Bank-specific Factors Research Articles

An Empirical Investigation on the Determinants of Interest Rate Spread of Commercial Banks in Bangladesh

This paper aims to investigate the determinants or factors affecting the interest rate spread of private commercial banks in Bangladesh from 2013 to 2022. For the purpose of the study, the interest rate spread (IRS) of banks has been considered as a dependent variable while bank-specific factors and macroeconomic factors have been considered independent variables. Bank-specific factors are credit risk, bank size, operating cost ratio, liquidity risk, net interest income as a ratio of total income, capital adequacy ratio, and loan to deposit ratio while macroeconomic factors are Inflation and GDP. The Pooled Ordinary Least Square method (OLS), the Fixed Effect method (FE), the Random Effect method (RE), and the Generalized Least Square method (GLS) have been used to investigate the impact of the factors on interest rate spread. The results exhibit that bank-specific factors such as net interest income as a ratio of total income, and capital adequacy ratio are found to be statistically significant and positively impact the interest rate spread. In contrast, the results also exhibit that bank-specific factors such as bank size, operating expense ratio, and loan to deposit ratio are statistically significant and negatively impact the interest rate spread. Again, the results determine that the macroeconomic factor which is inflation found to be statistically significant and positively impacts the interest rate spread. The study’s findings will assist the banks’ regulatory body in formulating and developing strategies to maintain a satisfactory level of interest rate spread.

Risk sharing framework and systemic tolerance in Indian banks: Double layer network approach

Interconnectedness spreads systemic risk and is critical in enhancing banks’ systemic tolerance through interbank liquidity and lines of credit. Literature on systemic risk has not considered the importance of interconnectedness in providing liquidity to improve banks’ systemic tolerance. As a bank’s resistivity towards systemic disruption depends on its tolerance, the current article develops a model to measure the systemic tolerance of individual banks in a two-layer interbank network using ΔCoVaR. It estimates systemic tolerance distance through a risk-sharing framework and analyzes the significance of macroeconomic and bank-specific factors in explaining systemic tolerance. The results support that systemic tolerance values are higher during the down-cycle than the up-cycle, signaling the importance of interconnectedness in protecting against systemic crises. The empirics further substantiate that risk-sharing distance is lower, and structure is complex with clusters during economic down-cycle. This highlights that banks couple with each other during stressful environments and empirically validate the importance of interbank and lines of credit in enhancing systemic tolerance and, therefore, possess the regulator to develop a robust interbank market through regulatory guidelines.

Bank-specific and Macroeconomic Determinants of Commercial Banks Profitability in Kenya

This study focuses and examines the impact of bank-specific factors and macroeconomic determinants on the financial performance of commercial banks listed on the Nairobi Securities Exchange (NSE) during the period spanning from 2011 to 2020. The research is anchored on transaction cost economic theory with financial panel data methodology. In the pursuit of study objective, the study employed pooled ordinary least squares (OLS) estimation method combined with fixed effect model to account for individual-specific characteristics that may not be directly observable but are likely to impact the dependent variable. The research findings reveal that bank assets, bank capital and debt ratio have a positive impact on bank profitability while bank concentration has a negative effect. Notably, inflation rate, lending rate and tax rate were insignificant in relation to rate of return on equity among the selected banks in NSE. The study recommends that banks should prioritize efficient capital allocation and diversify their business lines and offerings. Therefore, banks should give thought to the implementation of strategic asset management as a means to optimize their asset allocation, as it can contribute to increased profitability through diversification and efficient asset utilization.

Elucidating the Non-Performing Assets in Indian Banking Sector: Does Macroeconomic Factor Matter?*

Using the system generalized methods of moments on panel data set of 45 selected Indian commercial banks from 2005–2006 to 2019–2020, the study investigates the determinants of non-performing assets (NPAs), taking into account macroeconomic and bank-specific factors. The study finds evidence of a persistent effect in stressed assets. The profitability ratio, operational capacity, cost efficiency and aggressive lending negatively and significantly affect the NPAs. The negative impact of the profitability ratio implies that less efficient banks are more exposed to bad loans. While cost efficiency discourages the NPAs, on the other hand, higher credit deposit ratio (operational capacity) suggests that a well-diversified portfolio leads to lesser probability of loan defaults. The probability of loan default is high when more advances are released to the economy’s weaker and vulnerable sectors (high-priority sector lending). Small-sized banks are more efficient in NPAs management than large-sized banks. Various macroeconomic variables, such as lending rates and credit growth in the banking industry, significantly affect the NPAs. The higher lending rate adversely affects borrowers’ repayment capacity, leading to more stressed assets. Therefore, to maintain bad assets within a bearable limit, policymakers should take macroeconomic determinants into consideration.

Impact of Mobile Money innovation in Ghana on bank profitability

The study investigated the bank specific, industry and macroeconomic factors that impact the profitability of banks from a developing country perspective. The differentiator for this paper is the inclusion of mobile money floats as a factor that influence bank profitability in a mobile money driven financial system. Using panel data techniques, the study found that bank-related factors that drive bank profitability are operating expense ratio, capitalisation, and bank size. All macroeconomic variables included in the study are also important in explaining bank profitability and so is market concentration and regulation. The study however, revealed that mobile money floats does not influence bank profitability significantly, however, bank size complements and moderates the relationship between mobile money and bank profitability positively. The study recommend that smaller banks should invest more in information technology to attract more mobile money floats to improve upon profitability and consequently financial inclusion and economic development.

Impact of Bank-Specific Factors on Capital Adequacy in the Nigerian Banking Sector: An Empirical Analysis

The study investigates the divergence between the capital adequacy of banks in Nigeria and the Bank for International Settlements' (BIS) global standards for bank capital adequacy. It specifically examines the factors affecting capital adequacy in Nigerian banks. The main objective is to evaluate how specific factors impact capital adequacy within this context. Data spanning from 2012 to 2022 from the Central Bank of Nigeria's Statistical Bulletin was collected for 13 selected deposit money banks in Nigeria. Econometric methods were employed to analyse this data. The findings indicate that asset quality and return on equity (ROE) adversely affect the capital adequacy of Nigerian deposit money banks during the study period. Conversely, bank liquidity, bank size, management efficiency, non-performing loans, and return on assets positively influence bank capital adequacy in Nigeria. It is recommended that particular attention be given to bank liquidity and bank size, as these factors significantly enhance the capital adequacy of Nigerian banks within the reviewed of period

Determinants of Income Smoothing Practices in Light of the Recent Pandemic: Evidence from Banks in MEA Region

This study examined the effects of the recent COVID-19 pandemic on income smoothing practices in the banking sector of Middle Eastern and African (MEA) countries. It examined how global geopolitical risk (GPR) and the bank's internal indicators influenced these practices. Focusing on 175 banks across the MEA region with data spanning from 2018 to 2021. This study employed several econometric approaches, i.e., GMM, 2SLS, MMQR and QRPD, to provide robust estimations. The study's scientific novelty is in its thorough analysis of how COVID-19 stringency and global geopolitical uncertainties uniquely impact income smoothing practices, utilising advanced econometric techniques to capture nuances across different regions. The findings revealed that income smoothness has increased in response to stringent COVID-19 measures such as lockdowns and movement controls, with consistent results across various methods. Additionally, the higher global GPR is associated with increased income smoothness. The study also identified varying impacts of bank-specific factors: bank size, and capital adequacy ratio (CAR), generally show positive effects, while return on assets (ROA), cost-to-income ratio (CI), leverage (LEV), and liquidity (LIQ) often have negative impacts, with some variables displaying minimal significance in different quantiles. Practically, the study offers valuable insights for policymakers and banking sector professionals by highlighting how heightened COVID-19 stringency and geopolitical risks influence income smoothness. This can aid in the development of strategies to manage financial stability and adapt to future economic shocks.

Moderating effect of bank performance on bank value: Evidence from Jordan

The relationship between bank performance and bank value is a crucial area of study, particularly in the context of emerging economies like Jordan. This study aims to investigate the moderating effect of bank performance on bank value, providing insight into how performance metrics influence overall valuation. The study employs a comprehensive methodological approach, utilizing panel data regression analysis to examine data from a sample of Jordanian banks over the period from 2014 to 2022. Key performance indicators such as Tobin’s Q, accounting conservatism, debt ratio, current ratio (CR), return on assets (ROA), and asset turnover are factors that influence bank value in the Jordanian market. The results reveal that bank performance significantly moderates the relationship between bank-specific factors and bank value. Specifically, the study finds that return on assets has a positive and statistically significant effect on bank value. The analysis reveals a significant positive correlation between bank value and profitability, as evidenced by a moderate positive correlation coefficient (0.26) between Tobin’s Q and ROA. However, weak or non-significant correlations are observed between bank value and accounting conservatism, debt ratio, and asset turnover.

Interest rate spreads: Different stories for different types of loan

The paper studies the determinants of the interest rate spreads in Estonia, a country that stands out among European countries for its wide spreads and highly concentrated banking sector. Four distinct credit markets are considered for housing loans, consumer loans, long-term corporate loans and short-term corporate loans. The paper uses quarterly panel data from 2000Q1–2021Q1. It uses a two-stage approach to disaggregate the observed spread into a component determined by the bank-specific factors and a component determined by the market-specific factors, which is called pure spread. For each of the two components, we find substantial differences in the determinants of the spreads across different types of loan. While credit risk is important for long-term corporate and housing loans, inverse efficiency is significant in the segment of short-term loans. The contribution of market concentration to the pure spread is larger for household loans than for corporate loans.

Bank Specific Factors that Affect Credit Risk

Indonesian’s banking has taken steps to improve financial performance by managing credit risk and supporting economic recovery in 2023, efforts carried out by banks include providing credit and acting as intermediaries with very vulnerable credit risk challenges.This research has purpose to find out which bank spesific internal factor can significantly affect the credit risk in a bank. The independent variables in this study are efficiency, leverage, liquidity, ROA, ROE, solvency, banking spread, banking size, and ownership concentration. While the dependent variable is credit risk using NPL and Z-Score. The study used panel data regression models to test the data collected from 98 banks registered with OJK over three years (2020-2022). The results stated that leverage, ROA, ROE, solvency, bank size, have a positive influence on ZScore, while efficiency, liquidity, and bank spread have no influence on Zscore. The results also show that efficiency and ROA have a positive influence on NPL. Liquidity, ROE, solvency, bank spread, bank size, and ownership concentration variables have an influence on NPLs and leverage has no influence on NPL. Additionally, investors should be able to use this research's insights about company performance to get a general understanding of the credit risk associated with linked companies, which they can use to inform their investment decisions.

Does banking consolidation improve bank stability? Evidence from Sub-Saharan Africa

Purpose This study aims to investigate the influence of banking consolidations on bank stability in Sub-Saharan African (SSA) countries for the period 2003–2019, following a series of bank mergers and acquisitions (M&As) in the region and whether regulation-induced bank M&As affect banking sector stability. Design/methodology/approach The fixed effect panel regression model is used to understand the influence of regulation-induced and voluntary bank mergers and acquisitions on banking stability in SSA. The study also controlled for bank-specific factors, market concentration and macroeconomic variables that affect banking stability. The study used three measures of bank stability: the Z-score, risk-adjusted return on assets and risk-adjusted bank capital. Findings The study results reveal that voluntary bank M&As, market concentration, net interest margin, bank capital, bank deposits and income diversification influence banking sector stability positively. However, the findings show that regulation-induced bank mergers and acquisitions impact banking stability negatively. Where bank M&As were a result of banking regulatory reforms, called regulation-induced mergers and acquisitions (RIM&As), banking stability suffered, but voluntary bank M&As improved banking stability. Again, the study supports the concentration–stability argument rather than the competition–stability hypothesis. Therefore, more concentrated banking markets in SSA countries have more stable banks and fewer risks of system-wide bank failures. Other factors influencing banking stability in SSA are return on equity, bank efficiency (cost-to-income), bank size and deposits-to-assets ratio. However, their relationship is negative with the stability of the banking sector. Practical implications The findings imply that the regulatory authorities should encourage voluntary bank M&As and not regulation-induced bank M&As to improve the stability of the banking systems in SSA. Originality/value The study provides new evidence on the effects of regulation-induced bank M&As on the stability of banks.

Evaluating the influence of corporate governance mechanisms and bank-specific factors on the performance of Nepalese commercial banks

This purpose of the study is to evaluate the influence of corporate governance mechanism factors: board size, board independence, capital adequacy ratio, as well as bank-specific factors: dividend payout ratio and firm size, on the performance of Nepalese commercial banks. The study covered 10 years’ secondary data from 2013/14 to 2022/23, derived from the annual reports and websites of four selected commercial banks that were listed on the Nepal Stock Exchange: Kumari Bank Limited, Himalayan Bank Limited, Prabhu Bank Limited, and Prime Commercial Bank. A non-probability sample method, especially the purposive sampling approach, was used in this study. Earnings per share (EPS) is regarded to be the dependent variable, whereas two elements, namely, corporate governance mechanisms and bank-specific factors, are considered to be independent variables. Data analysis was carried out using the SPSS 25 software, which includes descriptive statistics, Pearson correlation, and multiple linear regression. The empirical results indicate that board size has a favorable influence on EPS, but this association does not reach statistical significance. In contrast, board independency has a notable and statistically significant negative impact on EPS. The capital adequacy ratio is positively correlated with EPS. However, the impact of firm size on EPS is not statistically significant. On the other hand, the dividend payout ratio has a significant positive effect on EPS.

Machine Learning-Driven Lending Decisions in Bank Consumer Finance

This paper investigates the bank lending decision process for internet consumer finance using machine learning. It focuses on microloans and compares Logistic Regression and GBDT models for credit risk assessment. Variables are filtered and recoded via Information Value and WoE methods to enhance discrimination between defaulting and performing users. Experimental results utilizing these models predict credit risk and optimize using AUC values. Additionally, it develops a fixed-effect regression model to explore how bank-specific factors affect systemic risk, revealing that larger banks reduce risk, while higher returns, non-performing loans, and equity volatility elevate it, with inconclusive effects from leverage ratio.

How do ESG challenges affect default risk? An empirical analysis from the global banking sector perspective

Purpose A review of the literature provides a solid reason to believe that an increase in environmental, social and corporate governance (ESG) activities have a positive impact on banks’ default risk (DR). However, the increasing impact of climate risk on credit, operational and market risks, as well as the reduced availability of funding for banks that underperform in terms of ESG risk, is a concern. Therefore, the purpose of this study is to verify the relevance of the implementation of ESG policies to a bank’s DR, against the background of macroeconomic and bank-specific factors. Design/methodology/approach Using a data set of 303 commercial banks from 61 countries from 2012 to 2021 and a panel regression methodology, the empirical importance of ESG activities for bank DR is documented. The two-stage generalized method of moments estimator was used to test the research questions. Findings Comparing different factors, the results highlight the positive impact of ESG activities on the bank’s DR. However, this relationship varies according to the specific pillars of the bank’s sustainability policies and changes into negative ones. Originality/value This paper fits the domain of DR management research, investigating whether ESG performance affects bank DR while controlling macroeconomic and market drivers. Prior literature has shown evidence on the relationship between macro and market forces and a bank’s risk profile while a limited one on the non-market drivers. The main contribution is to consider ESG (in total and as separate pillars) as independent drivers of the bank risk profile.

Bank-specific factors affecting the profitability of public sector banks in India: A dynamic panel approach

Bank-specific factors affecting the profitability of public sector banks in India: A dynamic panel approach

Do Corporate Governance and Bank-Specific Factors Matter On Banking Financial Performance?

Purpose: This study explores and presents empirical evidence on the influence of self-assessment of bank corporate governance and bank-specific factors on the financial performance of commercial banks in Indonesia. Methodology/approach: We conducted the study on 35 Indonesian public banks listed on the Indonesia Stock Exchange from 2017 to 2021. Using structural equation modeling, a thorough analysis was performed on a dataset of 160 observation samples that were carefully selected through purposive sampling. Findings: This study found that the implementation of corporate governance, which is proxied by the rating of self-assessment of corporate governance, and bank-specific factors significantly affect bank financial performance. The better the corporate governance self-assessment rating, the better the bank's financial performance. Other results indicate that bank-specific factors, as reflected by bank ownership, size, and diversification, significantly positively contribute to bank financial performance. Practical implications: This research aims to provide valuable insights that can support the Indonesian Financial Services Authority (OJK) in implementing effective corporate governance practices. It focuses on enhancing risk management, strengthening the bank's internal capacity, and ensuring compliance with regulations to promote best practices in bank management. Originality/value: This study provides new insight by examining the factors influencing financial performance in the banking sector, focusing on bank-specific factors and the regulatory aspects of Indonesian banking governance.

Bank Specific Factors and Liquidity of Commercial Banks in Kenya

Despite reporting increased level of liquidity among the commercial banks in Kenya, recent instances of bank failures that have led to the receivership of three banks, have sparked renewed interest in the liquidity of financial institutions. This stems from the uncertainty faced by many depositors about the stability of certain entities within the industry. Given the important role that banks play in any economy, it is crucial to understand the influencing factors of liquidity as a key determinant of bank stability. Thus, this study specifically sought to evaluate whether bank size, profitability, capital adequacy and capital structure affect liquidity in commercial banks in Kenya. The population for this study was 38 licensed commercial banks as at December 2022. The data was collected from the annual reports of commercial banks and Central Bank of Kenya data repository for the period ranging between 2012 and 2022. Both descriptive statistics involving measures of central tendency and distribution as well as inferential statistical analysis were employed. Specifically, the study employed panel regression model to investigate bank specific factors affecting liquidity among commercial banks in Kenya. From the descriptive statistical analysis, the research found that between 2012 and 2022, bank size, profitability, capital adequacy and capital structure had statistically significant effect on bank liquidity in Kenya. The study concluded that bank size, profitability, capital adequacy and capital structure have a significant effect on bank liquidity in Kenya. In light of the study's compelling finding the study recommends that it is paramount for all banks to strengthen their liquidity management strategies. Commercial banks in Kenya should focus on enhancing their profitability as a strategic measure to bolster liquidity management. Banks should adopt prudent financial practices that lead to sustained profitability, such as optimizing loan portfolios, controlling operating costs, and exploring diversified revenue streams. The study also recommends that commercial banks in Kenya prioritize the maintenance of a strong capital adequacy ratio as a fundamental aspect of their liquidity management strategies. Banks should collaborate closely with regulatory authorities to ensure compliance with capital adequacy requirements while also considering voluntary capital buffers to further fortify their financial strength. Lastly the study recommends commercial banks to develop comprehensive liquidity risk management strategies. These strategies should encompass a thorough analysis of their current financing mix, taking into account the proportion of equity, debt, and deposits.

Bank Specific Factors, Macroeconomic Variables and Market value of Nepalese Commercial Banks

The present research has been carried out to identify the relationship and impact of bank specific factors, macroeconomic variables on the market value of Nepalese commercial banks. This research is based on descriptive cum causal research design with quantitative data from secondary sources. The study adopts panel regression to capture both cross sectional and longitudinal data characteristics and employs ordinary least square model with 120 observations of 20 commercial banks as entire population from the period of 2016/17 to 2021/22. The study reveals that banks with higher loan growth and size tend to maintain efficient market value, yet careful lending areas selection are crucial to mitigate no performing loan risk, which can decrease profitability and increase market risk. Higher non-interest income to non-interest expenses, operating revenue to operating expenses are major dimension to increase the market value. Book value per share and dividend payout ratio reflecting investor confidence in the bank’s net worth and consistence return. The banks might adopt the strategy of diversifying lending portfolio, introduce non-interest income generation program along with increases the size and operation of the activities. The bank could follow the policy of increasing cash and stock dividend through higher profit. The study focuses on selected bank specific and macroeconomic factors without considering fixed/random and structural model. Future studies aim to employ in identifying causal link between bank factors, service quality and market value with different panel data model.

BANK-SPECIFIC, ECONOMIC AND LEGAL DETERMINANTS OF PROFITABILITY IN THE REPUBLIC OF NORTH MACEDONIA

Background: Bank profitability is more than just a financial indicator; it is a reflection of the health and vitality of the banking sector and the economy as a whole. Profitable banks help to maintain financial stability by increasing resilience, facilitating capital formation and intermediation, promoting innovation and adaptability, and instilling confidence and trust. Hence, profitability is critical in the banking sector since it directly influences policymakers, regulators, and bank management. Therefore, the study will estimate the influence of specific bank and economic-legal determinants on return on assets in the Republic of North Macedonia. Thus, the study aims to estimate the influence of specific bank and economic-legal determinants on return on assets in the Republic of Northern Macedonia. Methods: The study employs the methodology of the Vector Error Correction Model (VECM) and covers quarterly data from 2007 to 2022. To conduct the empirical analysis required to identify and assess the factors of bank profitability, quantitative data were gathered primarily from the National Bank of the Republic of North Macedonia, the International Monetary Fund (IMF), and the World Bank. Return on Assets was used as a dependent variable. The set of factors is composed into two groups: the first includes bank-specific (controlled) factors such as the sectors’ size, credit risk, capital adequacy, liquidity, income diversification, efficiency of operations, and non-performing loans. The second group includes macroeconomic (uncontrolled) factors such as economic growth, inflation, and interest rates. Results and Conclusions: Results reveal that the size of the banking sector, the risk of the credit, liquidity, income diversification and non-performing loans have a meaningful but negative influence on the response variable. However, capital adequacy, operational efficiency, GDP and interest rate have an important positive impact. Hence, based on the empirical analyses, to boost profitability, the Macedonian banking system should prioritise asset management as a size indication, raising the non-income ratio to diversify revenue, reducing credit risk and non-performing loans, and maintaining a good liquidity ratio.Furthermore, there is clear evidence that second-level banks should extend beyond national borders. Better loan portfolio management, greater technology with database processing and communication improvements, and expanded technology with database processing and communication improvements can strengthen the ability to deal with the next crisis. Additionally, banks should increase non-interest revenue by employing it as a risk outlet in banking and distributing it across many income-generating enterprises, enhancing profitability. These findings offer insights for bank executives and regulators interested in increasing bank profitability and stability.

Operational efficiency in the presence of undesirable byproducts: an analysis of Indian banking sector under traditional and market-based banking framework

PurposeIn the backdrop of an increase in market-based banking activities, this paper aims to study operational efficiency of Indian banking sector during 2009–2010 through 2017–2018 considering Capital Gain and Gain from Forex Market (as desirable outputs) and Slippage (as undesirable byproducts) simultaneously, along with Advances – a desirable output considered in the traditional banking performance assessment literature. This enables to have an assessment of performance (as captured by the measured efficiency scores) of Indian Banks following an alternative viewpoint about the banking activities. The authors also explain such efficiency scores in terms of bank-specific factors, banking industry competition scenario and interest rate channel.Design/methodology/approachUsing data envelopment analysis (DEA) method, the authors estimate six alternatives but interlinked operational efficiency scores (TES) of the Indian domestic commercial banks. In the second stage, they explain such TES in terms of bank-specific factors, banking industry competition scenario and interest rate channel.FindingsThe authors observe that the private sector banks as a group outperform those under public ownership. Moreover, although the private sector banks could maintain somewhat consistency in their operational efficiency performance over the sample period, public sector banks clearly show a declining tendency. The second stage econometric estimation results show that the priority sector lending has a negative effect on efficiency. Interestingly, the authors get varying results for the relationship between maturity and efficiency score depending on banks’ strategies on stressed assets management. Furthermore, the analyses result that banks are not so efficient in managing relatively larger-volume loans. It is also observed that banks’ efficiency positively depends on the Credit-to-Deposit (CD) ratio. It is found that the overall operational efficiency of the banks to manage their credit risk portfolio improves with a reduction in the lending rate (LR). However, the interaction of lending activities and capital market shows that with the increase in LR, corporate borrowers may switch to capital market to explore for desired funds, which may induce the banking sector to investment in capital markets and create a positive market sentiment.Originality/valueLiterature, although scanty, is there dealing stressed assets of a bank as some undesirable byproducts of its operational and business activities. However, such literature mostly done within the traditional framework of banking business activities and modern market-based business activities are almost absent in the literature. The authors have done it in the present study.