Banking Stability Index Research Articles

Assessing financial stability in Southeast Europe (SEE): An econometric perspective

In the last decade, the global financial landscape, including Southeast Europe's eleven diverse economies, has been significantly impacted by multiple financial crises. These crises have led to economic downturns, unemployment spikes, and unstable financial structures. This study investigates financial stability and risks in Southeast Europe from 2012 to 2021, focusing on Albania, Bosnia and Herzegovina, Bulgaria, Cyprus, Montenegro, Greece, Croatia, North Macedonia, Kosovo, Serbia, and Turkey. It aims to identify factors influencing financial stability amid distinct economic challenges posed by global crises. Utilizing the Financial Stability Index (FSI) as the dependent variable, alongside the Banking Stability Index (BSI), inflation rate, GDP, and public debt as independent variables, the research employs data from the World Bank and The Global Economy. Analysis through STATA software and methods like OLS, OLSR, FE, RE, and GMM reveals the critical role of banking in financial stability, with a robust BSI positively impacting it, while inflation poses additional risks. The study advises Southeast European policymakers to prioritize banking stability and economic growth to enhance financial stability, while also managing inflation and public debt to reduce future financial risks. Our findings suggest that a one-unit increase in the BSI is associated with a 3.35-unit increase in the FSI, highlighting the banking sectors significant influence on regional financial stability. High public debt levels, conversely, are found to correspond with reduced financial stability, with a strong negative correlation of -0.634 between FSI and public debt. These findings underscore the importance of robust banking systems and sound fiscal policies in maintaining financial stability in the face of economic adversities.

Measuring Financial Stability in Curaçao and Sint Maarten

Abstract Assessing the solidity of the financial system may be cumbersome since there is no single comprehensive indicator to measure financial stability. This paper presents two aggregate measures that can be deployed as early warning measures of financial stability for the monetary union of Curaçao and Sint Maarten, mainly focusing on the banking sector. As this sector comprises most of the monetary union's assets, the constructed measures are mainly focused on this sector. Following financial stability literature, we apply empirical normalization and aggregation to construct an Aggregate Financial Stability Index (AFSI) and a Banking Stability Index (BSI). These indices have been gaining popularity among central banks to assess financial stability on top of conventional measures such as Financial Soundness Indicators (FSIs) and credit cycles. The AFSI comprises banking-sector indicators, macro-financial developments, and international trends, while the BSI captures dimensions of banks' financial soundness. We benchmark the AFSI and the BSI to the period of deteriorating macro-financial conditions induced by the coronavirus crisis, and the development in the indices was as expected. Based on the robustness analyses conducted, we deem the constructed indices plausible for measuring and tracking financial stability within the monetary union of Curaçao and Sint Maarten. JEL classification numbers: C20, C45, E58, F15, G21. Keywords: Early warning indicators, Financial stability, Financial soundness indicators.

The Impact of Financial Development and Macroeconomic Fundamentals on Nonperforming Loans among Emerging Countries: An Assessment Using the NARDL Approach

The relationship between financial development indicators and non-performing loans (NPLs) has garnered significant attention, especially in emerging countries. The puzzle of whether financial sector development increases or decreases Non-performing Loans (NPL)s has not been resolved to the satisfaction of the curious mind. This research attempts to answer the above question by studying the asymmetric and symmetric association between financial sector development and NPLs, by utilizing the novel non-linear autoregressive distribution lag (NARDL) and the linear autoregressive distribution lag (ARDL) approach. Moreover, to make the study inclusive, we have added a series of proxies to measure financial sector development and macroeconomic vulnerabilities. Our main findings confirm that financial sector development and NPLs move together in the long run, and there is significant evidence of the asymmetric relationship. We infer that NPLs react differently to the negative and positive shocks of financial development and macroeconomic variables both in the short and long run. In the long-run positive shocks in financial intermediation, banking efficiency, banking depth, banking stability index, and banking non-interest income significantly impact the NPLs in emerging countries. The positive shocks of financial sector development (financial intermediation and size of banks) increase NPLs in emerging countries and vice-versa. Furthermore, regarding the macroeconomic variables, the positive shock of inflation, unemployment, and interest rate positively affect NPLs. The empirical analysis also concludes that in the long-run foreign bank presence is an insignificant factor affecting NPLs in the selected countries. This study emphasizes that, unlike the linear model, the non-linear model provides a more realistic and robust result by highlighting hidden asymmetries, which will help policymakers make appropriate strategic decisions.

Dual Banking System Stability Index in the Shadow of COVID-19 Pandemic

The financial system is categorized as stable if there is no excessive volatility from financial pressures or crises. The IMF indicates that the crisis is not only related to one element but more than two or three elements of the crisis. The banking system's stability is measured by the banking stability index, gauging the effectiveness of monetary policy and financial risk. This study aims to measure the stability of the Indonesian banking system in the dual banking system model. The indicator to measure banking stability used the Z-score statistic based on fluctuations of Return on Assets for each type of bank. The Markov Switching Vector Autoregressive (MSVAR) model method was used to analyze the volatility of banking stability. Independent variables used included credit risk (NPL), Loan to Deposit Ratio, Liquidity Risk, Net Interest Margin, Capital Adequacy Ratio, Money Market Rate, Inflation, Gross Domestic Product, Federal Reserve rate, and Exchange Rate. The results of the regime switch analysis concluded that Indonesia's banking stability experienced a structural break due to the effects of the pandemic in April 2020. Based on the average Z-score value, the Islamic banking stability index was higher than conventional banking. In other words, Islamic banking was more stable than the conventional banking system. The Islamic banking stability index (iZscore) was significantly influenced by the level of Net Operating Margin, Financing to deposit ratio, Potential Loss Profit Sharing, Islamic Money Market Rate, and Exchange Rate. However, non-performing financing did not affect Islamic banking stability since the profit-sharing system implemented by Islamic banking stability was more influenced by the ratio of potential loss and profit-sharing system.

The Relationship Between Household Credit and Banking Stability in Malaysia: Panel Evidence

This study investigates the relationship between household credit and banking stability in Malaysia using a sample of 37 commercial banks spanning the period from 2008 to 2015. In analyzing household credit’s influence on the Malaysian banking sector’s stability, household credit was categorized into two components, namely mortgage and consumer credit. The Banking Stability Index (BSI) for each bank is constructed using 15 bank-specific variables and some macro-economic variables. The determinants of the BSI are estimated using a static panel data technique. The fixed-effects regression results showed a statistically significant negative relationship between both forms of household credit (mortgage credit and consumer credit) upon the banking sector’s stability. The finding signals that understanding the link between household credit and the Bank Stability Index is crucial to the policymakers and the banks’ management in closely monitoring household credit, particularly mortgage and consumer credit.

ANALISIS PENGARUH FAKTOR-FAKTOR FUNDAMENTAL KINERJA BANK DAN MAKRO EKONOMI TERHADAP STABILITAS PERBANKAN DI INDONESIA

This study aimed to analyze the influence of fundamental factors and macro-economic performance of the bank to the stability of banks in Indonesia during the period 2011-2017. Fundamental factors indicated by the LDR, NPL and CAR. Meanwhile, macroeconomic factors indicated by variable Bi rate and inflation. Banking stability is reflected by the banking stability index. This study uses a quantitative approach to the panel regression analysis model data by using the tools of the computer program eviews 10. The results of these empirically demonstrated that simultaneous, variable factors of fundamental and macroeconomic factors have a significant influence on the stability of perbankan. While partially, the results of this study indicate that the variable LDR, NPL, Bi rate and inflation significant influence on the stability of the banking and CAR variables not significant effect on the stability of the banking system.

Deposit structure, market discipline, and ownership type: Evidence from Indonesia

In this paper, we extend the literature on the discipline imposed by depositors on banks by disentangling the impact of macro risk and micro risk. We also take advantage of a unique dataset in which depositors are split into different categories of deposit size in different types of banks (bank ownership structure). We consider the Banking Stability Index, which is used by the Indonesia Deposit Insurance Corporation as a dashboard to monitor banking stability at the country level as well as individual stability measures such as the Z-score. Using monthly data from 2005 to 2013, our findings show that both macro and micro levels of risk are considered by depositors to discipline banks. Large uninsured depositors are more effective at disciplining banks, highlighting the credibility of the insurance system that is in place. Bank ownership type also matters in explaining the difference in market discipline by depositors.

Measuring systemic risk via GAS models and extreme value theory: Revisiting the 2007 financial crisis

The advent of the 2007 financial crisis showed that risk measures formulated so far did not perform as expected. This poor performance may bring serious consequences for the system stability, possibly causing very adverse effects on the banking and insurance industries. In this paper we propose a new systemic risk measure based on extreme value theory, the Financial System Dependence Index (FSDI) which uses the spread of Credit Default Swaps (CDS) of financial institutions as the data source. Furthermore we add time dynamics for this measure, which is described by a GAS model. We motivate the quality of FSDI by comparing it to the risk measure proposed by Segoviano and Goodhart (2009), the Bank Stability Index (BSI), through a horse race based on the ideas of Rodríguez-Moreno and Peña (2013). In our empirical analysis, FSDI outperformed BSI.

The Effect of Using Securitization on the Stability and the Risk of Banks: Evidence From Emerging Countries

The purpose of this study is to investigate whether securitization affect financial stability and risk of banks issued from emerging countries during the period 2007 to 2017.To reach this end we conduct dynamic panel data econometrics with Generalized Methods of Moments (GMM) system on 20 banks issued from emerging countries. The dependent variables are defined by “Bank Stability Index” (BSI) and “logarithm of z-score” and ratios of total risk and credit risk. The independent variables are split into variable of interest (securitization ratio), bank-specific variables (capital adequacy, profitability, on-balance sheet interest rate risk, financial margin, income diversification, liquidity and bank size) and country-specific variables (GDP and inflation).As major conclusion, we find that using securitization - by banks from emerging countries – enhances their financial stability and minimizes their total risk and credit risk.As a practical contribution to this work, we suggest that banks' decision-makers in emerging countries increase their use of securitization in order to benefit from its beneficial effect on their financial stability and risks.

Bank Stability Index for Selected Countries with Dual Banking Systems

Bank Stability Index for Selected Countries with Dual Banking Systems

Islamic Banks’ Financial Stability and Its Determinants: a Comparison Study With Conventional Banks in Indonesia

<p><em>The research aimed to analyze the stability of Islamic banking industry and its determinants in Indonesia. The same analysis was also done to the conventional banking industry as Indonesia practices dual banking systems. Using monthly data on Indonesian Banking Statistics for 2008-2013, this research implemented the Banking Stability Index (BSI) model for predicting the bank's stability. The analysis began with measuring BSI then using VECM to examine the effect of variables on BSI. </em><em>The result showed that the BSI of both banking system was exhibiting the moderate level of stability though Islamic banking is </em><em>more stable and safe way of financing</em><em> than conventional banking. The shocks of inflation, exchange rate, efficiency, income diversity, liquidity, and Industrial Production Index responded positively by Islamic Bank' stability, while interest rate and market share responded negatively. In another hand, conventional bank' stability responded positively the shock of the exchange rate, income diversity, interest rate, liquidity, and market share, while other variables responded negatively. The results of shocking variables strongly indicated that the conventional banking is more vulnerable than Islamic banking. Islamic banking looked tend to the shock resistance and less volatile. This conclusion, however, might be still questioned as the BSI was not designed specifically for Islamic banking. </em><em>Therefore, constructing an Islamic BSI (under Islamic banking characters) was important to measure the banking stability more appropriate and to develop a proper early warning system for Islamic banking industry.</em></p>

The evaluation of stability of Czech and Slovak banks

Research background: Commercial banks could affect the stability of the whole banking system due to the way they carry out their business activities. The supervision authorities play a key role in protecting banking stability by ensuring banks´ resilience to shocks, ability to recover their position in response to crisis and ultimately the supervision authorities help prevent failure of these banks. Therefore, in recent years? researchers have been trying to define conditions that could guarantee stability of banks.
 Purpose of the article: This paper aims to describe the methodology used to measure banking stability, namely banking stability index (BSI) and Z-score. In the first part, we present the literature review, then we try to assess the stability in the condition of the Czech Republic and Slovakia during the period 2006?2016.
 Methods: The BSI is constructed according to the methodology presented by Ghosh (2011), taking into account the main components, which are described by the set of financial indicators of banks.
 Findings & Value added: Results showed that the average BSI in the whole sample moved from 0.20454 (in 2015) to 0.2486 (in 2007). The results according to countries have showed that the tendency of development in the Czech and Slovak banking sector was the same. At the beginning of the analyzed period, the Slovak banks were more stable compared to Czech ones. Since 2009 the situation has been different, where the Czech banks could be considered as more stable compared to Slovak ones. The tendency of development of Z-score in both countries could be considered as the same, without the 2009 year, when the Czech banks significantly strengthened their capitalization, which influenced the development of Z-score. The results of correlation analysis between Z-score and BSI pointed to the fact that there was no high correlation between these two measures, therefore it is appropriate to use both methodologies for stability evaluation.

The evaluation of stability of Czech and Slovak banks

Research background: Commercial banks could affect the stability of the whole banking system due to the way they carry out their business activities. The supervision authorities play a key role in protecting banking stability by ensuring banks´ resilience to shocks, ability to recover their position in response to crisis and ultimately the supervision authorities help prevent failure of these banks. Therefore, in recent years’ researchers have been trying to define conditions that could guarantee stability of banks.
 Purpose of the article: This paper aims to describe the methodology used to measure banking stability, namely banking stability index (BSI) and Z-score. In the first part, we present the literature review, then we try to assess the stability in the condition of the Czech Republic and Slovakia during the period 2006–2016.
 Methods: The BSI is constructed according to the methodology presented by Ghosh (2011), taking into account the main components, which are described by the set of financial indicators of banks.
 Findings & Value added: Results showed that the average BSI in the whole sample moved from 0.20454 (in 2015) to 0.2486 (in 2007). The results according to countries have showed that the tendency of development in the Czech and Slovak banking sector was the same. At the beginning of the analyzed period, the Slovak banks were more stable compared to Czech ones. Since 2009 the situation has been different, where the Czech banks could be considered as more stable compared to Slovak ones. The tendency of development of Z-score in both countries could be considered as the same, without the 2009 year, when the Czech banks significantly strengthened their capitalization, which influenced the development of Z-score. The results of correlation analysis between Z-score and BSI pointed to the fact that there was no high correlation between these two measures, therefore it is appropriate to use both methodologies for stability evaluation.

The evaluation of banking stability in the European Union countries

Successful development of the economy is based on the effective and stable performance of credit institutions. This paper discusses some of the existing efforts to evaluate stability in the financial or banking system and brings attempts to construct the banking stability index (BSI), taking into account indicators of the financial strength of banks and major risks affecting banks in the banking system. The BSI is then used for evaluation of banking stability in the European Union (EU) countries. Results showed that in 2014 countries with the most stable banking sectors were Luxembourg and Estonia. On the opposite end of the scale were banking sectors in Spain, Portugal and Greece. The outcome of the study showed a decline of the average banking stability in EU countries during the period of 2005–2008 and its improvement since 2009. The improvement in last year's was positively affected mainly by the development of the capital adequacy.

The Evaluation of Banking Stability in the European Union countries

Successful development of the economy is based on the effective and stable performance of credit institutions. This paper discusses some of the existing efforts to evaluate stability in the financial or banking system and brings attempts to construct the banking stability index (BSI), taking into account indicators of the financial strength of banks and major risks affecting banks in the banking system. The BSI is then used for evaluation of banking stability in the European Union (EU) countries. Results showed that in 2014 countries with the most stable banking sectors were Luxembourg and Estonia. On the opposite end of the scale were banking sectors in Spain, Portugal and Greece. The outcome of the study showed a decline of the average banking stability in EU countries during the period of 2005–2008 and its improvement since 2009. The improvement in last year's was positively affected mainly by the development of the capital adequacy.

Stability Measurement of Dual Banking System in Indonesia: Markov Switching Approach

Various macro and microeconomic shocks that occur during this time suggest the potential for financial instability. This study attempts to analyze the influence of macro and microeconomic variables of the dual banking stability in Indonesia and compares the stability level of both banking system by using two similar stability measurement models namely the Z-score and Banking Stability Index. The method used in this is a Markov Switching VAR. The results of this study described through two analyze: First, the calculation index of financial stability with Z-score and BSI. Second, results of Markov-Switching prove that the sharia banking system has a higher level of stability compared to the conventional banking system. It means sharia banking is more stable than conventional ones. DOI: 10.15408/aiq.v10i1.5867

Measuring the Stability of Indian Public Sector Banks

This study aims to construct a Bank Stability Index for public sector banks of India for the period 2011-12 to 2015-16. The purpose is to rank the public sector banks in terms of their stability in the banking industry. The overall stability index is based on five dimensions including capital adequacy, asset quality, profitability, liquidity and efficiency as suggested in the Report on Financial Stability 2016 of India’s central bank. Both equal and unequal weighted methods have been employed for the calculation of an index. The empirical findings reveals that some of dimensions are playing relatively important role in determination of stability. Study found that the overall stability of banks increased sharply after 2013 and it reaches at maximum in 2014 then after it started to decline and continued to decline. Study also reveal that the stability of SBI and its associate banks have improved.

Bank Stability Measures for Dual Banking System

Bank stability is of paramount importance in the growth of the economy, sustainability and going concern of the financial sector. Thus, it places high reliance on the measures to indicate the stability of the financial institution. There are many indicators used as measures for bank stability. However, the recent Global Financial Crisis showed that despite reports of ‘healthy’ financial institution prior to crisis, these institutions suffered many problems including liquidity, during the crisis. Thus, this led to confusion on reliance of important components of a healthy financial institutions as indicators, leading to loss of confidence on the overall stability of the financial system. Therefore, there is an urgent need for review of the current measures of bank stability that look at the indicators used as measures of banking stability across different jurisdictions. This study aims to develop bank stability index as a measure of bank stability in countries with dual banking system. This methodology rely on qualitative review of literatures and report produced by central banks of different jurisdictions. © 2017 American Scientific Publishers All rights reserved.

Banking Stability for Financial Stability

This paper while emphasizing the importance of the concept of financial stability in wake of recent global financial crisis in particular and other (banking and financial) crises in general attempts to highlight the significance of the soundness of banking sector in emerging economies where banking sector constitutes a lion’s share in the financial system. This study investigates banking stability by structuring a recursive micro panel Vector Auto Regressive (VAR) model and corroborates the significance of the interrelatedness of the bank-specific variables such as; Liquidity, Asset Quality, Capital Adequacy and Profitability. This paper while underscoring the prominence of financial stability in wake of recent global financial crisis in particular and other (banking and financial) crises in general argues that the soundness of banking sector in banking dominated financial system of emerging economies is of great significance in ensuring financial stability. Further, the paper offers an in-depth review of literature on financial stability in backdrop of the ongoing definition debate for financial stability. A significant contribution of this study is in establishing that liquidity in the banking dominated financial system is reciprocally related with asset quality, capital adequacy, and profitability of constituent banks by employing a robust panel data drawn from 56 leading banks for a period of 12 years. Another contribution of this study is that, employing the most appropriate key determinants of banking sector soundness, the paper models a simple and basic axiomatic form of banking stability index (BSI) in the context of an emerging economy banking sector.

The Consequences of Post-Crisis Regulatory Architecture for Banks in Central Eastern Europe

In response to the financial crisis of 2008, the global banking industry has been undergoing fundamental regulatory changes, imposed by the Basel III Agreement, the 2010 US Dodd-Frank Act and the introduction of a new European supervisory structure. This paper analyses the possible long-term impact of this new regulatory framework on the banking sectors of CEE-5 countries. The aim of this paper is to contribute to the discussion on the anticipated long-term impact of the new regulatory environment for bank stability and efficiency, with a focus on host countries from Central and Eastern Europe. The main research question is whether the post crisis regulatory and supervisory architecture, based on a new macro and micro institutional framework, will have a positive impact on banks in CEE. To answer these questions, we analyse the condition of CEE-5 banking sectors. In particular, we are looking how banks in CEE-5 reacted to two different periods: the pre-crisis period of a dynamic economic and credit market growth and the period of global economic and financial collapse (2008), using DEA methodology, measures of market competitive conditions and bank stability index Z-score.