Bank Stability Research Articles

The Impact of Digital Payment on Banking Stability

Previous studies provides conclusions regarding the relationship between digital payments and banking stability in a particular country. Therefore, this research wants to see how the growth of digital payments impacts banking stability in 110 countries in the world from 2017 – 2022. This study explores the relationship between digital payments and banking stability using a panel data regression model. Digital payment transactions are proxied by the payment penetration ratio (PPR) while banking stability is proxied by the country's Z-score. This research found a negative correlation between digital payment transactions and banking stability in data from 110 countries. This is possible because of the risks arising from digital payment transactions. Overall, these findings support policies to increase secure payment transactions for banking stability.

The development of the life insurance market and bank stability in developing countries

This study investigates the relationship between the development of the life insurance market and bank stability within the context of developing countries. We used data from 2012 to 2020 across 108 developing countries and applied econometric techniques, including fixed-effect and system generalized method of moments (GMM) methods, to test the relationship between the life insurance market size, life insurance market growth, and bank stability at the country level. Our results indicate a positive relationship between life insurance market size and bank stability, i.e., a large life insurance market can help increase bank stability in developing countries. However, these countries should refrain from developing their life insurance markets too quickly; according to our empirical results, there is an inverted U-shaped relationship between life insurance market growth and bank stability. In the context of the growing life insurance market in developing countries as well as the increasing cooperation between banks and insurance companies towards expanding the life insurance market in these countries, our research provides important policy implications for ensuring the stability for financial markets in general.

Islamic Banks Stability in Indonesia: Assesing the Role of Islamicity Performance Amidst the Pandemic Challenges

Research Originality: Islamicity performance reflects adherence to Sharia principles, which are fundamental to Islamic banking operations. Research that emphasizes the contribution of Islamicity performance to the stability of Islamic bank requires additional studies.Research Objectives: This research examines the influence of banks’ internal factors, Islamicity performance, and macroeconomic factors on the Islamic bank stability amidst the pandemic challenges using financial intermediation theory.Research Methods:A random effects test was performed on a balanced panel data covering the period of 2017.1-2023.3 on 10 Islamic banks continuously publishing quarterly financial reports.Empirical Results: Credit risk and eficiency affect stability. Higher expenses enhance stability during pandemic. Reserves for uncollectible debt reduce stability. Islamicity performance in profit-sharing financing may reduce stability. Economic growth and inflation negatively affect stability pre-pandemic. Interest rate and dummy variables have positive effects.Implications: These findings imply the significance of preemptive risk management, cost-effective operations, prudent reserves allocation, and regulatory compliance to enhance stability in Islamic bank across varying economic circumstances.JEL Classification: E4, G21, B22How to Cite:Amaroh, S., Masykuroh, E., Husnurrosyidah., & Ali, M., (2024). Islamic Banks Stability in Indonesia: Assesing the Role of Islamicity Performance Amidst the Pandemic Challenges. Etikonomi, 23(2), 317 – 332. https://doi.org/10.15408/etk.v23i2.37269.

CBDC and banking stability: Modeling cascading effects on reserves, lending, and liquidity

This research uses a dynamic modelling approach to design and simulate an equilibrium model of the interaction between CBDC issuance, deposits and bank reserves. With many central banks announcing their intention to issue central bank digital currencies (CBDCs), it has become imperative to rigorously analyse the potential impact of these issues on the banking system. This study aims to examine the implications of the introduction of CBDCs within a robust analytical framework, in order to inform policymakers and financial sector players about the possible consequences of this major monetary innovation. The study results show that overconfidence of economic agents towards CBDCs can drastically reduce bank reserves, thereby limiting the lending capacity of banks and creating liquidity problems. Similarly, increasing reserve requirements in fiat currency for each unit of CBDC issued can constrain bank reserves and restrict loans and deposits. Additionally, a rise in interest rates on CBDC-related loans can discourage borrowers, thereby reducing loan demand and affecting banking activity. An increase in interest rates leads to a decrease in the quantity of CBDC in circulation, an increase in bank reserves and deposits in CBDC, and a decrease in bank loans. Monitoring the level of confidence of economic agents towards CBDCs is crucial to avoid excessive speculation.

Assessing river bank erosion on Majuli Island for strength and stability in resilient protection

ABSTRACT The present study addresses the issues and challenges of Brahmaputra river bank erosion near Majuli Island, Assam. For field study, the most vulnerable locations, namely (i) Ahatguri area, (ii) Okhala Chuk, (iii) Kamalabari ferry ghat, (iv) Cinnatoli Chapori and (v) Kandhulimari area are taken into consideration. Geometrical as well as geotechnical investigations were carried out to obtain detailed information for the stability analysis of river bank slopes of selected sites. Through 2-D finite element-based numerical tool PLAXIS2D, results indicated low stability of river bank due to low shear strength and ingress of moisture. To improve the strength and stiffness of the river bank soil, authors suggest a soil stabilisation technique using a Cement-Soil mixture with a 1:25 ratio (4%). The influence of improvement in the geotechnical properties was noted with the improvement in the stability of the river bank soil when assessed numerically. Results depicted that under ‘saturated and stabilized condition’, approximately 99% reduction in maximum total displacement and 55–85% reduction in maximum total strain was observed at all the five critical locations studied. Factor of safety values of stabilised bank was increased by 4.5 to 12 times, compared to the corresponding results obtained for ‘saturated and unstabilized’ condition.

Competition, economic freedom and bank stability: Evidence from ASEAN

This study examines how economic freedom and competition affect bank stability. We use data from 70 ASEAN-4 banks from 2007 to 2019 using the system generalized technique of moments. Results corroborate competition-fragility hypothesis. Market strength (or less competition) can boost bank stability. However, in the ASEAN-4 area, competition and bank stability have a non-linear relationship, suggesting that bank stability may decline after market strength exceeds a threshold. Financial and economic freedom also boosts bank stability. This implies banks in free financial and economic contexts are more stable. Banks with more market dominance in nations with more economic or financial autonomy may also be more unstable. The findings suggest that authorities should allow some competition and economic flexibility to keep banks stable. The study examined ASEAN-4 economic freedom’s effects empirically for the first time. It illuminates competitiveness and bank stability.

Assessing Financial Stability through ESG: The Impact of Sustainable Finance on Commercial Banks listed in Pakistan Stock Exchange (PSX)

The notion of sustainable finance, which encompasses environmental, social, and governance (ESG) considerations, has become increasingly prominent in assessing the financial resilience of companies, particularly within the banking industry, in recent times. The primary objective of this research is to examine the influence of ESG practices on the financial stability of commercial banks that are publicly traded on the Pakistan Stock Exchange (PSX). The study utilizes an extensive dataset of 10 years from 2014 to 2023 that includes significant ESG indicators as well as financial performance metrics, spanning multiple years. The study seeks to analyze the impact of sustainable finance practices on the overall financial stability of the chosen banks using advanced statistical techniques and regression analysis. The results of this study are anticipated to provide insight into the possible advantages and drawbacks of incorporating ESG factors into the operational plans of commercial banks. Moreover, this study will make a valuable contribution to the current body of knowledge on sustainable finance, particularly in the context of emerging economies like Pakistan. In such markets, the importance of ESG factors in shaping financial decision-making is undergoing rapid transformation.

Asset Allocation and Bank Resilience: China Insights

This research is based on the panel data from the annual reports of Chinese commercial banks for the years 2010-2020. A panel data model is constructed to empirically investigate the influence of commercial banks' asset allocation on financial stability. The study innovatively explores the differences between large-scale banks and general-scale banks in this context, as well as the interaction effects between large-scale banks and their methods of capital application. The findings indicate that: firstly, the higher the proportion of corporate loans in commercial banks, the stronger the stability. With the support of national policies, the operating environment for emerging industries has improved, leading to a reduction in bankruptcy risks and further decreasing the credit risk of related banks, which contributes to the enhancement of banks' financial stability. Additionally, compared to securities investments affected by market fluctuations, corporate loans are less susceptible to significant capital changes, and their risks are primarily determined by the operating conditions of the related enterprises, making them relatively controllable. Secondly, the higher the proportion of personal loans in commercial banks, the stronger the stability. The largest part of personal loans consists of housing mortgage loans, which have a low non-performing loan rate and high quality in China. Therefore, an increase in personal loans helps to enhance the financial stability of banks. Thirdly, large-scale banks exhibit lower financial stability. Due to the redundancy in management personnel in large-scale banks, management costs, adjustment costs, and transaction costs are relatively high. Furthermore, it is worth noting that because large-scale banks hold a significant amount of surplus funds, they are prone to excessive securities investments. Fluctuations in the securities market increase external risks and decrease financial stability.

Towards Better Financial Governance: The Urgency of Model Risk Management in Indonesia Viewed Through Maqashid Shariah

This study assesses the adequacy of Model Risk Management (MRM) frameworks within Indonesian Islamic banking by utilizing Maqashid Shariah principles as a tool to align these frameworks more closely with global standards, specifically focusing on safeguarding life (Hifzh Al-Nafs) and property (Hifzh Al-Mal). Through a comparative literature review, this research examines the structure and effectiveness of MRM practices in Indonesia, referencing regulations such as POJK 65/2016 and SEOJK 25-SEOJK.03-2023, against those in developed financial markets such as the USA, UK, Europe, Japan, and UAE, with an emphasis on governance, lifecycle management, and internal audit processes. The findings suggest that Indonesia’s current MRM frameworks are somewhat rudimentary when contrasted with international norms. Key areas identified for enhancement include expanding the scope, enhancing governance structures, refining model lifecycle management, and strengthening internal audits and oversight mechanisms. By employing Maqashid Shariah principles as an analytical tool, this paper proposes enhancements to MRM frameworks that can significantly improve the stability and compliance of Islamic banks in Indonesia, promoting greater global competitiveness and adherence to Shariah principles. This approach not only integrates traditional MRM approaches with Islamic ethical standards but also provides a tailored framework for regulatory enhancements that support a stable, compliant, and ethical Islamic banking environment.

Does an Independent Central Bank Smooth Exchange Rate Volatility? Evidence from Time-Varying Panel Causality Analysis

Abstract This paper empirically examines the effect of the central banks independence on exchange rate volatility by using a large data-set for the E7 (7 emerging countries) covering the period 1998-2017. This paper applies the time-varying panel causality analysis to obtain country-based results. The results show that the policy design, with relatively independent central banks, provides supportive results for macroeconomic stability. It is concluded that policies focusing on current problems by ignoring macroeconomic stability, such as the 2008 crisis, have eliminated the relationship between bank independence and stability.

Bank erosion under the impacts of fluvial erosion, frost heaving/freeze-thaw process of rivers in seasonal frozen regions

Bank erosion is a key feature of channel evolution in alluvial rivers, and will occur under the combined effect of hydraulic erosion and frost heave/freeze-thaw process of rivers in seasonal frozen regions. However, most research on bank erosion modeling has seldom considered the impact of the frost heave/freeze-thaw process. Therefore, the variation in the mechanical characteristics of riverbank soil under the freeze-thaw cycle was investigated firstly in the current research and then used in the modeling of bank erosion processes at typical sections of the Songhua River. Additionally, a sensitivity analysis of riverbank stability was conducted using orthogonal experiments. The results indicate that after 7 freeze-thaw cycles, the soil cohesion and internal friction angle of bank soil decreased by about 10%–47 % and 9%–19 %, respectively. Unlike lowland rivers, bank erosion of rivers in seasonal frozen regions is more likely to occur during the rising water period. The frost heaving/freeze-thaw process will make the bank stability safety coefficient Fs more quickly decrease to the unstable critical value. As compared with the case without considering the frost heaving/freeze-thaw process, the mass failure occurred in advance when the frost heaving/freeze-thaw process was considered, and the calculated bank erosion volume was increased by 11%–51 %, agreeing better with the measured value. The sensitivity ranking of the four influencing factors on riverbank stability under freezing-thawing conditions is as follows: river stage > groundwater level > cohesion > internal friction angle. The current study can provide a reference for research on bank erosion and channel evolution of rivers in seasonal frozen regions.

Effect of Capital Adequacy on Operational Efficiency of Commercial Banks in Kenya

This study investigates the impact of capital adequacy on the operational efficiency of Kenyan banks, highlighting its importance for financial stability and risk management using a two-step analytical approach: first, Stochastic Frontier Analysis was used to determine operational efficiency scores for each bank; second, a panel Generalized Method of Moments (GMM) regression model assessed the relationship between these scores and capital adequacy. The study employed a panel GMM Method, accounting for individual and time-specific effects as well as endogeneity and correlation biases. The study concentrated on data from 2008 to 2022, from verified audited financial statements from the Central Bank of Kenya and the respective banks' websites. The study revealed a positive relationship between capital adequacy and operational efficiency. Specifically, increased capital adequacy was associated with a 10.32% improvement in operational efficiency. The study also found that market structure plays a significant role in this relationship. Based on these findings, policymakers should adopt comprehensive strategies focusing on stringent capital adequacy regulations to enhance bank performance and stability.

BOARD STRUCTURE AND ISLAMIC BANK STABILITY: A STANDALONE RISK COMMITTEE MODERATING EFFECT

This study investigates the impact of board attributes on the stability of Islamic banks and whether the presence a standalone risk management committee (SARC) moderates their relation. Applying the feasible generalized least squares (FGLS) regression as well as the two-step system generalized method of moments (GMM) estimator for robustness to a panel sample of 43 Islamic banks across 15 countries over eleven years from 2010 to 2020, we document evidence suggesting that board meetings, board gender diversity and foreign directors do not influence the stability of Islamic banks. Conversely, board members holding doctorate degrees (PhDs) significantly and negatively affect the stability of Islamic banks. In addition, the presence of SARC significantly improves the stability of Islamic banks. The study further finds that SARC partially and positively moderates the effects of board members with PhDs and foreign directors on the stability of Islamic banks.

Organization and methodology of stress testing of banking risks

The paper identifies stress testing as an important tool that helps the NBU and banking institutions effectively manage risks. The importance of stress testing is determined by the possibilities of: assessing the stability of banks, identifying vulnerable places, increasing transparency and trust, preparing for crisis situations, improving policies and procedures. It has been proven that the effective conduct of stress testing allows: to ensure the stability of the banking institution, to identify vulnerabilities, to increase transparency and trust, to prepare for crisis situations, to improve policies and procedures. It was determined that the NBU plays a key role in conducting stress testing, providing supervision of the banking system and determining general approaches to assessing the stability of banks by establishing regulatory requirements, analyzing the results of stress testing, developing policies and recommendations for banks. It is shown that the main aspects of credit risk stress testing are: assessment of the impact on the credit portfolio, analysis of financial indicators, sensitivity to risks, development of preventive measures, capital planning, systematic approach to credit risk monitoring. The banking institution uses the results of stress testing to develop a strategy and business plan, risk management policies and procedures, and business recovery plans. The methodology of stress testing of credit risk, liquidity risk, interest rate risk of the bank book, market risk, and operational risk has been formalized, which should be carried out at least once a quarter. The purpose of stress testing and assumptions for developing stress scenarios for each type of risk are defined. Recommendations for improving the organization of the stress testing process have been developed. A set of measures to improve the mechanism of stress testing of banking activity risks is substantiated: development of unified methods and algorithms of stress testing, harmonization of national approaches with international standards, integration of stress testing into the risk management system, technological support and automation of processes, improvement of personnel qualifications.

THE INFLUENCE OF FINANCING MODEL AND CREDIT RISK ON FINANCIAL STABILITY (STUDY OF ISLAMIC RURAL BANKS IN JAVA ISLAND)

This study examines the impact of profit-sharing financing and profit-margin financing on financial stability of Islamic Rural Banks (IRBs) in Java Island and incorporates credit risk as an intervening variable. Utilizing a panel dataset of 90 registered IRBs operating in Java Island from 2011 to 2021 and applying path analysis, we find that profit margin financing has a significant negative impact on the financial stability of IRBs, both directly and indirectly through its association with credit risk. In contrast, profit sharing financing shows a positive and significant direct effect on financial stability. This result implies that profit margin financing may pose a greater risk to the financial stability of IRBs than profit-sharing financing. The study highlights the need for IRBs to carefully manage their financing strategies, taking into consideration the potential risks associated with profit margin financing. Effective risk management practices are crucial for mitigating credit risk and ensuring the overall stability of IRBs. The research emphasizes the importance of a selective approach in providing profit-sharing financing to mitigate potential risks. It also underscores the significance of striking a balance between profitability and credit risk management to ensure the long-term stability of IRBs.

The effect of ESG scores on bank stability: Islamic vs. conventional banks

ABSTRACT This paper examines the impact of ESG (Environmental, Social, and Governance) factors on the stability of banks across different continents, focusing on both conventional and Islamic banking institutions. The empirical analysis indicates a positive influence of ESG activities on the stability of these financial institutions. Notably, the study finds that ESG scores significantly enhance the stability of both conventional and Islamic banks. The environmental pillar score, especially within the conventional banking sector, shows highly positive and statistically significant results, highlighting the benefits of environmentally responsible practices. In contrast, the social pillar is positively correlated with stability in the Islamic banking sector, suggesting that active involvement in community service and social responsibility initiatives leads to improved stability. Overall, the study emphasizes the transformative potential of ESG activities in enhancing the stability and valuation of banks by positively influencing both their external perception and internal operations.

Do financial inclusion and bank competition matter for banks’ stability in Asia?

This study investigates the effect of financial inclusion (FI), considering micro and macro indicators as well as micro- and macro-FI separately, on the stability of Asian banks and examines the moderating effect of bank competition (BC) on this relationship. Using data from 2011 to 2021, this study examines the relationship between FI, BC, and bank stability (BS). The hypotheses were tested using a “two-step system-GMM framework”. The findings were also authenticated using the panel OLS approach. The results indicate that FI (considering micro- and macro-indicators) and micro- and macroFI have significant positive effects on the stability of Asian banks. However, the impact of micro-FI is greater than that of macro-FI on the BS in Asia. Furthermore, the results manifest that BC has a significant positive impact on BS and positively moderates the relationship between micro-FI and BS, whereas it negatively moderates the relationship between macro-FI and BS. The findings of this study have practical implications for regulators, bankers, and policymakers involved in formulating strategies to enhance Asian banks’ stability.

Central bank communication and stabilization policies under firms’ motivated beliefs

Central bank communication and stabilization policies under firms’ motivated beliefs

Identifying the optimal type and locations of natural water retention measures using spatial modeling and cost-benefit analysis

Water management has shifted from solely technical and engineering approaches towards nature-based solutions (NBS), like natural water retention measures (NWRM), offering benefits beyond hydrology, such as improved well-being and biodiversity conservation. Determining the best type and location of these measures is challenging due to diverse options with varying benefits and effects depending on measure type and location characteristics. While most studies regarding the optimal allocation and implementation of NBS focus on the urban environment, this study presents a methodology for decision-makers focusing on inter-urban regions with limited data on NWRM implementation. Through hydrological modeling and cost-benefit analysis (CBA), we identify Pareto optimal NWRM sites and types, considering water quantity and quality alongside economic, environmental, and social objectives. We defined optimal locations that seek the most significant reduction of runoff, sediment, and pollutants, whilst optimal NWRM types are defined to seek the most cost-effective measures based on hydrological, ecological, and social criteria. Using the Open Non-point Source Pollution and Erosion Comparison Tool (OpenNSPECT), we simulated increased infiltration in different inter-urban areas and identified the optimal placement. The criteria for selecting suitable NWRM types for the identified areas are derived from the EU Directorate General for the Environment (DG-ENV) NWRM database. The results show different effective areas for reducing runoff, sediment, and pollutants. While one NWRM (natural bank stabilization) was identified as most beneficial for reducing sediment, several measures were selected for runoff reduction. Interestingly, measures with high potential for pollutant reduction seem to offer limited social and biodiversity benefits, suggesting conflicting objectives and highlighting the importance of accounting for multiple criteria. By employing simplified models and qualitative benefit assessments, this paper presents a practical decision-making approach to facilitate NWRM implementation in data-scarce areas.

Numerical simulation of morphological evolution in a gravel-bed meandering river during floods: a case study on the Sai-Jiang river

ABSTRACT The water velocity undergoes a significant increase during the initial stage of floods. The present study focuses on investigating the scours and silting occurring in an S-shaped gravel-bed river. The primary objective is to analyze the impact of 10-year flood events on both the riverbed and bank stability. This river is located in the Sai-jiang River reach, Fujian Province, China. A numerical model of riverbed scours and silting is herein tested. The research results indicate that the morphological evolution of the whole river section is affected in the early stage of flood evolution; however, in the later stage, some key places such as the bridge and the river land are still greatly affected. The apex of the river bend is in close proximity to the downstream river island, resulting in scour at the head of the river island that deviates from conventional patterns of head scour and tail siting. Furthermore, the presence of artificial structures like bridges exacerbates the scour and silting processes in river beds during flood events. For this case, the riverbed adjacent to the Banzhong Bridge pier experienced a widening of approximately 50 m and downstream extension of around 300 m, with a maximum vertical scouring depth of 2.87 m.