system and real economic development.

Do Capital Requirements Really Reduce the Riskiness of Banks?

Do Capital Requirements Really Reduce the Riskiness of Banks?

The interrelationships between bank risk and charter value in ASIAN-5

ABSTRACT This study examines the interrelationships between bank risk and charter value in five countries in Southeast Asia (ASEAN-5) from 2006 to 2019 using a simultaneous equations model. The findings show a two-way relationship between bank risk and charter value. More specifically, the positive relationship between charter value and bank risk implies that banks with a more excellent charter value tend to pursue fast growth strategies and thus may face a higher risk. This positive link, however, only holds up to a certain level of charter value. On the other hand, the negative impact of bank risk on charter value argues that more risky banks tend to generate lower returns, thus reducing charter value. Additionally, a bidirectional relationship between them still holds when using an alternative measure of bank risk and controlling for the global financial crisis and governance indicators. Therefore, our findings provide critical implications for policymakers, managers, and academics.

DOES INTERNATIONAL MONETARY POLICY INFLUENCE THE BANK RISK? EVIDENCE FROM INDIA

This study empirically examines the impact of international monetary policy on bank risk in the Indian context. Using annual data from 64 banks and employing panel OLS and GMM techniques, this study finds that: (1) a contractionary international monetary policy increases bank risk; (2) an appreciation of the domestic exchange rate induces bank riskiness; (3) the domestic monetary policy affects bank risk through the “search for yield” channel; and (4) the international monetary policy is relatively significant in explaining the bank riskiness in the post-global financial crisis period.

Financialization, Structural Power, and the Global Financial Crisis for Europe’s Core and Periphery

In the aftermath of the Global Financial Crisis (GFC), European governments intervened to support domestic financial systems; several years later, peripheral European economies were at greater risk of having domestic financial crises transform into fiscal crises. While mainstream economic thinking predicts financial markets will punish risky bank behavior with higher interest rates and punitive resolution measures, in fact, banks in core European economies, which engaged in riskier activity in the subprime mortgage market, faced preferential treatment in the aftermath of the GFC. This article argues that financialization, the increased structural economic power of financial institutions, increased the structural power of core members of the Eurozone to direct supranational policies after the GFC. It supports these claims with financial data from balance sheets for a sample of EU economies, as well as institutional analysis of the financial aspects of European integration, and the financial, monetary, and fiscal responses that followed the onset of the GFC. While banks in the Eurozone core were more likely to have engaged in risky behavior, they were more likely to receive liquidity assistance from monetary authorities like the Federal Reserve due to their activity in the US. As Eurozone governments consider how to respond to crises, such as the Covid-19 pandemic going forward, policies that more equitably support governments rescuing domestic financial actors should be considered in tandem with broader financial regulations of structurally important economic institutions.

Juridical Review of Credit Collateral within Financial Engineering in Indonesia: An Introduction

Lending is the main business activity in the banking business. However, it should be noted that in addition to promising benefits as the main source of bank income, lending also has a high risk side for banks, namely the risk of failure to return, resulting in losses for the lending bank. To reduce this risk, before extending credit, banks must make a careful assessment of the character, ability, collateral and business prospects of the debtor. Credit collateral has an important role in lending. Creditors collateral is an additional guarantee submitted by a Debtor Customer to a bank in the framework of providing credit or financing facilities based on Sharia Principles. This paper aims to provide an overview of the juridical overview of credit collateral in financial engineering in Indonesia. The research result shows that guarantee is not an absolute requirement. Therefore, it is possible for banks to provide unsecured credit. Guarantee is only one of the conditions that must be met by the customer in addition to other conditions. However, in operational practice, in lending, banks need to require collateral in the form of assets belonging to the debtor. This is based on the premise that lending is a risky banking activity, so in its implementation, banks must pay attention to sound credit principles. Keywords: credit collateral, financial engineering, Indonesian banking system DOI: 10.7176/JLPG/121-01 Publication date: June 30 th 2022

CEO incentives and bank risk over the business cycle

We examine whether the relationship between managerial risk-taking incentives and bank risk is sensitive to the underlying macroeconomic conditions. We find that risk-taking incentives provided to bank executives are associated with higher bank riskiness during economic downturns. We attribute this finding to the increase in moral hazard during macroeconomic downturns when the perceived probability of future bailouts and government guarantees rises. This association is particularly strong for larger banks, banks that maintain lower capital ratios and banks that are managed by more powerful Chief Executive Officers (CEOs). Our findings highlight the importance of the interaction between managerial incentives and the macroeconomic environment. Boards and regulators may find it useful to consider the countercyclical nature of the relationship between risk-taking incentives and bank riskiness when designing managerial compensation.

Uncertainty and Banks’ Security Holdings

The paper enriches the existing literature on financial intermediaries’ operations in the face of uncertainty by empirically examining the impact of banking uncertainty on banks’ security holdings. Using bank-level data in Vietnam during 2007–2019 to compute a micro uncertainty proxy based on the dispersion of bank shocks, we document that banking uncertainty tends to enhance total security holdings at banks. Decomposing aggregate securities into disaggregate components, we find that safer investments (including government bonds and financial institution bonds) dominate the overall impact of banking uncertainty on security holdings, which completely offset a drop in the volume of riskier investments (including corporate bonds and stocks) in times of higher uncertainty. Furthermore, our analysis reveals that the impact of banking uncertainty on all security holdings is stronger at riskier banks, thereby implying that bank behavior is likely attributable to the precautionary motive.