Stability Of Banking System Research Articles

Do Malaysian Banks Manage Earnings Through Loan Loss Provisions?

The 1988 Basle regulations are meant to synchronise banking regulations worldwide and add to the stability of the global banking system. Basle II, due to be released in 2006, addresses some of the flaws in the 1988 accord. However, both versions do not close a loophole for managing earnings through discretionary adjustments of the loan loss provisions. Some researchers have found indications of income smoothing through loan loss provisions in banks, but others have concluded otherwise. All of these studies were conducted on banks outside of Malaysia. This study looks specifically at Malaysian banks, and uses a model based on bank‐specific and macroeconomic factors that are peculiar to Malaysia. It concludes that Malaysian banks do not smoothen income. The likely reason is that good governance in Malaysian banks is driven more by regulatory measures imposed by the authorities than stock market discipline. Thus bankers do not seem to be concerned with managing earnings to present a rosy picture to investors. However, from a macroeconomic perspective, stacking up loan loss provisions during good times will help to release more credit during downturns in economic cycles, helping to softwn the impact of recessions. Further research on whether Malaysian banks conduct capital management, to meet regulatory capital requirements, will help to shed more light on the behaviour of Malaysian banks.

Banking System Stability: A Cross-Atlantic Perspective

This paper derives indicators of the severity and structure of banking system risk from asymptotic interdependencies between banks%u2019 equity prices. We use new tools available from multivariate extreme value theory to estimate individual banks%u2019 exposure to each other (%u201Ccontagion risk%u201D) and to systematic risk. Moreover, by applying structural break tests to those measures we study whether capital markets indicate changes in the importance of systemic risk over time. Using data for the United States and the euro area, we can also compare banking system stability between the two largest economies in the world. Finally, for Europe we assess the relative importance of cross-border bank spillovers as compared to domestic bank spillovers. The results suggest, inter alia, that systemic risk in the US is higher than in the euro area, mainly as cross-border risks are still relatively mild in Europe. On both sides of the Atlantic systemic risk has increased during the 1990s.

Bond underwriting syndicates organized by commercial banks: evidence from prewar Japan

The purpose of this paper is to empirically examine the nature of bond underwriting syndicates organized by commercial banks. I use a unique data set from Japan during a prewar period when banks were permitted to underwrite corporate bonds. The paper shows that risk aversion led to a greater tendency for investment houses to form a syndicate than commercial banks. The evidence is consistent with the argument against universal banking that asserts that commercial banks will be exposed to underwriting risk, thereby potentially undermining the stability of banking system. J. Japanese Int. Economies 19 (3) (2005) 303–321.

(Deposit Insurance and Stability of the Banking System)

(Deposit Insurance and Stability of the Banking System)

Risk Assessment for Banking Systems

We propose a new approach to assess the financial stability of an entire banking system using standard tools from modern management in combination with a network model of inter-bank loans. Rather than looking at banks individually, we analyze at the level of the banking system as a whole. We apply our model to a unique dataset of all Austrian banks. We find that correlation in banks' asset portfolios dominates contagion as the main source of systemic risk. Contagion occurs rarely but can wipe out a major part of the banking system. Low bankruptcy costs and an efficient crisis resolution policy are crucial to limit the system wide impact of contagious default events. We compute the value at risk for a lender of last resort and find the necessary funds to prevent contagion to be surprisingly small. More diversification in the inter-bank market does not necessarily reduce the of contagion.

La solvabilité des banques japonaises : situation actuelle et enjeux

Japanese banks solvency : description and challenges Since 1990, Japanese banks have had serious financial problems. The large amounts of non performing loans and the decreasing value of the stock and real estate markets have caused heavy losses that have undermined the financial soundness of Japanese banks. Anyway, under the pressure of the financial authorities, the Japanese banking system has managed to survive without fundamental changes and the current restructuring process in which mega-banks are engaged has not been achieved yet. This article shows that the fiscal year 2003 may be crucial for the Japanese banking system. The level and the quality of its equity capital are getting dramatically lower. Capital adequacy ratios of megabanks are still above 8%, due to the decrease of balance sheets, but the stability of the Japanese banking system mainly relies on the regulations that provide public guaranties and fundings in case of need. JEL classifications : G21, G28, O53

Le traitement du risque de crédit dans l’Accord de Bâle II : une évaluation

Credit risk and the new Basel capital accord The new Basel capital accord implies a redefinition of prudential regulation, especially for credit risk. In this article, we show that Cooke ratio is unable to appreciate correctly credit risk profile of banking portfolio. By contrast, the future credit risk measure appears more reliable. In particular, IRB approach is a way to improve banks' credit risk perception and evolution. Convergence between economic capital and regulatory capital can be obtained. Nevertheless, IRB approach is deficient. So, prudential regulation efficiency, banking system and economic stability are questioned. JEL classifications : D82, C2, C28, L51

Lessons from the Russian Meltdown: The Economics of Soft Legal Constraints

On 17 August 1998, Russia abandoned its exchange rate regime, defaulted on its domestic public debt and declared a moratorium on all private foreign liabilities, which was equivalent to an outright default. The depth and speed of the Russian meltdown shocked the international markets, and precipitated a period of serious financial instability. Important lessons on issues of bank supervision and international stability can be learned by understanding the roots of such a crisis. The visible reason of the crisis was an unsustainable fiscal deficit coupled with massive capital flight, but what were their underlying causes? We argue that the structure of individual incentives in a context of capture of state decisions by special interests, compounded by a rouble overvaluation driven by exceptional international support, helps to explain the build–up of non–payment, theft and capital flight that led to the crisis. We offer an explicit model of rational collective non–compliance, cash stripping and rational collective non–payment which led to the fiscal and banking crisis and, ultimately, to a complete meltdown. In our view, the banking sector was already insolvent prior to the crisis, and contributed directly and indirectly to it. We conclude with a radical policy proposal for a stable banking system for Russia, appropriate for its current capacity for legal and supervisory enforcement. It is based on a segmented, narrow banking sector, concentration in commercial banking and a cautious extension of deposit insurance.

Does deposit insurance increase banking system stability? An empirical investigation

Based on evidence for 61 countries in 1980–1997, this study finds that explicit deposit insurance tends to increase the likelihood of banking crises, the more so where bank interest rates are deregulated and the institutional environment is weak. Also, the adverse impact of deposit insurance on bank stability tends to be stronger the more extensive is the coverage offered to depositors, where the scheme is funded, and where it is run by the government rather than the private sector.

Banking Crises Under Soft Legal Constraints Lessons from the Russian Meltdown

On August 17, 1998, Russia defaulted on its domestic public debt, declared a moratorium on the private banks' foreign liabilities which was equivalent to an outright default, and abandoned its exchange rate regime. The depth of the Russian meltdown shocked the international markets, and precipitated a period of serious financial instability. It is important to understand the roots of such a crisis to learn about possible lessons on both issues of bank supervision and international stability. While the visible cause of the crisis was an unsustainable fiscal deficit coupled with massive capital flight, the critical question concerns the origin of such circumstances. This paper argues that the structure of individual incentives in the Russian legal context, compounded by the exceptional support granted by international institutions to Russia, explains the cycle of nonpayment, capital flight and fiscal unbalances leading to the dramatic 1998 crisis. We offer an interpretative model of noncompliance, cash-stripping and rational collective nonpayment which led to the fiscal and banking crisis and ultimately to a complete meltdown. In our view, the banking sector was already insolvent prior to the crisis, and contributed directly and indirectly to it. The last section of the paper puts forward a radical medium-term policy proposal for a stable banking and payment system for Russia. Russia needs to create a basic foundation for savings and intermediation by asset restrictions and market segmentation, crude but effective rules used in all underdeveloped systems to restrain asset stripping and opportunism. Concretely, we propose a cautious extension of deposit insurance away from the monopolistic Sberbank and towards a narrow banking layer. The proposal also proposes measures to restore charter value in the commercial banking sector.

Deposit Insurance and Market Assessment of Banking System Stability: Evidence from Denmark

Deposit Insurance and Market Assessment of Banking System Stability: Evidence from Denmark

What Determines the Number of Bank Relationships? Cross-Country Evidence

We investigate the determinants of multiple-bank relationships using a new data set comprising 1079 firms across 20 European countries. We document large cross-country variation in the average number of bank relationships per firm, uncovering a richness in European financial systems that extends beyond the standard description of being “bank-dominated”. After controlling for a variety of firm-specific characteristics, we find that firms maintain more bank relationships, on average, in countries with inefficient judicial systems and poor enforcement of creditor rights. Firms also maintain more relationships in countries with unconcentrated but stable banking systems and active public bond markets. Journal of Economic Literature Classification Numbers: G21, C41.

Does Deposit Insurance Increase Banking System Stability?

This study analyzes panel data for 61 countries during 1980–97 and concludes that explicit deposit insurance tends to be detrimental to bank stability, the more so where bank interest rates are deregulated and the institutional environment is weak. Also, the adverse impact of deposit insurance on bank stability tends to be stronger when the coverage offered to depositors is extensive, when the scheme is funded, and when it is run by the government rather than by the private sector.

Does Deposit Insurance Increase Banking System Stability?

This study analyzes panel data for 61 countries during 1980-97 and concludes that explicit deposit insurance tends to be detrimental to bank stability, the more so where bank interest rates are deregulated and the institutional environment is weak. Also, the adverse impact of deposit insurance on bank stability tends to be stronger when the coverage offered to depositors is extensive, when the scheme is funded, and when it is run by the government rather than by the private sector.

Lessons from the free banking era in Switzerland: The law of adverse clearings and the role of the non-issuing credit banks

Free banking in Switzerland lasted from 1826 to 1907. Although the system was reasonably successful, the Swiss experience has been almost entirely neglected in the debate over free banking. In its more advanced state of development, the stability of the Swiss free banking system deteriorated, since (1) all assumptions underlying the so-called law of adverse clearings were more or less violated, and (2) the note-issuing banks were prevented by their non-issuing rivals from increasing their discount rates, even if some of them were faced with heavy losses of specie. In 1907, therefore, free banking had to be abandoned.

Opening up for foreign banks: How Central and Eastern Europe can benefit1

AbstractThis paper analyses the role of foreign banks in the Czech Republic, Estonia, Hungary, and Poland. With respect to their planned EU membership, these countries have to consider the full implementation of free trade in financial services. Generally, liberalizing the market access of foreign banks allows the production of financial services according to comparative advantage, it fosters competition, it promotes bank privatization, and it facilitates a transfer of know‐how into the emerging financial systems. The most important sequencing issue that arises is that the incumbent banks should have been recapitalized for their truly inherited bad loans before markets are opened up. In view of the reform progress that has already been made in the countries under review, abolishing remaining entry barriers is unlikely to put the stability of banking systems at risk while allowing the benefits of open markets to be exploited.

Why Does Bank Performance Vary Across States?

Since 1980, commercial bank earnings have varied widely across states. The authors find that much of this variation can be attributed to the differences in economic conditions, and they suggest that interstate branching should promote a more stable banking system by enabling greater geographic diversification of bank operations.

The Stability of the Japanese Banking System: A Historical Perspective

In this paper we study the stability of the Japanese banking system in the prewar period. First, we review the development of the Japanese banking system from the Meiji Restoration until the Second World War. It will be shown that government policy toward the banking industry changed drastically after the 1927 banking panic. Second, we examine the causes of bank closings in 1927. We test whether or not such bank closings were due to their unsound management, which was reflected in the structure of assets and liabilities and bank performance, using a qualitative model. Our empirical results conclude that bank closings occurred more for banks with unsound management and inefficient operations. J. Japan. Int. Econ., December 1993, 7(4), pp. 387–407. School of Political Science and Economics, Waseda University, 6-1 Nishiwaseda 1-chome, Shinjuku-ku, Tokyo 160, Japan; and University of Tokyo, Hongo, Bunkyo-ku, Tokyo, Japan.

WHAT SHOULD BANKS REALLY DO?: COMMENT

In the July 1992 Contemporary Policy Issues edition, Lawrence J. White (1992) argues that the inherently unstable character of the banking system requires that depositors be protected by various types of government intervention. The comment here outlines the opposite argument: government intervention destabilizes an inherently stable banking system. A framework developed in the comment provides the basis for criticizing White's general approach and policy proposals.

The Reform of Federal Deposit Insurance

In the first essay, Calomiris argues that the most desirable means by which to achieve banking system stability is to permit unlimited branch banking combined with the type of privately administered formal deposit insurance programs of antebellum Indiana, Ohio, and Iowa. In the second essay, Barth and Bartholomew argue convincingly that the major culprit in the S&L crisis is the existing structure of the federal deposit insurance system. They take the view that the Financial Institutions Reform, Recovery and Enforcement Act was seriously flawed for its failure to adequately restructure the federal deposit insurance system. Brumbaugh and Litan express the view that due to the widespread use of accounting onventions to conceal balance sheet weaknesses, the number and assets of market-value insolvent banks cannot be known with any certainty. Kane argues that government deposit insurers have hidden or unacknowledged objectives and that these objectives conflict with the presumed long term goals of protecting depositors of modest means and preventing runs in a cost-effective manner. Romer and Weingast demonstrate how politicians benefited by keeping taxpayers uniformed about the thrift crisis and by establishing and enforcing a policy of forbearance. Chirinko and Guill quantitatively examine how macroeconomic shocks affect depository institutions. They argue that major problems can be encountered unless approaches to deposit-insurance reform and regulatory reform explicitly and carefully consider the impacts of such macroeconomic shocks on these institutions. Kaufman observes that, since 1974, the Federal Reserve has provided lender of last resort (LLR) assistance to prolong the life insolvent banks deemed too large to fail (TLTF). He argues that the LLR assistance in recent years has not saved most banks but has provided uninsured depositors time to flee without losses. It has frequently been argues that accounting techniques have played a significant part in the interaction of depository institutions and federal deposit insurance regulation. The last two papers in this book focus on the attributes of market-value accounting.