Bank Risk Research Articles

DETERMINAN LOAN AT RISK: MITIGASI DAN PENGELOLAANNYA

The purpose of this study is to analyze and empirically prove the influence of company internal factors / Bank specific (capital and performance) and company external factors / macroeconomics (economic growth and inflation) on Loan at Risk (LAR), including mitigation and management models in state-owned banks. The research period is 2012 – 2021, the sampling technique is saturated sampling, all members of the population are used as samples. The results of the study show that the Loan at Risk of state-owned banks is influenced by performance, economic growth and inflation. Loan at Risk to be properly mitigated and controlled. The handling must be carried out in an integrated and sustainable manner by the business line (RM) and risk line (CRM), starting from current loans to bad loans, and assisted by technology (digitalization) so that the settlement or recovery can be faster and optimal

Risk contribution to deposit insurance: Evidence from commercial and cooperative banks in the Eurozone

This paper analyses how the risk of commercial and cooperative banks may affect the European Deposit Guarantee Scheme (EDIS) to assess the appropriateness of a differentiated contribution regime. Evidence shows that these institutions have different objectives, ownership structures and operational approaches that impact their risk profile. As a result, a single regulatory approach may not be appropriate and may place an additional burden on cooperative banks. Using a simulation model and a sample of banks representing 81% of deposits in the Eurozone between 2018 and 2021, we analyse risk, deposit insurance losses and financial coverage needs. We find that cooperative banks are less risky, generate fewer losses and should provide fewer resources compared to commercial banks. These findings are important to achieve a more equitable and efficient funding policy in the future development of the EDIS as the third pillar to complete the Banking Union.

Capital market opening and commercial bank risk: Evidence from “Shanghai–Hong Kong Stock Connect”

Based on the implementation background of the “Shanghai–Hong Kong Stock Connect” policy, this paper explores the impact of capital market opening on the commercial banks risk. The results show that the capital market opening has a positive impact on the commercial banks risk. Financial information quality and external information environment are important transmission mechanisms for the capital market opening to affect the commercial bank risk. The impact of capital market opening on the commercial bank risk is heterogeneous, and it has a stronger effect on the risk reduction of commercial banks with larger asset size and capital flow ratio. This study objectively presents the effect of the implementation of the “Shanghai–Hong Kong Stock Connect” policy, and provides empirical evidence for commercial banks to avoid the capital market risks they may face.

How real estate bubbles affect the systemic risk of financial institutions in the United Arab Emirates

The paper addresses a crucial gap in the literature by examining the interplay between real estate price bubbles and systemic risk in the United Arab Emirates (UAE) from 2006 to 2022. The paper employs a three-step testing procedure: bubble detection using the bootstrapped GSADF test, measuring systemic risk using Delta-CoVaR and MES measures, and assessing the impact of real estate bubbles on bank risk through panel data regression. Utilizing a sample of 17 conventional banks operating in the UAE, the study demonstrates that the interplay between real estate price bubbles and systemic risk is influenced by the specific characteristics of banks. Higher levels of loan growth, leverage, and bank size heighten the systemic risk faced by banks during asset price bubbles. Interestingly, the results also indicate that banks with a greater degree of income diversification contribute less to systemic risk during periods characterized by real estate bubbles. The results from this study are useful for policymakers in designing and implementing regulations to stabilize and prevent the UAE's banking sector from being affected by real estate price bubbles.

Developing the Balanced Scorecard to Assess Investment Risks in Islamic Banks: The Yemeni Environment as a Model

this research aims to provide a Proposal Approach to developing a balanced scorecard for the use of assessing investment risks in Islamic banks. The researchers focused on the risks that are unique to Islamic banks from traditional banks, represented by the risk of the rate of return, the displaced commercial risk, the Fiduciary risk, Al- shari’a non-compliance risk, and the risk of investment in capital. To achieve this, the researchers relied on applying the Proposal Approach for three Islamic banks in Yemen due to the availability of their data in the annual reports. The results showed that there is a deficiency in the assessment of investment risks in Islamic banks with regard to the risks the Islamic banks are unique for, such as risk of the rate of return , the displaced commercial risk, the Fiduciary risk, Al- shari’a non-compliance risk, and the risk of investment in capital, It focused its attention on common risks between Islamic and commercial banks, such as credit risks, market risks, liquidity risks, and operational risks. The results also showed an effective role for the balanced scorecard in assessing investment risks in Islamic banks, which enhances the role of risk management in controlling and monitoring of the investment risks and taking appropriate procedures to reduce these risks to the acceptable levels. Keywords: Investment Risks, Risk Assessment, Balanced Scorecard.

The Impact of Monetary Policy on Bank Risk in the Western Balkan Countries

Abstract The objective of this research paper is to examine the impact of monetary policy conditions on bank risk-taking in the Western Balkan countries. The paper tries to identify if monetary policy conditions, especially money interest rates, may induce a greater appetite for bank risk-taking in the Western Balkan countries. The impact of macroeconomic and banking indicators on bank risk-taking will be examined, too. For this purpose, we apply pooled OLS techniques, Fixed and Random effects panel, and Hausman-Taylor Instrumental IV model. The econometric results show a negative correlation between the monetary policy rate and bank risk-taking, rejecting the hypothesis that monetary policy rates indicate bank risk increase. However, expansive credit policies or loan portfolio growth have a positive impact on bank risk-taking in the Western Balkans. The study is original, and its findings will be of value to Central Banks and other policymakers in the Western Balkan countries.

ASSESSMENT OF CREDIT RISK OF A COMMERCIAL BANK

This article presents a method for assessing the risks of commercial banks, mainly analyzing the credit risk, interest rate risk and capital risk faced by commercial banks. A model for assessing the credit risk of commercial banks in Uzbekistan is also reviewed.

On the wicked problem of quantifying and managing non-financial risks and the role of digital technology in providing solutions

The management of operational risk in financial institutions has all the characteristics of a ‘wicked problem’. Certainly, the repeated efforts of the Bank of International Settlements, (BIS) Basel Committee on Banking Supervision (BCBS) to have banks control and mitigate their operational risks speak to the tractability of extant approaches to addressing them effectively. The original ‘Principles for the Sound Management of Operational Risk’1 and its recent revisions,2 the BCBS ‘Principles for Effective Risk Data Aggregation and Risk Reporting’3 and the ‘Principles for Operational Resilience’,4 collectively offer a sound foundation for addressing this enduring problem. Why then are solutions so elusive for banks to implement? This paper first outlines the institutional and social web of conditions and factors that contribute to the existence of this ‘wicked problem’. It then identifies how AI-based digital technologies can once and for all effectively address the problem of operational risk in large banks. Nevertheless, as powerful as today's digital technologies are, they require an organising vision, particularly if they are to contribute to the management of operational risk. This paper informs such a vision and identifies a comprehensive artificial intelligence-based digital architecture to realise it.

Der digitale Euro aus einer historischen Perspektive

Abstract The introduction of a digital currency is part of the continuous evolution of the financial system, which has always been driven by technological innovations. For the first time in many years, Western central banks are exposed to potential currency competition. But a digital euro also has the potential to affect the two-tier structure of the grown financial system. The ECB should not engage in an interest rate competition with commercial banks and the digital currency should remain non-interest-bearing. Instead of imposing holding limits, notice periods could also be used to reduce the risk of bank runs. The ECB should limit itself and implement a hybrid digital central bank currency.

The Impact of Macroeconomic Factors on Bank Credit Risk

Credit risk has become one of the main risks faced by banks under the background of increasing loan demand. Meanwhile, bank credit risk may be affected by a number of factors, including the expansion rate of Gross Domestic Product (GDP), changes in interest rate, unemployment rate and even more. These macroeconomic factors are crucial in determining how credit risk for banks is shaped. This paper concludes the different impacts of different macroeconomic factors discussed in several papers on the risks of bank credit, and illustrates how changes in GDP growth rate and rate of interest affect credit risks. Through comprehensive literature review and empirical research, this paper finds that macro factors, including the expansion rate of GDP and the rate of interest, have considerable impacts on banks' credit risk. Bank credit risk will decrease as GDP growth rate increases; however the risk of bank credit will increase as interest rates rise. At the end, the paper provides several suggestions for the development of risk management strategies, including the monitoring of macroeconomic factors and the adjustment of credit policies under different economic situations. The research results are intended to help researchers in related fields understand current research findings and patterns of development in the research field, to give a theoretical foundation and backing for their investigations, and to offer important guiding significance for banks and relevant regulators to formulate risk management strategies.

Risk Assessment of the Banking Industry under COVID-19

The outbreak of the COVID-19 pandemic in 2020 has brought various risks and threats to the entire banking industry, from which we can also know the importance of bank risk management. This paper mainly describes, analyzes, and summarizes the five aspects of liquidity risk, credit risk, market risk, and systemic risk. With regard to liquidity risk, the article describes the impact of the Federal Reserves continuous interest rate hikes on the banking industry in order to curb the high inflation caused by the COVID-19 pandemic and takes the collapse of Silicon Valley Bank as an example for analysis. Regarding credit risk, this article takes Credit Suisse Bank as an example. Highly leveraged speculative transactions caused huge losses to the company due to the high default rate during the epidemic. For the analysis of market risk, the article synthesizes the deeds of Credit Suisse Bank and Silicon Valley Bank, focuses on the interest rate, and the reasons for the collapse of Credit Suisse and Silicon Valley Bank are different on the surface, but the underlying logic of the two events is traced to the same There is a close relationship between the current interest rate environment and the changes in interest rates in recent years. As for systemic risk, the article mainly writes about the purpose and effect of Basel III and the supervision of the capital adequacy ratio during the epidemic. Overall, commercial banks need to closely monitor these risks and take steps to mitigate them to ensure their stability and continued operations during the pandemic.

Macroprudential regulation and bank risk: The role of shareholders' and creditors' rights

This paper analyzes whether the effect of macroprudential policies on bank risk is channeled through investors' protection using panel data from a sample of 624 banks from 40 countries. We show that investors' protection plays a significant role in the effect of macroprudential policies on bank risk, which translates into higher efficiency for macroprudential policies in countries with highly protected creditors, whereas there is a loss of effectiveness in countries where shareholders are highly protected. We provide further evidence that the impact of loosening a macroprudential policy is asymmetric (and more pronounced) compared with the adoption or tightening of a macroprudential policy.

BOARD OF COMMISSIONERS AGE DIVERSITY, PROFITABILITY, AND BANK RISK-TAKING

Introduction: The age of the board of commissioners is one of the personal characteristics of commissioners that can affect the level of bank profitability and risk-taking. This study examines the effect of the board of commissioners' age diversity on bank profitability and risk-taking. Methods: The author uses the multiple linear regression method using a total of 223 observations in banking companies listed on the Indonesia Stock Exchange for the period 2008-2017. Results: The dependent variables used in this study are Return on Assets (ROA), Return on Equity (ROE), and bank risk investment, with the independent variable being the age diversity of the board of commissioners. The results of this study indicate that the age diversity of the board of commissioners has a significant negative effect on the level of bank profitability, as measured by ROA and ROE. However, the age diversity of the board of commissioners has a significant positive effect on bank risk-taking. Conclusion and suggestion: The selection of the Board of Commissioners needs to pay attention to the ages of the members of the Board of Commissioners as a whole because the results of this study indicate that high age diversity in the scope of commissioners can worsen bank profitability and higher risk-taking.

THE IMPACT OF DIVERSIFICATION, SIZE, GROWTH, LOAN, DEPOSIT, EQUITY, AND LLP ON BANK RISK DURING THE COVID-19 PANDEMIC

This research aims to obtain empirical evidence about the effect of revenue diversification, firm size, firm growth, loan, deposit, equity, and loan loss provision on bank risk during the COVID-19 pandemic in banking companies listed on the Indonesia Stock Exchange (IDX) for the 2020-2021 period. The number of samples was 29 banking companies selected by purposive sampling method. The data were processed and analyzed using multiple linear regression analysis techniques through EViews 9. The results showed that revenue diversification, firm growth, deposit, and loan loss provision had a significant positive effect on bank risk. Firm size and loan have a significant negative on bank risk. Equity has no significant effect on bank risk.

Stabilizing leverage, financial technology innovation, and commercial bank risks: Evidence from China

With the rapid development of financial technology (FinTech), balancing FinTech innovation with capital risk management is an emerging issue for banks and regulators. To address this issue, we investigate FinTech's impact on the leverage risks of commercial banks. First, we formulate a theoretical model about the optimal leverage ratio determination for commercial banks within the context of FinTech development. We then conduct an empirical study using Chinese banking microdata from 2005 to 2020. Furthermore, we perform robustness tests by varying FinTech indexes. Our empirical results reveal that (1) an optimal leverage ratio exists that minimizes the risks of commercial banks. Furthermore, (2) FinTech helps banks balance their asset allocation structure, playing a countercyclical role in risk reduction. Finally, (3) FinTech can improve profitability and decrease leverage risks of large, medium-sized, and listed banks. These findings can help banks enhance their FinTech innovation capabilities and regulators prevent governance risks.

Environmental policy stringency and bank risks: Does green economy matter?

This study examines the relationship between environmental policy stringency (EPS) and bank risks, with an additional focus on exploring the influence of EPS on bank risks through the mechanism of green economy. The primary result of our study reveals that EPS can increase bank risks. Additionally, we find that EPS contributes to the mitigation of bank risks through the channel of green economy. Moreover, we identify that EPS can more prominently increase bank risks in both Asia and Europe and during non-crisis periods. Furthermore, for banks with greater capital, lower leverage, and in developed countries, the favorable influence of EPS on bank risks becomes increasingly noteworthy.

Does Diversification and Restructuring Reduce Non-Performing Financing?

Research Aims: This research aims to identify the influence of MSMEs and non-MSMEs financing diversification, as well as financing restructuring, on non-performing financing (NPF). Methodology: This study utilizes a quantitative research method with secondary data, including Asset Quality Reports and Financial Ratio Reports accessed through the Financial Services Authority (OJK) from 2018 to 2022 for 10 Islamic commercial banks in Indonesia on a quarterly basis. Non-Probability Sampling was used as the sampling technique, and data analysis was conducted using panel regression with the Fixed Effect Model through Eviews 12 software. Research Findings: The empirical results indicate that both MSMEs and non-MSMEs credit diversification do not have a significant impact on reducing credit risk in Islamic banks in Indonesia. However, restructuring has an impact on non-performing financing in Islamic banks in Indonesia. Theoretical Contribution: This study contributes to the literature by examining the relationship between diversification of MSME and non-MSME financing and financing restructuring. With this research, it is hoped that Islamic banks will pay more attention to minimizing problematic financing to maintain the stability of their financial performance. Research limitation and implication: In practical terms, these findings suggest that policymakers may consider implementing a concentration strategy for financing in specific sectors. If diversification is to be continued, further policy adjustments may be necessary.

Using machine learning for detecting liquidity risk in banks

The accurate classification of banks’ Liquidity Risk (LR) for regulatory supervision is hindered by limitations in the measures, such as Minimum Liquid Assets (MLA), Net-Stable Funding Ratio (NSFR), and Liquidity Coverage Ratio (LCR). This study addressed two limitations on data integrity vulnerabilities and the narrow composition of LR factors excluding practical LR determinants such as credit portfolio quality, market conditions, strategies of assets and funding. Theoretical gaps included the eight new LR factors in this study, benchmarking study results with measures to interpret the studies’ contributions and the selection of suitable prediction methods for non-linear, imbalanced, scaling, and near real-time data. We used data from 38 Tanzanian banks (2010-2021) from the Bank of Tanzania (BOT). Extensive factors experimentation using Random Forest (RF) and Multi-Layer Perceptron (MLP) models identified ten features for Machine Learning (ML) analysis and LR rating as output. A hybrid RF-MLP model with a 199-tree RF and 10-512-250-120-80-60-6 MLP was developed. It increased LR sensitivity and reduced RF and MLP model limitations through generalisation, and demonstrated statistical and practical performance. It minimised classification errors with Type I and II errors, and Negative Likelihood of 0.8%, 9.1%, and 1%; Discriminant Power of 2.61; and 90% to 96% Accuracy, Balanced Accuracy, Precision, Recall, F1 Score, G-mean, Cohen’s Kappa, Youden Index, and Area Under the Curve. Past LR scenarios confirmed RF-MLP performance improvement over MLA. The unavailability of LCR and NSFR data hindered a comprehensive evaluation. This study extended LR factors and proposed a model to complement LR classification.

Board expertise and the relationship between bank risk governance and performance

Board expertise and the relationship between bank risk governance and performance

Study on liquidity risk of commercial banks

China’s banking system, a product of its planned economy, is a means for China to implement its economic and financial development and consolidate its role in the global economy. Recently, this system has been decentralised by adapting specific regulations to international standards. Against this backdrop, the development of inter-bank activities has played a vital role in the rapid expansion of Chinese banking sector’s assets. This study, uses data from 34 listed commercial banks between 2010 and 2018, to analyse the effect of interbank activities on commercial banks’ liquidity risk using a panel data model. This determines whether the effects are the same for different commercial banks. The study concludes that the expansion of interbank activities has increased commercial banks' liquidity risk, and that this effect is more significant in joint-stock banks than in urban commercial banks. Therefore, commercial banks should sensibly position their interbank development model, conduct their interbank business prudently and rationally, and continuously strengthen their risk control measures. The supervisory authorities must continue to strengthen supervision of interbank activities and prevent funds from being de-realised.