Bank Recovery Research Articles

BRRD credibility and the bank-sovereign nexus

ABSTRACT We investigate the effectiveness of the Bank Recovery and Resolution Directive (BRRD) in mitigating the bank-sovereign nexus in the Euro Area. Using CDS spreads to measure bank and sovereign credit risk and a DCC-MIDAS model capturing the long-term component of bank-sovereign interconnectedness, we document that the dynamic correlation between banks and sovereigns has decreased in Euro Area countries since the introduction of the BRRD. Panel data analysis reveals that the decline in interconnectedness is not driven by the banks’ capital adequacy, size or holdings of domestic sovereign securities.

Modelling the recovery of Indian banks under prompt corrective action framework: TOPSIS methodology

Modelling the recovery of Indian banks under prompt corrective action framework: TOPSIS methodology

СУЧАСНІ ПІДХОДИ ДО УПРАВЛІННЯ ПРОБЛЕМНИМИ КРЕДИТАМИ В БАНКАХ

The management of non-performing loans is one of the most urgent issues of the banking system during the years of Ukraine's independence. This issue has become especially relevant in recent years, because of the crisis in the economic and financial systems. The article highlights the main factors that became the reasons for appearing of problem loans. Among such factors, external factors were identified, the primary source of which is macroeconomic instability, as well as imbalances in the banking system and internal factors related to cooperation with borrowers. It was found that the measures taken by the NBU to reduce the level of problem loans in the banking system led to a significant recovery of banks, but still, however, in terms of state banks, relevant issues of such exposure take place (after the nationalization of Pryvatbank), which was due to the questionable financing to related parties. The article reveals the content and describes the main measures to reduce the volume of problem loans, which are most often apply in the practice of foreign countries, including loan restructuring, debt write-off, sale of non-performing loan portfolio and other legal measures. It has been found that increasing uncertainty in the economy and financial system leads to the need to find new approaches to managing problem loans in banks. The process of significant changes in approaches to non-performing loans management in leading European countries can be divided in three stages, which were described in this article. During the first stage, the key role in reducing the amount of bad debts of banks in the post-crisis period were played by public authorities, by improving existing and introducing new regulatory requirements. In particular, the participation of third-party service companies and strategic partnerships, as well as the creation of service platforms has become widespread. The second stage was defined by a wide range of private solutions. The third stage is underway. The ultimate goal of such changes should be development of a full-fledged ecosystem of problem loans, which will include the development of private partnerships, state participation as a strategic support for these processes and the use of a wide range of digital solutions.

A modelling proposal for the public interest under the European resolution framework

Abstract The post 2008 financial crisis reform package includes the bank resolution framework. Among other measures, it foresees that failing banks should be left under insolvency proceedings, unless they meet their salvage is in the public interest. The Bank Recovery and Resolution Directive defines the public interest, providing guidance that resolution authorities need to take into account when deciding between resolution (continuation of the bank’s activity) or liquidation when a bank fails. While the guidance stems for a legal act, the concept can be mathematically modelled together with the underlying decision making process. To date, only parts of the resolution public interest or the concept of financial crisis have been modelled. The public interest assessment and underlying decision process, to the knowledge of the author, have not been mathematically modelled. This paper proposes a mathematical model for the public interest assessment as provided under the European resolution framework. While this seems to be the first such effort, it should be seen as a basis for further critical thinking that should allow more advancements that would ultimately facilitate the assessment and to provide insights for its intended users. The model can be easily implemented by practitioners by selecting or adding more relevant variables and most importantly by following their own calibration. The model is designed in a way to enable integration in an artificial intelligence deployment on data that authorities collect on the economies.

Unijne ramy zarządzania kryzysowego w sektorze bankowym – główne problemy do rozwiązania

The Bank Recovery and Resolution Directive (BRRD) introduced into EU legislation a new procedure, i.e. resolution, maintaining at the same time standard insolvency proceedings as a default option for dealing with failing banks. The experience so far indicates that such a shape of EU crisis management framework is not optimal. The article presents six main issues that need to be addressed in order to ensure greater consistency, effectiveness, and credibility of EU crisis management framework. The topics reviewed in the article concern public interest assessment, unalignment between triggers for resolution and triggers for initiating insolvency proceedings, availability of state aid as well as lack of clear regulations for liquidity in resolution. Other topics discussed in the article include resolution of small and medium-sized banks with greater support of deposit guarantee schemes. The paper presents the reasons why the indicated areas need to be addressed as well as tries to provide a direction of desired regulatory changes.

Bank Recovery and Resolution Measures’ Restrictive Effects on Appealing Against Them

The article is intended as a step forward from considering only the noble objectives and positive effects associated with the authorities’ bank recovery and resolution powers, for revealing also the inherent effects of these powers on the possibility of banks fighting back against the powers’ unlawful application. Specifically, while the Bank Recovery and Resolution Directive (BRRD) sets out the general rule that, under its regime, a bank should have the right to appeal against authorities’ actions, some of the measures established under the BRRD have a natural effect of greatly diminishing bank managers’ motivation to appeal or even completely eliminate any independent decision-making capabilities. This includes choices of whether to file an appeal. This article shows that the properties or outcomes connected with some recovery and resolution measures specified in the BRRD reduce banks’ right of appeal to a fiction and may leave possibilities for uncontrolled unlawful application of powers by the supervisory and resolution authorities.

At the End of the Waterfall – Resolvability of Central Counterparties

After the prudential requirements introduced by EMIR in 2012, the European Union took a further step when it adopted a regulation in 2021 on the framework for the recovery and resolution of central counterparties. The regulation is based on the bank recovery and resolution directive of 2014. This paper provides a critical overview of the new regulation by focusing on the question of whether the bank resolution tools are useful and effective in the case of central counterparty resolutions.

Insolvency of Significant Non-Financial Enterprises: Lessons from Bank Failures and Bank Resolution

In the aftermath of the global financial crisis the EU bank resolution regime went through fundamental changes that seek to preserve financial stability and ensure continuity of critical functions. The same cannot be said of insolvency rules applicable to non-financial enterprises. Unlike bank resolution with its macroprudential and proactive focus, insolvency law has largely remained microprudential and reactive. Admittedly, unlike bank failures, corporate insolvencies usually do not pose systemic risk. However, in practice this may not hold true for significant non-financial enterprises (SNFEs). Such enterprises oftentimes play a major role in national economies and serve important public functions. Their failure may trigger contagion and cause disruptive consequences. Insofar as insolvency of SNFEs raises concerns common to bank failures, the question arises whether certain strategies and tools embraced within the EU bank recovery and resolution framework should be extended to regulate SNFE insolvency. This article explores the feasibility of such an extension. Bank resolution, insolvency, significant non-financial enterprises, enterprise groups, Carillion, early intervention, recovery and resolution planning, living wills, public interest, systemic risk, critical functions.

Debt holder monitoring and implicit guarantees: Did the BRRD improve market discipline?

This paper argues that the European Union’s Banking Recovery and Resolution Directive (BRRD) has improved market discipline in the European bank market for unsecured debt. The different impact of the BRRD on bank bonds provides a quasi-natural experiment that allows us to study the effects of the BRRD within banks using a difference-in-difference approach. Identification is based on the fact that (otherwise identical) bonds of a given bank maturing before 2016 are explicitly protected from BRRD bail-in. The empirical results are consistent with the hypothesis that debt holders actively monitor banks and that the BRRD diminished bailout expectations after its enactment. Bank bonds subject to BRRD bail-in carry a 13-basis points bail-in premium in terms of the yield spread, driven by low capitalization. Banks that respond to market pressure by de-risking their portfolios are able to secure cheaper funding for instruments that are subject to bail-in.

ІНТЕГРАЛЬНЕ ОЦІНЮВАННЯ РІВНЯ ФІНАНСОВОЇ СТАБІЛЬНОСТІ БАНКІВ В СИСТЕМІ ЇХ ФІНАНСОВОГО ОЗДОРОВЛЕННЯ

Анотація. Присвячено розвиткові методичних підходів до оцінювання рівня фінансової стабільності банків у системі їхнього фінансового оздоровлення на основі використання інтегрального підходу. Обґрунтовано принципи здійснення оцінювання ефективності системи фінансового оздоровлення, а також доведено, що воно повинно здійснюватися на основі показників фінансової стійкості, ділової активності, показників ліквідності, ефективності управління, а також показників, негативне значення яких може призвести до неплатоспроможності банківської установи. Комплексність внутрішньої будови запропонованого інтегрального показника рівня фінансової стабільності банківської системи дозволяє виявляти слабкі зони у її функціонуванні та векторно спрямовувати дії регулятора задля своєчасного проведення відповідних санаційних заходів або налагодження ефективного управління в системі фінансового оздоровлення банків. Ключові слова: банківська система, фінансове оздоровлення, фінансова стабільність, інтегральний показник, індикатори фінансової стабільності. Формул: 8; рис.: 3; табл.: 6; бібл.: 9.

Have Too-Big-to-Fail Expectations Diminished? Evidence from the European Overnight Interbank Market

Using the Eurosystem’s proprietary interbank loan data from June 2008–June 2020, we show that larger European banks have had a lower cost of overnight borrowing than smaller banks. The size premium remains significant after controlling for a large set of other factors but has decreased over time, especially in countries that were stricken by the Sovereign Debt Crisis. A difference-in-differences analysis suggests that the decline in the size premium is related to the actual bail-in events, not to the implementation dates of the Bank Recovery and Resolution Directive as such. This finding is robust to controlling for the effect of the ECB’s long-term refinancing operations. Overall, the results suggest that the regulatory move towards bail-in rather than bailout policies to deal with financially distressed banks has reduced the too-big-to-fail expectations concerning large banks.

The Commercial Banking Sector in Eurozone after the Pandemic: The Paths to Recovery

Purpose: The aim of the paper is to address the situation in the Eurozone commercial banks’ sector during the pandemic and the mechanisms of the COVID-19 impact on the sector. It discusses the decline of profitability because of the pandemic, the growth of non-performing loans (NPLs) in banking sectors of some Eurozone member countries, as well as the management of the situation. Design/Methodology/Approach: The literature review and meta-synthesis from extant studies was used. Based on the review, a causal link between the current situation in the Eurozone banking sector and the possible paths of its recovery were identified. Findings: Commercial banks in Eurozone were affected by the consequences of the pandemic situation, especially in terms of lending activity and profitability, what may lead to a considerable increase in non-performing loans. The diversity of the situation in different countries increases the difficulty of prediction. There are some positive, neutral, and negative scenarios possible to happen. It is still a great role for the banking authorities to manage the post-pandemic situation and to provide proper recovery plans, especially dedicated for those small and medium sized banks, which are not covered by the solutions provided by the banking union. Practical implications: The paper analyses the current situation in the banking sector in Eurozone. It also presents the possible scenarios in the future and the paths leading the banking sector to recovery. Such analyses are significant for the post-pandemic policies implemented both, on Eurozone and national levels. Originality/Value: The identification of the main problems in the Eurozone banking sector because of the COVID-19 pandemic. The research findings may contribute to better understanding the need of implementation of bank recovery solutions, like the accomplishment of the banking union or the proposal of the securitization framework for banks’ non-performing exposures.

Assessment of the current state of the use of non-monetary methods of state regulation of financial recovery of banks

The object of research is the processes of state regulation of financial recovery of banks by non-monetary methods. One of the most problematic areas is determining the practical aspects of regulating the financial recovery of banks by non-monetary methods, which include: – establishment of mandatory requirements for banking services and business processes; – carrying out checks and taking measures in the event of a violation; – establishment of methods of organizing or conducting banking activities in the process of financial recovery; – licensing rules. An important aspect is the identification of factors that exacerbate the problems of the banking system, in particular, lead to large-scale lending to related parties; opaque ownership structure; inaccurate financial statements; fictitious accounts in foreign banks; money laundering and the like. Improvement of state regulation of financial recovery of banks through the use of preventive measures is possible with the effective use of non-monetary methods of such regulation. The study used methods of analysis and synthesis, induction and deduction, methods of systematization and comparison, tabular and graphical methods. The composition of monetary instruments and their features have been determined. The proposed measures for non-monetary regulation of financial recovery of banks are related to: – improving the procedure for disclosing information on the ultimate owners of the bank; – strengthening the responsibility of banks for the results of their activities; – improving the mechanisms for minimizing credit risks for banks both at the stage of issuing a loan and at the stage of its servicing; – improving the procedure for financial restructuring of problem assets of banks; – set of recreational measures to restore the bank’s solvency, prevent bankruptcy or increase its competitiveness. The use of non-monetary methods of financial recovery and the introduction of the requirements of European legislation into national banking practice testifies to the improvement of state regulation of financial recovery of banks, protects them from insolvency and ensures development.

Impact Assessment Study of NPAs and Rate of Recovery: Are Private Sector Banks in India Better off?

Our study significantly contributes in understanding a comparative framework and the interactions of idiosyncratic and systematic factors for determining non-performing assets (NPA) and rate of recovery for banks in India, as put forward by Basel committee. Although determinants of NPA is very well debated issue, the comparison of public and private sector banks in terms of their assets quality i.e. NPAs and rate of recovery and their determinants like collateral, operational inefficiency, GDP growth rate etc. are the added contribition of this study. We have employed Arrelano–Bond dynamic panel method on 35 banks in India for the period 1998–1999 to 2017–2018 for determinants of NPAs, while determinants of rate of recovery are studied for the period 2003–2004 to 2017–2018. Our findings show that the priority sector loan has significant differences in determining NPA across banks despite them having sufficient collateral. The negative relationship between collateral and recovery, especially for private sector banks, signifies low recovery for illliquid collateral. This study may recommend that a bank with high net interest margin (NIM), high proportion of secured and liquid collateral, and sufficient mix of long- and short-duration loans in line with bank’s asset liability policy can manage their portfolio well.

Modelling the recovery of Indian banks under prompt corrective action framework: TOPSIS methodology

Modelling the recovery of Indian banks under prompt corrective action framework: TOPSIS methodology

Financial Narratives. A multimodal analysis of newspaper articles

Financial narratives have always been relevant to economic fluctuations, rationalising current actions, such as spending and investing, inspiring and linking activities to important values and needs (Shiller 2017). In 2014, the European Parliament adopted the Bank Recovery and Resolution Directive (BRRD) which includes the bail-in tool. This means that taxpayers would not risk losses, but rather creditors and depositors would take a loss on their holdings. This Directive was applied to four banks and the press and media coverage of both resolutions and their effects was remarkable, influencing several issues regarding these banks’ bondholders. The present study will investigate a corpus of articles from The Financial Times ( FT.com , Europe) and one from The Times ( thetimes.co.uk ), selected around the keyword bail*-in , attempting to highlight how financial information is provided multimodally. The choice of the expression bail*-in was made because of its highly specialised semantic load in the financial field. The use of textual organisation, tables, graphs, and the relationship between text and image will be dealt with and applied to the corpus gathered. Verbal and visual elements have been considered as fulfilling, on the one hand, the three functions of informing, narrating and persuading, characterising news discourse, and, on the other hand, those of informing, evaluating and predicting, typical of financial discourse. This paper is part of an ongoing study on financial newspaper articles and whether and to what extent knowledge dissemination is popularised from specialised to non-specialised texts, recombined and recontextualised to be more intelligible to the layman. The main aim will be to analyse the combination of the verbal and visual structures of these articles, trying to detect any differences in the multimodal strategies employed by a specialised and a non-specialised newspaper.

Alternative forms of deposit insurance and the quest for European harmonized deposit guarantee scheme-centred special administrative regimes to handle troubled banks

Abstract Since normal corporate insolvency proceedings run by law courts and purely aimed at liquidating troubled entities are generally considered inappropriate for peculiar institutions like banks, having a special administrative regime, which provides the authorities with resolution-like tools, is of paramount importance to maintaining the stability of the system and reducing the destruction of value. Still, in order for these special administrative regimes to properly work and, thereby, for the winding up to be orderly, as provided by the Bank Recovery and Resolution Directive, an active and leading role should be played by deposit guarantee schemes. Accordingly, this article advocates the adoption of special administrative regimes dedicated to troubled banks, harmonized at the European Union level and based on the interventionist role of deposit guarantee schemes, which I define as harmonized deposit guarantee scheme-centred special administrative regimes. But, from this perspective, a review of the European Union legislation, with regard to State aid provision and depositor preference, is needed to enable such schemes to properly perform their function through the so-called optional measures. And, in this regard, the article advances some reform proposals.

Fatores influenciadores da intenção de doar sangue: proposição de um modelo exploratório

Purpose – Identify the main factors that significantly influence individuals living in the metropolitan region of Belo Horizonte / MG to donate blood.Design/methodology/approach – Methodologically, it was decided to develop a quantitative research, developed in the light of structural equation modeling, allowing the development of an exploratory behavioral model about the intention to donate blood.Findings – As main results, it was identified that the 'attitude towards screening' contributes significantly to the 'perception of safety' that the individual has about the process of blood donation.Research limitations/implications – Difficulty of access to the main hemotherapy center in the state, Minas Gerais Blood Bank Foundation (HEMOMINAS), a fact that prevented access to up-to-date data on the region's blood donation scenario.Practical implications – The indicators that are directly related to the practice of blood donation obtained statistically significant mean differences between the group of individuals who already donated blood and those who never donated, the former being more sensitive to calls for donation.Originality/value – There is a deepening of the knowledge of the variables that influence the individual who voluntarily performs an act such as blood donation. In this sense, this study provides inputs for the development of more assertive, efficient and effective blood donation public policies, contributing to the recovery of blood banks and raising the rate of donors in the country.

What Are the Determinants of Mrel- Eligible Debt Yields? Evidence From the EU Banking Sector

We examine the risk sensitiveness of minimum requirement for own funds and eligible liabilities (MREL)‐eligible debt yields in a sample of 63 European banking groups during the period 2009Q3–2019Q2 in 14 European countries. We conclude that MREL‐eligible debt is risk sensitive, as investors closely monitor indicators related to individual banks, issuance characteristics, market risk variables and the features of the banking system potentially affecting MREL‐eligible debt default risk. Our results, however, are not homogeneous across banks, time periods or types of debt product. In particular, we find evidence of higher risk sensitiveness in other systemically important institutions and non‐ systemic banks. We also identify higher levels of risk sensitiveness after the entry into force of the first Bank Recovery and Resolution Directive. However, we observe less risk sensitiveness during periods when targeted longer term refinancing operations were under way, in particularregarding bank and marketrisk variables. Our model also suggests that investors closely monitor senior non‐preferred issuers. This means that the market discipline that has traditionally been exercised through subordinated debt is currently exercised through senior non‐preferred issuances. Credit ratings are seen as a high‐credibility tool, helping investors in the market to better exercise market discipline.

Forecasting recovery rates on non-performing loans with machine learning

We compare the performance of a wide set of regression techniques and machine-learning algorithms for predicting recovery rates on non-performing loans, using a private database from a European debt collection agency. We find that rule-based algorithms such as Cubist, boosted trees, and random forests perform significantly better than other approaches. In addition to loan contract specificities, predictors that refer to the bank recovery process — prior to the portfolio’s sale to a debt collector — are also shown to enhance forecasting performance. These variables, derived from the time series of contacts to defaulted clients and client reimbursements to the bank, help all algorithms better identify debtors with different repayment ability and/or commitment, and in general those with different recovery potential.