Resilience Of Banking System Research Articles

The impact of climate change on the resilience of banking systems in selected Sub-Saharan economies

Climate change is seen as a peril to the overall financial system, yet this revelation is in its infant stage. On that note, this study investigates the impact of climate change shocks on banking system resilience in selected Sub-Saharan economies. The study relies on a quantitative research method by first employing a Generalized Auto Regressive Conditional Heteroskedasticity (GARCH) (1,1) model to forecast the volatility series of the climate change variables. Further, the study applies the panel ARDL model to disseminate the long- and short-term associations between the obtained conditional variances of climate change parameters and banking system resilience within a time frame of 1996-2017 for 29 selected economies. The results show that banking systems in SSA are resilient to temperature shocks in the long-term. However, the study finds that the banking systems in SSA are not resilient to both precipitation and greenhouse gas shocks in the long-term. For the short-term impact assessment, the study finds that banking systems in SSA are resilient to only precipitation shocks. The study concludes that banking sectors in SSA should vigorously conduct stress-testing on climate-related financial risks and also design forward-looking strategies as well as climate change risk management procedures in the wake of climate change events.

Cascading bankruptcies under simultaneous sectorial shocks: Theory and application to the Tunisian banking sector

AbstractThis paper proposes a theoretical framework modelling the effect of simultaneous sectorial shocks on the banking system resilience, in presence of overlapping portfolio risk. A sectorial shock decreases the value of banks' assets and solvency. We show that beyond a determined threshold, the regulator (central bank) shall intervene in order to avoid that simultaneous sectorial shocks lead to bankruptcies in a cascading process. The model is simulated in the context of the Tunisian banking system for a variety of extreme macroeconomic conditions (economic recession and inflation). The simulations show that the simultaneous shocks to industry, commerce and real estate sectors might lead to the bankruptcies of one to 10 banks among the 23 Tunisian banks via the cascading contagion channel, in the absence of a prompt and adequate intervention by the regulator.

Inflation targeting and its spillover effects on financial stability in emerging market economies

In this paper, we study whether adoption of inflation targeting monetary policy framework has spillover effects on financial stability in emerging market economies. Working with data for 64 emerging market economies, we develop financial stability and sector specific stability indices and identify the effect using dynamic panel data models in difference-in-difference framework. We find significant positive spillover effects of inflation targeting adoption on banking system resilience and external capital inflows arising from improved transparency and accountability of the central banks. Based on the results, the paper recommends to emerging market economies which are currently under inflation targeting lite regime, to adopt full-fledged inflation targeting monetary policy.

Assessing the interconnectedness and systemic risk contagion in the Chinese banking network

PurposeIn this paper, the authors use the balance sheet data to investigate the interconnectedness and risk contagion effects in China's banking sector. They firstly study the network structure and centrality of the interbank network. Then, they investigate how and to what extent the credit shock and liquidity shock can lead to the risk propagation in the banking network.Design/methodology/approachReferring to the theoretical framework by Haldane and May (2011), this paper uses the network topology theory to analyze the contagion mechanism of credit shock and liquidity shock. Centrality measures and log-log plot are used to evaluate the interconnectedness of China's banking network.FindingsThe network topology has shown clustering effects of large banks in China's financial network. If the Industrial and Commercial Bank of China (ICBC) is in distress, the credit shock has little impact on the Chinese banking sector. However, the liquidity shock has shown more substantial effects than that of the credit shock. The discount rate and the rollover ratio play significant roles in determining the contagion effects. If the credit shock and liquidity shock coincide, the contagion effects will be amplified.Research limitations/implicationsThe results of this paper reveal the network structure of China's interbank market and the resilience of banking system to the adverse shock. The findings are valuable for regulators to make policies and supervise the systemic important banks.Originality/valueThe balance sheet data of different types of banks are used to construct a bilateral exposure matrix. Based on the matrix, this paper investigates the knock-on effects of credit shock triggered by the debt default in the interbank market, the knock-on effects of liquidity effects, which is featured by “fire sale” of bank assets, and the contagion effects of combined shocks.

UKRAINE’S MONETARY POLICY EFFECTIVENESS UNDER WAR

Introduction. Notwithstanding the Ukrainian banking system's resilience under war, there are devaluation and inflation pressures. In turn, monetary policy is found to be vital to combat drastic GDP decline and FX reserve depletion. Materials and methods. In an attempt to examine the effectiveness of the NBU's (National bank of Ukraine) monetary policy, the article employs comparative and statistical analysis of its instruments based on data regarding dynamics of key and other interest rates (deposits, loans, certificate of deposits, refinancing, DGBs), volumes of foreign exchange interventions and international reserves, DGBs. Results and discussion. This paper summarises the fundamental changes in monetary policy since the beginning of the full-scale war. The findings demonstrate a shift from the policy priority of inflation targeting and a freely floating exchange rate in favour of monetary financing of the budget deficit. At the same time, the devaluation of the national currency is restrained mainly at the expense of international credit and grant funds, which makes it possible to cover the losses of the NBU's FX reserves to support the exchange rate and carry out additional money issuance. The results show that under the war, the NBU's monetary policy is effective in limiting devaluation processes due to the timely introduction of a fixed exchange rate, strengthening of currency restrictions and their further adjustment. However, due to the increase in the discount rate and the corresponding increase in interest rates on certificates of deposit and refinancing and a slight increase in deposits, DGBs did not restrain inflation due to the lack of alternative monetary financing of the budget deficit. Further focus exclusively on the inflation targeting regime does not meet the current tasks of monetary policy and thereby reduces its effectiveness. The current budget dependence on monetary financing requires optimising monetary expansion measures in order to flow the issuing money from the military to the consumer market. Conclusions. The effectiveness of inflation targeting with limited monetary policy transmission indicates that the NBU should focus on other goals equally crucial to maintaining price stability, such as limiting exchange rate fluctuations and monetary financing for economic growth. In post-war recovery, the monetary policy direction solely on inflation targeting will remain inappropriate, given the mainly non-monetary factors of inflation.

ВПЛИВ ВАЛЮТНОГО КАНАЛУ ТРАНСМІСІЙНОГО МЕХАНІЗМУ ТА ВАЛЮТНОЇ ПОЛІТИКИ НА ЕКОНОМІЧНИЙ РОЗВИТОК

The article examines the peculiarities of the functioning of the currency channel of the monetary transmission mechanism of the central bank and its impact on the economic development of Ukraine in 2005-2020. The study was conducted on the basis of the use of linear regression models and the calculation of relevant indicators that characterize the reliability of the proposed models. The main economic parameters on which the dynamics of the hryvnia exchange rate has the greatest influence are determined and the methods of assessing the efficiency of the monetary channel currency transmission channel are improved. Based on the analysis and quantitative assessment of the impact of the weighted average exchange rate of hryvnia to the US dollar on the dynamics of the monetary base, monetary aggregates, lending rates, the base interest rate of the National Bank of Ukraine and the yield on short-term domestic government bonds, the main economic tendencies and links in the mechanism of functioning of the currency channel of monetary transmission were defined. In order to assess the impact of the currency channel on the main macroeconomic indicators, the impact of the dynamics of the hryvnia exchange rate on the growth rate of real GDP, inflation, the level of monetization of the economy and financial dollarization was determined. It is substantiated that the appreciation of the hryvnia exchange rate against leading currencies significantly restrains the growth rate of real GDP and contributes to rising inflation, which requires additional measures by the NBU to improve currency regulation and control. Based on the generalization of the NBU practice, the main directions are identified and a it was developed the system of measures to improve the efficiency of the monetary channel of the monetary transmission mechanism based on increasing the banking system's resilience to internal and external shocks, maintaining relative exchange rate stability and low volatility, ensuring effective foreign exchange market management, maintaining the balance of payments, as well as improving the efficiency of currency regulation and the implementation by the central bank of a prudent monetary policy that ensures the effective transmission of monetary impulses from the central bank to the real sector of the economy.

Improving the Resilience of Banking System in Small Open Economy: Is Macroprudential Policy Efficient?

Research background:Although macroprudential instruments increase financial stability, it is necessary to test how they affect the overall economic recovery after a global financial crisis. In the post-crisis period, the real sector needed a strong injection of capital in order to be able to start recovery and to encourage economic growth. At the same time, most of the countries introduced strict regulatory measures that strengthen bank capital and the liquidity base. From the standpoint of the financial sector stability, these measures contributed to the overall financial stability, but at the same time, these measures hold up the bank credit activity.Purpose of the article:This paper analyses the impact of macroprudential instruments on the bank credit activity toward the non-financial sector. The analysis is made by using the Granger Causality Test and the ARLDS Bounds Test.Methods:The research was conducted for the period of 2000 – 2019, based on the data of the Croatian National Bank and the Croatian Bureau of Statistics using logarithmic quarterly data. The analysis is made by using the Granger Causality Test and the ARLDS Bounds Test.Findings & Value added:The results confirm the thesis that additional macroprudential measures decrease the bank credit activity toward the real sector, which slows down the real sector recovery and extends the downturn in the business cycle. On the other hand, the macroprudential measures increase the financial stability of the whole economy, which is positive for future investments and recovery of the real sector.

Banking system resilience: an empirical appraisal

Purpose The purpose of this paper is to empirically appraise the health of banking systems by applying a new theoretical framework based on resilience and stability simultaneously. In line with complex system theories, the authors will consider the dynamics of the banking system as a whole, analysing not only banks individually but also the broad environment in which they operate. For doing so, the authors propose a composite indicator (CI) for analysing the resilience and stability of banking systems of developed countries. The main purpose of the indicator is not to make predictions on future banks’ behaviour, but rather to use it as a tool for appraising the overall health of the most salient banking systems. Design/methodology/approach The authors have designed a theoretical framework of resilience and stability taking into account the review of previous literature. The authors have identified the main factors underlying these two concepts that can be appraised as complementary targets. The authors have applied multiple factor analyses to identify the main determinants of banks’ resilience and stability, and the authors have constructed a CI giving different weights to the relevant dimensions previously identified. The authors have tried different model specification and the authors have chosen the simplest model that render better empirical results. The authors construct the resilience and stability indicator for the group of G7 countries, Spain and Portugal, from 2004 up to 2015. Findings First, resilience–stability indicators for the group of countries analysed reveal quite different patterns in the aftermath of the financial crises. While some countries have improved its relative position within the ranking, the authors find others evolving just in the opposite direction. Second, the relative position of countries in terms of the resilience–stability indicator allows the authors to identify Canada and the USA as examples of best practices. Third, by analysing countries individually the authors will be better able to identify potential weakness and areas for improvement in each case. Practical implications The evolution of the resilience and stability indicator will serve as an early warning system for policy makers and supervisors in identifying signs of weakness, as well as a useful tool to identify the best practices. Furthermore, this indicator will allow to better assessing the potential vulnerability of banking systems in the advent of a forthcoming crisis. Therefore, this measurement should not be interpreted as an absolute value but as a warning signal of potential weakness in each case. Originality/value The main contribution of this paper to the existing literature is that it introduces a new reconceptualization of the health of the banking system in line with complex theories. The theoretical background is based on a comprehensive framework of resilience and stability as complementary targets. The CI summarises into a single figure a multidimensional concept like resilience and stability. The variables that the authors have used for the construction of the indicator have been validated by applying multiple factor analysis. The authors have empirically appraise the resilience and stability of a group of advanced economies that encompass the group of the more developed countries in the world and the two European cases that have receive financial support in order to see if there are remarkable differences.

Assessing the Costs and Benefits of Capital-Based Macroprudential Policy

We develop an integrated Early Warning Global Vector Autoregressive (EW-GVAR) model to quantify the costs and benefits of capital-based macroprudential policy measures. Our findings illustrate that capital-based measures are transmitted both via their impact on the banking system's resilience and via indirect macro-financial feedback effects. The feedback effects relate to dampened credit and asset price growth and, depending on how banks move to higher capital ratios, can account for up to a half of the overall effectiveness of capital- based measures. Moreover, we document significant cross-country spillover effects, especially for measures implemented in larger countries. Overall, our model helps to understand how and through which channels changes in capitalization affect bank lending and the wider economy and can inform policy makers on the optimal calibration and timing of capital-based macroprudential instruments.

An Integrated Macroprudential Stress Test of Bank Liquidity and Solvency

We develop a macroprudential stress test to assess the resilience of banking systems. The proposed approach integrates liquidity risk and solvency risk and provides a convenient method to estimate the change in both of them based on the evolution of financial distress within the banking system. We estimate this evolution of financial distress using a new measure of systemic distress that incorporates microprudential as well as macroprudential risks in the banking system network. The proposed stress test provides output metrics that capture idiosyncratic as well as systemic economic risks at the level of an individual bank and the banking system as a whole. The empirical application of the stress test framework to the U.S. banking system shows how it can be effectively used to identify the systemic vulnerability of individual banks and the resilience of the system as a whole to economic risks. It also shows how the proposed approach can be effective for monitoring and assessing systemic interdependencies among banks.

Banking System Resilience and Financial Stability - An Evidence from Indian Banking

This paper while emphasising 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 examines banking sector stability by constructing a micro vector auto regressive (VAR) model and establishes the significance of the interrelatedness of the bank-specific variables such as; Liquidity, Asset Quality, Capital Adequacy and Profitability. Further, the paper offers a substantive review of literature on the concept of financial stability in backdrop of the ongoing definition debate for financial stability. A significant contribution of this study is that, by employing the most appropriate key determinants of banking sector soundness, the paper constructs a recursive micro VAR model to explain the interdependence and comovement of the banking stability covariates in a bank-dominated financial system that aids in understanding the dynamics of financial stability of emerging economies

The dynamics of financial stability in complex networks

We address the problem of banking system resilience by applying off-equilibrium statistical physics to a system of particles, representing the economic agents, modelled according to the theoretical foundation of the current banking regulation, the so called Merton-Vasicek model. Economic agents are attracted to each other to exchange ‘economic energy’, forming a network of trades. When the capital level of one economic agent drops below a minimum, the economic agent becomes insolvent. The insolvency of one single economic agent affects the economic energy of all its neighbours which thus become susceptible to insolvency, being able to trigger a chain of insolvencies (avalanche). We show that the distribution of avalanche sizes follows a power-law whose exponent depends on the minimum capital level. Furthermore, we present evidence that under an increase in the minimum capital level, large crashes will be avoided only if one assumes that agents will accept a drop in business levels, while keeping their trading attitudes and policies unchanged. The alternative assumption, that agents will try to restore their business levels, may lead to the unexpected consequence that large crises occur with higher probability.

Banking System Resilience and Financial Stability - An Evidence from Indian Banking

This paper while emphasising 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. Further, an attempt is made to define financial stability in backdrop of the ongoing definition debate for financial stability. 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.

Australian Banking System Resilience: What Should Be Expected Looking Forward? An International Perspective

This paper reviews Australian banks’ performance from an international perspective, with a focus on changes in capital and liquidity risk. The paper analyses the extent of any vulnerability that might arise from a potential deterioration in the funding markets and discusses whether liquidity rules, such as those being considered by the Basel Committee on Banking Supervision, may help reduce banks’ liquidity risks and improve financial stability.

Australian Banking System Resilience: What Should Be Expected Looking Forward? An International Perspective

Australian Banking System Resilience: What Should Be Expected Looking Forward? An International Perspective