Bank Systemic Risk Research Articles

Analyzing microeconomic determinants of non-performing loans in Saudi Arabian banks: Implications for banking sector health and risk management

This research aims to study the smaller economic factors that influence the percentage of loans that banks in Saudi Arabia have given out but are not getting repaid. It uses data from 10 Saudi Arabian banks, covering 130 instances from the years 2009 to 2021, to figure out which economic factors at the bank level matter most. These factors are taken from the banks' yearly financial statements. The study looks at five specific factors suggested by earlier research, which are believed to impact the percentage of these non-repaying loans in the banking sector. These factors are the ratio of loans to deposits, the capital adequacy ratio (CAR), the return on assets (ROA), the net interest margin (NIM), and the size of the bank. The findings reveal that the size of the bank, its CAR, its ROA, its ratio of loans to deposits (which has a reverse effect), and its NIM (which has a direct effect) all play significant roles in determining the percentage of non-repaying loans in Saudi Arabian banks. Understanding these factors is crucial for getting insights into the health of the banking system. Monitoring and evaluating the ratio of non-repaying loans is important for keeping the financial system healthy and supporting steady economic growth. The study suggests that to manage the risks of loans not being repaid and to keep the banking system stable, effective policies and risk management practices are needed. It advises that banks improve their lending processes to manage non-repaying loans better and ensure profits for their shareholders.

Comprehensively Strengthen Financial Supervision and Effectively Forestall and Defuse Financial Risks: Book Review on Research on the Formation and Prevention of Systemic Risks in the Banking Industry from the Perspective of Platform Finance

The book Research on the Formation and Prevention of Systemic Risks in the Banking Industry from the Perspective of Platform Finance is an in-depth discussion of the formation mechanism, characteristics, transmission paths and prevention of systemic risks in the banking industry from the perspective of platform finance. By combining theory and practice, this book not only provides readers with a comprehensive understanding of systemic risks in the banking industry, but also provides practical strategies and suggestions for banking industry risk management and supervision.

Can investor sentiment connectedness predict banking systemic risk: evidence from China

ABSTRACT Investor sentiment connectedness (TCI), which depicts the aggregate effect of investor sentiment contagion, is documented as a potential risk contagion channel and plays an essential role in the evolution of systemic risk. This study applies the TVP-VAR model to construct TCI and examines whether TCI can predict banking systemic risk. Empirical results show that an increase in TCI strongly and stably predicts increasing banking systemic risk over the next month. Additionally, both in-sample and out-of-sample results indicate that TCI provides incremental information for banking systemic risk prediction.

Competition, regulation, and systemic risk in dual banking systems

This study investigates the impact of competition and banking regulation on the systemic risk of Islamic Banks (IBs) and Conventional Banks (CBs). Utilizing a random effects panel model with robust errors and an unbalanced panel data set encompassing 80 IBs and 204 CBs from 17 emerging market countries spanning 2000 to 2019, we show that the lack of competition increases systemic risk exposure, which may stem from the interconnection channels and the individual bank risk contributions. Interestingly, this effect is not significantly different between IBs and CBs. Our results also reveal a non-linear relationship between competition and systemic risk. Specifically, greater competition leads to increased systemic stability, but beyond a certain threshold, higher competition exacerbates banks' systemic risk. Additionally, we find that larger banks are more vulnerable to systemic risk, and the lack of competition worsens this vulnerability. We also show that banks with greater market power after the GFC are more exposed to systemic risk.

Bank leverage and systemic risk: Impact of bank risk‐taking and inter‐bank business

AbstractIn order to prevent and resolve systemic risk more effectively through deleveraging policy, this research takes China A‐share listed commercial banks from 2011 to 2021 as samples, calculates the systemic risk spillover through the conditional value at risk model, re‐estimates the leverage ratio with reference to the “Administration Measures for the Leverage Ratio of Commercial Banks (revised)”, and evaluates the influence of the leverage ratio on systemic risk. The results show that a high leverage ratio increases systemic risk spillover, and under this increase state‐owned commercial banks have the greatest contribution. Further research presents that a better leverage ratio enhances the systemic risk spillover by improving bank risk‐taking and encouraging inter‐bank business expansion. In addition, over different periods of economic development the influence of the leverage ratio on systemic risk exudes different characteristics. During an economic upswing, the leverage ratio's impact on systemic risk significantly drops.

Stock Repurchases, ESG Ratings and Systemic Risk in Banking

Stock Repurchases, ESG Ratings and Systemic Risk in Banking

Banking on resilience: EU macroprudential policy and systemic risk

This study examines the effectiveness of macroprudential policies on banking systemic risk for 172 European banks across 20 EU countries from 2000 to 2017. Using a dynamic panel framework, it assesses the effectiveness of policy on two dimensions of systemic risk: banks' contribution to aggregate systemic risk (ΔCoVaR) and their vulnerability in stressed markets (Exposure-ΔCoVaR). Results show policy actions reduce bank systemic risk, especially in terms of Exposure-ΔCoVaR. However, this effect varies between tightening and loosening measures. Interestingly, the analysis indicates that policies don't significantly affect banks' contribution to systemic risk as measured by ΔCoVaR. Borrower-based policies and exposure limits in particular enhance bank resilience. This study has important implications for policymakers regarding the calibration and evaluation of macroprudential measures.

Indispensable Source of Risk Contagion With Big Data Analysis From a More Comprehensive View on Shadow Banking

Although shadow banking widely exists in the financial systems of various countries, their definitions vary significantly due to specific economic and financial characteristics. This paper classifies Chinese shadow banking into six categories: securities, trust, private lending, banking, fund, and insurance. The AR-GARCH-DCC model is used to measure systemic risk spillover through from an industrial and institutional perspective. The network topology index is employed to analyze risk contagion and further explore influencing factors. Firstly, based on the results of the AR-GARCH-DCC, the estimated dynamic volatility (σ) indicates that shadow banking risk spillover is time-varying, especially in trust and securities. Second, according to the static risk spillover analysis, various institutions play different roles and can transform between risk spillovers and overflowers. Thirdly, eigenvector centrality, leverage, assets, CPI, and macroeconomic prosperity significantly impact shadow banking systemic risk spillover.

Media sentiment, deposit stability and bank systemic risk: Evidence from China

Using textual analysis techniques, we construct the unique bank-level media sentiment index in China with the data of news narratives to examine its driving effect on bank systemic risk with a distinction between systemic linkage and bank tail risk. We find consistent and robust evidence that negative media sentiment tends to increase market-data-based systemic risk measures. The withdrawal of deposits due to the negative media sentiment forces banks to raise interbank lending, which increases the cost of their liability and encourages them to engage in risky and similar business, in hence enlarging both bank tail risk and systemic linkage. We also find that the negative media sentiment of banks increases systemic risk, mainly by improving system linkage in the early stage, but mainly by improving bank tail risk in the later stage.

Credit diversification and banking systemic risk

Credit diversification and banking systemic risk

Short-term Capital Inflows and Banking Systemic Risk

Based on stock data of listed banking companies, this article uses the Copula-CoVaR method to estimate banking systemic risk. Study has found that local and non-state-owned large banks are susceptible by negative impacts and greater the financial market risk spillovers. Research has calculated the scale of short-term cross-border capital inflows per quarter from 2010 to 2020 and found that short-term cross-border capital inflows have a positive impact on the improvement of banking systemic risk, and it will amplify its impact through real estate market fluctuations. The policy implication of the article is to pay attention to the use of macro prudential policy tools, guide cross-border capital inflows, avoid the aggregation of high-risk assets such as the real estate market, prevent risk accumulation, and prevent and resolve major systemic financial risks.

Financial Openness, Bank Systematic Risk, and Macroprudential Supervision

International experiences have underscored the dual implications of financial openness. Given China’s unique circumstances and its escalating level of financial openness, it is crucial to assess potential impacts on the country’s bank systemic risk. This paper uses the quarterly data of 37 listed banks in China from 2010 to 2022 to explore the relationship between financial openness and systemic risk of the banking system, the mechanism of action, and the moderating effect of macroprudential policy on the two. The findings indicate an inverted “U”-shaped correlation between financial openness and bank systemic risk. On one side of this shape, financial openness primarily exacerbates funding mismatch, thereby increasing the systemic risk of banks. Conversely, on the other side, it primarily alleviates systemic risk by optimizing capital management. Moreover, with the help of macroprudential supervision, the inverted “U”-shaped relationship between financial openness and bank systemic risk leads to a lower level of systemic risk and, at the same time, promotes the early arrival of the inverted “U”-shaped inflection point between financial openness and bank systemic risk. Notably, the impact of financial openness on the systemic risk of joint-stock commercial banks, urban commercial banks, and rural commercial banks is more significant. The above research results provide a regulatory reference for effectively preventing and resolving systemic risk while achieving high-quality openness to the outside world. In deepening financial openness, the banking industry needs to pay attention to the funding mismatch and the efficiency of capital management and implement differential risk supervision and prevention mechanisms for banks with different ownership, which is conducive to the reduction of bank systematic risk.

Bank digital transformation, bank competitiveness and systemic risk

The aim of this paper is to analyze the impact of the digital transformation of banks on their systemic risks. We find that the digital transformation of commercial banks can significantly inhibit the systemic risk of banks, and this conclusion is still valid after considering the endogeneity of the model. The bank’s digital transformation reduces its systemic risk by increasing its own competitiveness. Further analysis shows that the reduction of banks’ marginal costs due to digital transformation is a key factor in promoting banks’ competitiveness as the mechanism by which digital transformation reduces banks’ systemic risk. The role of bank digital transformation in reducing systemic risk is heterogeneous, which is more obvious in large commercial banks, commercial banks that have not established financial technology subsidiaries, and systemically important banks.

Research on the impact of digital transformation on the systemic risk of banks

Taking 26 listed commercial banks in China from 2010 to 2021 as a research sample, this paper empirically analyzes the impact and mechanism of digital transformation on bank systemic risk. The results show that digital transformation significantly reduces the systemic risk of banks, and the mechanism analysis finds that digital transformation inhibits the systemic risk of banks through two major channels: improving the operational efficiency of banks and reducing bank risk-taking. The results of heterogeneity analysis show that the digital transformation of small and medium-sized banks has a more significant inhibitory effect on the systemic risk of banks. This study provides a reference for better driving the digital transformation of banks and preventing systemic risks in the banking industry.

Systemic Risk in Banking, Fire Sales, and Macroeconomic Disasters

Systemic Risk in Banking, Fire Sales, and Macroeconomic Disasters

The impact of sentiment consistency on bank risk: A dual perspective from bank managers and credit rating experts

The article examines the predictive role of the consistency of tone between credit rating experts and bank managers on bank bankruptcy risk and systemic risk. Firstly, the article collected 716 reports, which are the intersection of credit rating reports and bank annual reports of all US commercial banks from 2006 to 2022. Secondly, the FINBERT model was fine-tuned to calculate the tone scores of all reports and the similarity of tones between parties. Empirical analysis revealed that the more positive the tone of credit rating reports, the lower the bankruptcy risk and systemic risk of banks. Furthermore, integrating the perspective of bank managers, the article used a moderation effect experiment to further explore the moderating effect of the tone of bank annual reports and the consistency of tone between parties on the tone of credit rating reports regarding bank risk. The empirical results indicate that the tone of bank annual reports can effectively moderate the predictive effect of credit rating reports on bank risk. Additionally, the consistency of tone index has a significant positive moderating effect on the impact of the tone of credit rating reports on bank risk. This study provides important insights into the exploration of financial text tones on bank bankruptcy risk and systemic risk, suggesting the use of multidimensional text tones for bank risk measurement. It also demonstrates for the first time the importance of consistency of financial text tones in different dimensions in bank risk warning.

HFTCRNet: Hierarchical Fusion Transformer for Interbank Credit Rating and Risk Assessment.

As a prominent application of deep neural networks in financial literature, bank credit ratings play a pivotal role in safeguarding global economic stability and preventing crises. In the contemporary financial system, interconnectivity among banks has reached unprecedented levels. However, many existing credit risk models continue to assess each bank independently, resulting in inevitable suboptimal performance. Thus, developing advanced neural networks to model intricate temporal dynamics and interconnected relationships in the banking system is essential for an effective credit rating and risk assessment learning system. To this end, we propose a novel hierarchical fusion transformer for interbank credit rating and risk assessment (HFTCRNet), which includes the long-term temporal transformer (LT 3 ) module, short-term cross-graph transformer (STCGT) module, attentive risk contagion transformer (ARCT) module, and hierarchical fusion transformer (HFT) module to capture the long-term growth trajectories of banks, the short-term interbank network variance, the potential propagation of risks within interbank network, and integrate these information hierarchically. We further develop an interbank credit rating dataset, encompassing quarterly financial data, interbank lending networks, and key indicators such as credit ratings and systemic risk (SRISK) for 4548 banks from 2016Q1 to 2023Q1. Notably, we also adapt the minimum density algorithm to stabilize the interbank loan network over time, aiding in the analysis of long-term and short-term network effects. Our learning system uses semi-supervised learning to handle labels of varying sparsity, integrating credit ratings and SRISK for a comprehensive assessment of individual bank creditworthiness and systemic interbank risk. Extensive experimental results on our interbank dataset show that HFTCRNet not only outperforms all the baselines in terms of credit rating accuracy but also can evaluate the systemic risk within the interbank network. Code will be available at: https://github.com/AI4Risk/HFTCRNet.

How macroeconomic conditions affect systemic risk in the short and long-run?

This study quantifies the effects of macroeconomic variables on various market-based systemic-risk measures in 24 European banks over the 2008–2019 period. In a first step, I measure daily systemic risk for banks based on ΔCoVaR, MES, and SRISK frameworks, and examine the contributions of individual banks to aggregate systemic risk during specific stress events. Systemic risk in European banks has risen in the wake of the global financial crisis and the Brexit referendum result. In a second step, I investigate how macroeconomic conditions affect systemic risk in the short and long-run. I find that three systemic risk measures have a long-run stable relationship with EU industrial production, EU inflation, Euribor, and US equity market volatility, but some variables have opposite effects in the short and long-run.

Bank opacity, systemic risk and financial stability

This paper examines the impact of bank opacity on European financial stability. Based on a panel dataset of listed European banks covering the period 2002–2018, I find that bank opacity has a significant influence on the institution-specific contribution to the ∆Conditional Value at Risk and Marginal Expected Shortfall. The enforcement mechanism and the policies introduced by accounting standard setters and regulators for the risk disclosure of banks have a positive impact on the reduction of systemic risk. Both the risk reporting in accordance with IFRS 7 and the measures introduced by the Basel Committee in the form of the Basel Pillar 3 regulation led to an increase in transparency and thus an improvement in financial market stability. As an independent enforcement mechanism, the country-specific strength of the external auditing profession plays a significant role in fostering stability. The results are robust, by using both alternative opacity measures and instrumental-variable estimations (2SLS) to control for potential endogeneity.

A systematic literature review of risks in Islamic banking system: research agenda and future research directions

A systematic literature review of risks in Islamic banking system: research agenda and future research directions