Banking Crisis Research Articles

How effective are bad bank resolutions? New evidence from Europe

The paper studies the effectiveness of bank resolutions using a comprehensive database on banks headquartered in 18 European countries over the period 2000–19. By means of difference-in-differences methodology, we find that impaired asset segregations – otherwise known as bad banks – have been more effective than state-funded recapitalisations of distressed banks. While recapitalised banks seem to have used the injected funds mainly to clean up their balance sheets by reducing problem loans and cutting down on lending, banks that segregated assets increased progressively their lending after the creation of the bad bank. For both types of banking crisis interventions, we find a significant ex-post reduction in the cost of bank funding and shift towards deposit funding.

Authority of Deposit Insurance Corporation in Bank Guarantee and Resolutions Post Law Number 4 of 2023 Concerning Development and Strengthening of Financial Sector

In the banking world, the institution of LPS is strengthened because LPS is one of the supporters of economic stability, strengthening the authority of LPS in carrying out the functions of deposit guarantor and bank resolution, and a new mandate is also given to LPS as the organizer of the insurance policy guarantee program, then followed by an increase in supervisory and regulatory functions by the insurance supervision authority. The purpose of the study was to determine the nature of the existence of the Deposit Insurance Corporation, and to find out the Resolution of Failed Banks by LPS After the Issuance of the Law on the Development and Strengthening of the Financial Sector. The method used is the method of writing law. The government wants the P2SK Law to be the first step in financial sector reform. LPS is domiciled as part of the financial safety net that can minimize the adverse impact of the banking crisis. Another function and role played by LPS in shaping the stability of the banking system is to implement bank resolutions, both regarding failed banks that must be liquidated and those that must be saved.

Agricultural business in independent Ukraine: thirty-year dynamics of the reorganization process

Purpose. The purpose of the article is to identify stages in development and to analyze the content of transformation processes in Ukrainian agriculture for the period of 1991–2022 years.
 Methodology / approach. This research uses content analysis of legislative field to present basis for organization of agriculture business activity for the 30-years of restoration of Ukraine independence. Official statistical data are studied to reveal repercussion in productivity as an effect of Laws, Acts and Agreements implementation. Methods of regression and correlation analysis are used to unveil peculiarities in agriculture tendency. Hodrick-Prescott method is applied to extract structural components, exclude random impacts on economical processes and to find out significant changes or turnings in the sector development. Quantitative analysis results were obtained by the GNU Octave software tool.
 Results. Legislative evolution has influenced on the way of agriculture business organization and branch productivity. Analysis revealed two stages in its development. The first one (1991–1999) is the period of business transformation with changes of ownership forms on the land. This period is notable by its descending dynamics. Transformation has required to build relationships in business environment after collapse of Soviet Union, to supply with material and technical resources, to support its activity with financial funds. The essence of the first stage is in findings of an effective form of farming management. The second stage is the exit from the lowest point at which agrarian business was in 1999 and the gradual growth of its activity and profitability. This is the period of strengthening of relationships in the business environment, development of crop and livestock production, implementing of new technologies of land cultivation, plant, and animal care. It is the period of economic recovery on the base of private land ownership, motivation of producers’ activity, agreements on free trade and cooperation with the EU and other countries. Simultaneously, it is the years of overcoming of such shocking consequences as economic collapse of the end of 1990s, the instability of foreign currency and the banking crisis of 2008–2009, the beginning of the hybrid occupation of Ukraine by Russia in 2014, the rapid fluctuation of the value of its own currency in 2014–2015 because of war. The alteration of the principles of currency exchange rate formation with the transition from a fixed value to that is formed under the influence of market conditions was a mean to overcome this instability. Russia’s full-scale armed aggression against Ukraine since 2022 caused the latest devastating events in the economy.
 Originality / scientific novelty. The novelty of the obtained research results is in presentation, argumentation, and interpretation of productivity waves in agriculture development for the 30-years of Ukraine independency with the use of extract method of structural components and correlation analysis of smoothed data sets. The continuity of legislative stages of agriculture reorganization was built to reveal ground for agriculture growth and to understand factors of branch sustainability. It is the first time when research shows how to detect latent changes in the development in the context of legislative changes, external threats, and internal peculiarities of branch.
 Practical value / implications. Results of analysis can be implemented in the historical reconstruction of causes and consequences of falls and rises in the Ukrainian economy for the period of 1991–2022. Used smoothing method is suggested to be applied in econometric research when the dynamics of indicators behavior cannot be approximated with certain function unmistakably because of ambiguous form of data scattering or its latent character.

An event-driven bank stress indicator: The case of US regional banks

Financial markets have been shaken by the surge of a banking crisis in early 2023. The failure of Silicon Valley Bank has raised concerns about the health of various financial institutions in a period of rapid monetary contraction and high interest rates. I discuss the stress levels of sixty US regional banks, by proposing a new “bank stress indicator”, based on an event study framework. The indicator suggests six highly stressed banks: First Republic Bank, Western Alliance Bancorporation, KeyCorp, Comerica Incorporated, Zions Bancorporation and PacWest Bancorp. Although most of these banks have been highly profitable and have built solid balance sheet positions over the past years, they have faced large shares of uninsured deposits, which have put them at risk. The new Bank Term Funding Program launched by the Fed is designed to help in this matter, lowering the risk of new failures.

ANALYSIS OF THE IMPACT OF THE SITUATION IN THE WORLD ON «FORTEBANK» JSC

In an effort to curb the spread of the virus around the world, something hitherto unheard of has been attempted – shutting down economies in different regions, in some cases twice, leaving tens of millions of people out of work and millions of businesses shut down. These people and companies are customers of banks, and as a result of their inability to meet their obligations to banks, the number of defaults may increase dramatically.Unlike many past shocks, the COVID-19 crisis is not just a banking crisis, but a real economy crisis. Banks will undoubtedly suffer as credit losses cascade through the economy and demand for banking services falls. But the reasons for the problems are not in the banks. The global banking system entered the crisis with a good capitalization and much more stable than it was 12 years ago.The good news is that the banking sector is sufficiently capitalized to withstand the coming shock.In 2020, the financial sector of Kazakhstan developed under the influence of a double shock: oil prices fell and, as expected, as a result of the restrictive measures imposed in connection with the coronavirus pandemic, business activity decreased.This year is projected to be the most significant drop in economic growth in the last 20 years. According to the forecasts of the Ministry of National Economy of the Republic of Kazakhstan, the decline in GDP for the year will be - 2.1%, and according to the IMF – at the level of - 2.7%. It is obvious that the determining factor in the development trajectory of the country's financial sector this year and next is the scenario of the spread and the possibility of overcoming the pandemic, its impact on business activity and market relations.The banking sector approached the beginning of the pandemic with a large capital stock, as evidenced by the independent asset quality assessment (AQR) for the 14 largest banks, which account for 87% of the banking system's assets.In the group-14 highly qualified large banks are included in JSC" ForteBank". The main financial indicators of banks during the pandemic period did not decrease, income received from ATMs, as well as Rosli.

The Collapse Of Silvergate Bank

The U.S. Banking Crisis of 2023 is reportedly different from previous crises. The well-expected failure of Silvergate Bank is because of its crypto-friendly business. This study examines the events that led to the bank's collapse granularly that led to its bankruptcy. A qualitative examination uses historical research and case study method to examine the background of the bank, the series of events that led to its rise, and the eventual collapse of the bank. Discussion and findings from the study explain the various forms of risks that banks face in the course of their business. The study contributes to the literature on bank crises and failures and will be useful to the banking industry and regulators

Resolving Failed Banks: Uncertainty, Multiple Bidding and Auction Design

Abstract The FDIC resolves insolvent banks with scoring auctions. Although the structure of the scoring rule is known to bidders, they are uncertain about how the FDIC trades off different bid components. Scoring-rule uncertainty motivates bidders to submit multiple bids for the same failed bank. To evaluate the effects of uncertainty and multiple bidding for FDIC costs, we develop a methodology for analysing multidimensional bidding when the auctioneer’s scoring weights are unknown to bidders. We estimate private valuations for failed-bank assets during the great financial crisis and compute counterfactuals in the absence of scoring uncertainty. Our findings imply a substantial reduction in FDIC resolution costs of between 29.8% ($8.2 billion) and 44.6% ($12.3 billion). These savings can reduce policy-driven banking-sector distortions, since FDIC resolution costs are covered either through special levies on banks or through loans from the US Treasury. Our analyses also shed new light on optimal bid portfolio choice in combinatorial auctions.

2008 Financial Crisis: Cause, Consequence & Response

The US real estate bubble's deflation marked the beginning of the financial crisis in 2008. On September 15, 2008, the investment bank Lehman Brothers went bankrupt, sparking a widespread global banking crisis. With several financial institutions failing and financial assets sharply declining, the crisis swiftly extended to the whole financial system. The US financial crisis quickly turned into a global economic disaster that affected Europe and the rest of the globe. The global financial crisis was directly brought on by the American subprime crisis. Beneath the credit crisis, the US financial crisis was brought on by a buildup of long-term excessive spending, an abundance of loans without an economic foundation, exorbitant salaries paid to bank white-collar staff, a severe shortage of developing businesses, an imbalance in fintech, the absence of financial regulation, and other ingrained causes. By analyzing the causes of the financial crisis, people can prepare for a rainy day. However, the investors should not be too optimistic. It also realizes that there are still a lot of unfinished business. Investors need to seize the favorable opportunity, in the favorable time is easier to solve these problems.

Banking regulation and banks’ risk-taking behavior: The role of investors’ protection

Using panel data from a sample of 535 banks from OECD countries for the 2004–2016 period, this paper examines whether the influence of banking regulation on banks’ risk is channeled through the level of investors’ protection. The banking regulatory factors we consider are activity restrictions, capital stringency and supervisory power. We find that the overall effect of banking regulation on banks’ risk is conditional on the level of investors’ protection and that investors’ protection plays the role of reinforcing each of these individual effects. Investor protection reinforces the positive effect of activity restrictions and capital stringency on banks’ risk and also reinforces the negative effect of supervisory power on this risk. These results are robust to a different estimation method and a different proxy for banks’ risk. Additional robustness tests reveal that some of the banking regulation effects are contingent on the banks’ size and the systemic banking crisis period.

Corporate Governance and Banks’ Capital Adequacy in Gambia: The Moderating Impact of Politics

Bank failures and banking crises create fears and anxieties in various stakeholders; and some of remote causes of bank failures across the globe are weak/poor corporate governance structures and practices, credit risk; government recapitalization regulation; corruption and embezzlement of banks’ assets; and weak legal/regulatory and political institutions. Undercapitalization is a symptom of banks’ capital inadequacy to withstand financial shock. Anchored on stakeholder-institutional theory; and secondary data, and general linear model, this study investigated the moderating impact of politics on the relationship between board effectiveness, management efficiency and capital adequacy of Gambia’s banking sector while controlling for financial leverage. The studied established that: the interaction of political stability and board effectiveness in risk management has significant negative effect on banks’ capital adequacy in Gambia; the interaction of political stability and management efficiency in profit maximization has significant positive effect on banks’ capital adequacy in Gambia; financial leverage has significant positive effect on banks’ capital adequacy in Gambia; board effectiveness in risk management has significant positive effect on banks’ capital adequacy in Gambia; and management efficiency in profit maximization has significant negative effect on banks’ capital adequacy in Gambia. The relevance of the joint stakeholder-institutional theory was established in this study. The work recommends that all political stakeholders in Gambia should strive to stabilize the country’s political system, and that the board of directors of banks in Gambia should ensure that their management teams apply prudent and best banking practices in declaring profit. This is because a positive profit should increase the capital adequacy of banks in a normal situation.

ASSESSMENT OF THE EFFECTIVENESS OF BANK RESOLUTION IN UKRAINE

For Ukraine, in the context of economic turbulence and uncertainty in the financial market, an important task is to find ways to prevent situations where losses from the liquidation of insolvent banks constitute a much larger share of the proceeds from the sale of assets of failed banks. In view of this, an important task is to transform the system of bank resolution, including the choice of resolution methods as opposed to liquidation, as well as to improve approaches within these procedures to the management and sale of assets of insolvent banks. As part of this approach, it is important to ensure that the resolution method is chosen to maximize the satisfaction of the bank’s creditors claims and to determine a fair and high-quality valuation of bank assets. The authority to resolve banks has been transferred to the Deposit Guarantee Fund, which is guided by the methods of bank resolution specified by law. However, most of the domestic insolvent banks were liquidated. Depositors, creditors, the banking system, and the DGF suffered significant economic losses, reputational risks, and a loss of confidence in banks and supervisory and resolution authorities. In order to avoid such negative consequences in the future, it is necessary to look for ways to resolve these issues today, in the martial law crisis conditions. The paper proposes an author’s methodology for assessing the effectiveness of bank resolution. The paper uses actual practical material to assess the effectiveness of procedures of the sale of assets of insolvent banks and for which no resolution methods have been applied. It is proved that not all assets can be sold at appraised value. Based on the results of comparing the appraised value of assets and the investor’s price (tender offer), it turns out that sometimes it is more expedient to accept an investor’s offer that is lower than the appraised value at the stage of an open tender than to sell such assets in the future at an even lower price than the investor’s price. In this case, the Fund, and thus the depositors, will suffer a loss of economic benefit.

Stress testing bank insolvency risk by systemic equity market shock: An expected shortfall approach

This paper proposes a simple intuitive approach for assessing and stress testing the insolvency risk of global systemically important banks (G-SIBs) by shocking systemic risk in the equity market. In particular, the paper introduces two metrics to measure the relative adequacy of total loss absorbing capacity (TLAC) upon resolution of a bank under both real market conditions and stress test settings. The metrics may also be calculated on a regular basis for monitoring bank insolvency risk. Three global systemically important banks, including Credit Suisse, are presented as examples for the analysis. To capture the heavy tail feature of equity market downturns and ensure conservatism for stress testing, an analytical framework is adopted based on extreme value theory with expected shortfall, power law distributions and copula method. The analysis concludes that G-SIBs may have a high probability of loss exceeding TLAC under systemic market stress.

Depositor discipline and the banking panic of 2023

Depositor discipline and the banking panic of 2023

Depositor discipline and the banking panic of 2023

Depositor discipline and the banking panic of 2023

Analysis of Risk-Based Bank Ratings in Banking Companies before and After Merger: Case Study Indonesian Banking Industries

The difficulties experienced by banks in Indonesia appear to be very prolonged, even though Bank Indonesia has carried out its duties as lender of last resort namely the inherent function of protecting the bank in the event of liquidity difficulties. This banking crisis ultimately led to the liquidation of many banks and mergers. The purpose of this study is to analyze the health of banks in banks that carried out merger actions from 2015 to 2019 and banks listed on the IDX. Research was analyzed using the RBBR method (Risk Based Bank Rating). The method in this study was conducted based on credit risk and liquidity risk as measured using the NPL ratio (Non Performing Loan) and LDR ratio (Loan Deposit Ratio). GCG factors are measured by GCG composite ratings published by banks, factors earnings calculated using the ROA ratio (Return on Asset) and NIM (Net Interest Margin). Factor Capital calculated by CAR ratio (Capital Adequacy Ratio). The results of the RBBR analysis show that in general, almost all assessment factors have decreased, except for factors capital just.

Quasi-Fiscal Implications of Central Bank Crisis Interventions: Case Studies

Quasi-Fiscal Implications of Central Bank Crisis Interventions: Case Studies

Financial openness, financial sector development, and income inequality: With an extensive set of pull and push factors

AbstractThis paper investigates the impact of financial openness on financial sector development and income inequality. We use the de jure and de facto measures of financial openness across 78 countries from 1980 to 2019. By employing a system generalized method of moments (GMM) with 5‐year averaged data and a novel push and pull modeling framework, we obtain three key results. First, the de jure measure of financial openness exacerbates income inequality and is sensitive to banking crises and conflict intensity. Second, the de facto measure spurs stock value traded in emerging market economies (EMEs) and declines domestic credit in Africa. Third, the interaction between de facto measures with schooling and governance factors affects financial sector development and income inequality. We highlighted that the mere usage of the de jure measure and their interaction is incorrect. The key implication is that valuable information about the real impact of openness can be obtained from the de facto measures and their interaction with favorable macroeconomic fundamentals, governance factors, and adverse nonpolicy factors.

American Enterprise Institute roundtable on addressing the underlying causes of the banking crisis of 2023

American Enterprise Institute roundtable on addressing the underlying causes of the banking crisis of 2023

Quasi-Fiscal Implications of Central Bank Crisis Interventions

Quasi-Fiscal Implications of Central Bank Crisis Interventions

Bank Runs and Design Flaws of Deposit Insurance

Deposit insurance systems are designed to balance the benefits of preventing bank runs and protecting ordinary savers against the costs of reduced market discipline and potential burdens on taxpayers. Design flaws of deposit insurance make the benefits too low and the costs too high. This paper presents an example in which solvent banks can effectively manage runs, depositors discipline banks to a reasonable extent, and taxpayers have a fair deal. It has three key features: the bank’s authority to activate deposit insurance early, a coinsurance scheme that transfer money from those who run on solvent banks to those who stay put, and a shareholder position for taxpayers. Early activation of deposit insurance prevents fire sales of assets and provides opportunities to verify the bank’s solvency. The coinsurance scheme weakens the incentive to run and strengthens the incentive to hold on to their accounts. As shareholders, taxpayers receive dividends in normal times in exchange for large payouts in catastrophic events.