Big Banks Research Articles

The Big Bank Theory. Into the Bank Corporate Governance Literature

Corporate Governance of banks is not only important it also unique. Sound bank Corporate Governance is a crucial element for promoting a more resilient financial system and sustaining economic growth. A systematic literature review is conducted on a sample of articles published on peer-reviewed academic journals. Balancing theoretical and empirical contributions, findings show that academic research on bank Corporate Governance is mainly focused on risks potentially faced by banks and their performance capabilities. This paper examines the developments of bank Corporate Governance literature and tries to shed some light on the causality dilemma between theory and practice, by investigating whether or not the progress of regulation and supervision in the area of bank governance follows academic findings or vice versa.

ЈАЧАЊЕ РЕГУЛАТОРНОГ ОКВИРА У ФУНКЦИЈИ ФИНАНСИЈСКЕ СТАБИЛНОСТИ И СПРЕЧАВАЊА ВЕЛИКИХ БАНКАРСКИХ СКАНДАЛА

Numerous big banking scandals in the period from 1980 to the collapse of financial markets in the US in September 2008 indicate that the Global economic crisis was inevitable. This is because the basic causes of the crisis are built into the foundations of the US neoliberal model of speculative financial capitalism. The previous anti-crisis policies in the United States, which decisively shape global regulation as well, have not yielded the desired results because the ruling political, economic and military elite of the US is not ready to adopt and implement fundamental social and economic reforms. For this reason, the big banking scandals which marked the past five-year period (2010 - 2015) are not a big surprise. Bailed out by taxpayers' money, global banks continue to behave in the same way they behaved until the collapse of financial markets in September 2008, which brought the whole world to a crisis of unprecedented proportions. New big banking scandals imply a new wave of crisis with incalculable economic and social consequences of global proportions. In this regard, the main objective of this paper is to point to the necessity of global, regional and national institutions to redesign the existing and build a comprehensive and effective regulatory and supervisory framework, in order to prevent the deepening of the crisis so that the third decade of the 21st century can be entered with a stable, socially responsible and sustainable banking system.

Transformation of banking in the new paradigm strategy of Ukraine’s development

Transformation of banking in the new paradigm strategy of Ukraine’s development Bohdan Lutsiv Abstract The article considers the issues of transformation of banking into the new strategy of Ukraine’s development in conformity with the accelerating comprehensive transformations of the modern world. It is found that the crisis of globalization is deepening, resulting in the end of the industrial matrix of globalization and the beginning of post-industrial paradigm. It is pointed out that due to the networking transformation of the world a strategic perspective is rather an apolar world than a multipolar one, or a world of equivalent entities. This signals the end of Euro-centrism. In the paper, it is shown that Ukraine’s course to European integration should correlate with current Euro-integration strategies. The systematic analysis of the modern state of the economic backwardness of Ukraine was carried out and the dynamic model of development with the new industrial policy in the reform of the economy was used. A system analysis of the current economic underdevelopment in Ukraine is carried out and a dynamic model of development with a new industrial policy is proposed. Taking into account the deterioration of investment climate, Ukraine’s position in the global investment flows is determined. The structure of capital investments is analyzed by funding sources. In order to mitigate investment risks, a scheme of interaction between tools and instruments used for attracting investments to Ukraine’s economy is proposed. It is stressed that a sustainable stabilization of Ukraine’s banking system is a key driver for the recovery of the real sector. Since the banking sector has been and continues to be a leader and a driving force for reforms in the country, the current state of Ukraine’s banking system after a “big banking cleansing” is assessed. It is concluded that restoration of lending is an essential result received from the transformation of banking. The roots of non-performing loans in bank portfolios are defined and ways for restructuring non-performing loans are outlined. It is noted that addressing the problem of insider lending plays an important role in improving loan portfolios.

Forecasting net charge-off rates of banks: What model works best?

The purpose of this paper is to focus on the losses of two very big banks, Citigroup (Citi) and Wells Fargo & Company (Wells Fargo), and two very small banks, First Busey Corporation (Busey) and Capital City Bank Group (Capital), over the period 1991–2016. The federal government actually bailed out the two big banks, as measured by total assets, whereas neither of the two small banks required a bail out. Clearly, if one is able to use a variety of predictor variables to forecast accurately the losses of banks of various sizes, in different geographical locations, and operating a variety of business models, this may help identify potential causes of future banking problems and thereby lessen, if not eliminate, the need for future bailouts. This is important for both the banks and the bank regulatory authorities. In particular, those banks expected to suffer significant losses on loans may be in a position to increase their provisioning and thus loan loss allowances. If such banks are unable to take this type of action or other corrective action to address expected losses, regulatory action may become necessary in response to this situation. The motivation for our paper is this very issue: can one obtain accurate forecasts of losses, or the net charge-off rates, of banks? We provide an answer to this question by examining the four banks mentioned using several hundred predictor variables and several different forecast techniques.

Size, Efficiency, Market Power, and Economies of Scale in the African Banking Sector

There is a growing body of evidence that interest rate spreads in Africa are higher for big banks compared to small banks. One concern is that big banks might be using their market power to charge higher lending rates as they become larger, more efficient, and unchallenged. In contrast, several studies found that when bank size increases beyond certain thresholds, diseconomies of scale are introduced that lead to inefficiency. In that case, we also would expect to see widened interest margins. This study examines the connection between bank size and efficiency to understand whether that relationship is influenced by exploitation of market power or economies of scale. Using a panel of 162 African banks for 2001–2011, we analyzed the empirical data using instrumental variables and fixed effects regressions, with overlapping and non-overlapping thresholds for bank size. We found two key results. First, bank size increases bank interest rate margins with an inverted U-shaped nexus. Second, market power and economies of scale do not increase or decrease the interest rate margins significantly. The main policy implication is that interest rate margins cannot be elucidated by either market power or economies of scale. Other implications are discussed.

Systemically Important Financial Institutions (SIFI) in Indonesian Banking System

We study the Indonesian Banking System, as one of the emerging economies with significant numbers of bank employing component expected shortfall (CES) as a market-based systemic risk measurement. The measure is a hybrid one that combines too big to fail and too interconnected to fail paradigms. Our result shows that systemic risk in Indonesian Banking System is highly concentrated, dominated by five big banks which contributes to more than 80% of the total risk of the banking system. Moreover, the concentration increased as the financial turmoil waived the whole banking system in September 2008. As a robustness test, this research uses various weighting scheme using total assets, total equities, and total loans as weights of the firm. The result show relatively consistent systemically important financial institutions (SIFI) cluster compared to market capitalisation weight.

Persistent and Transient Inefficiency: Explaining the Low Efficiency of Chinese Big Banks

Considering the evidence that China’s five largest state-owned banks (the Big Five) suffer from low cost efficiency, this paper decomposes overall efficiency of Chinese banks into persistent efficiency and transient efficiency components. Low persistent efficiency reflects structural problems, while low transient efficiency is associated with short-term problems. Using the model of Kumbhakar, Lien and Hardaker (2014) based on the stochastic frontier approach, we measure persistent efficiency and transient efficiency for a large sample of 166 Chinese banks over the period 2008–2015. In line with existing evidence, we find a lower average cost efficiency of the Big Five banks compared to other Chinese banks. It is almost entirely due to low persistent cost efficiency. The Big Five banks transient efficiency is similar to other Chinese banks. Our findings support the view that major structural reforms are needed to enhance the efficiency of China’s Big Five banks.

Critical Review of Main Cosmogonic Theories

Big Bang theory postulates the red shift of light coming from distant galaxies is caused by the Doppler Effect. Like Plato’s astronomy, Big Bang theory has to be continuously propped up by countless patches in order to deal with new observations. Plato’s astronomy required countless epicycles within epicycles. Big Bang requires patches such as dark energy, dark matter, cosmic inflation, accelerating expansion of the Universe and countless revisions of Hubble’s constant. In addition, this theory and the fundamental law of mass and energy conservation are mutually exclusive; according to Big Bank all energy and mass appeared suddenly out of nothing. There are of course Big Bang versions that try not to contradict the conservation law. Such theories postulate a multi-verse populated by an infinite number of Universes or an infinite number of Universe instances. In other words, either the most basic law of physics or Occam’s razor must be rejected in the most outrageous manner possible because otherwise the Doppler Effect cannot be used to explain the cosmic red shift. 
 For these reasons, some astronomers promoted the stationary Universe theory and assumed that photons lose a significant amount of energy while traversing intergalactic distances and therefore suffer a red shift. This assumption is the basis of all Tired Light theories. According to Tired Light, photon energy loss is caused by collisions with other objects such as gas molecules or dust. As a result, this theory was quickly dismissed, because this loss mechanism cannot explain the broadening of supernova spectra, the variable rate of photon frequency decay and the fact that the image of distant objects is not blurred. Subsequently other versions of Tired Light theories were ignored because supposedly any other loss mechanism is not compatible with GTR field equations. According to these equations, when the photon structure is ignored, the energy momentum-tensor of a photon moving freely through space is constant. Experiments with laser beams show this conclusion is not exactly true. Therefore even free photons actually lose some minute amount of energy. What physical mechanism may explain this loss? A simple experiment with a common object will immediately reveal this mechanism. Internal interactions are the main mechanism responsible for the gradual dampening of spring oscillations and loss of energy, not collisions with other objects. When damping of photon oscillations caused by internal friction is considered, a new version of Tired Light can be formulated; a version that is validated by all astronomic observations without recourse to any patches and without rejecting the law of energy and mass conservation or Occam’s razor.

Reconciling Banking Regulation and the ‘Systemically Important Banks’ Syndrome: Deconstructing the Legal Constraints from a Nigerian Perspective

Banks occupy a central position in the financial architecture of any economy due to their financial intermediation roles and as facilitators of the national payments system. However, because of the peculiarly risky nature of their business, banks do fail. Among other outcomes, this can have grave repercussions for various stakeholders, especially depositors. To overcome these challenges and ensure that the banking system remains efficient, transparent, strong and stable, banking regulators apply various administrative and statutory measures. A major influential factor in seeking to keep distressed banks afloat is the ‘systemically important banks’ syndrome that nudges regulators to expend public funds in bailing out large insolvent banks because of their strategic position in the financial system and the potentially traumatic systemic implications of their failure and liquidation. The foremost tool in the pursuit of this objective is the now globally acknowledged failure-resolution policy of bank bailout. Here, regulators are unduly influenced by the ‘too big to fail’ phenomenon; they therefore reason that some banks are too big and are therefore too systemically important to be allowed to fail, hence the deployment of public funds to bail them out when they are in distress. This article considers the dilemma of banking regulators in pursuing the protection of depositors, on the one hand, and seeking to keep big distressed banks afloat at the expense of public resources, on the other. This objective is particularly pursued from the perspectives of the Nigerian jurisdiction. The article advances the view that the ‘systemically important banks’ syndrome may not be the most effective means of driving banking regulation because of the question of moral hazard involved. It proffers alternative measures for attaining the crucial outcome of effective banking regulation.

Deposit money banks’ efficiency in three years after, during and before the 2004–2005 consolidation in Nigeria: the puzzle on size

In this paper, the authors examined the efficiency of deposit money banks (DMBs) in Nigeria in three years after, during and before the 2004–2005 capital consolidation in Nigeria. This consolidation period was the last period the Central Bank of Nigeria implemented an official recapitalization policy of the deposit money banks in the country. The authors predicated the study on a modified intermediation and efficiency measurement frameworks. It utilizes deposits, fixed assets and employees as inputs, whose costs are interest payments, depreciation and staff expenses. Performing loans and advances, investments and liquid assets constituted the output variables. The authors computed the efficiency scores, using the Data Envelopment Analysis (DEA) approach. The data used were obtained from the DMBs that retained their identities and controlled over 75% of the banking industry’s total assets. They were purposively selected to maintain data consistency, and were size-classified by total assets. The findings show that small banks tend to be more cost efficient than medium and big banks. More so, medium sized banks tend to be more cost efficient than big banks, while big banks take the lead in cost efficiency score in post consolidation period. Cost efficiency of the banks was the highest during consolidation, followed by pre-consolidation and least in three years after consolidation.

Wall street occupies the blockchain - Financial firms plan to move trillions in assets to blockchains in 2018

WHEN BLOCKCHAINS first appeared nearly a decade ago as the technical backbone of Bitcoin, the world's leading cryptocurrency, they seemed to offer the masses a way to cut out the financial middleman. But now the big banks and other industry players are finding ways to spin the new tool to their advantage. Their blockchains share a vision that is precisely the opposite of the one laid out in the Bitcoin white paper, published under the pseudonym Satoshi Nakamoto in 2009. Like Nakamoto himself (or herself), you can own bitcoins without even stating your real name; nobody is in charge; and anybody can check the history of any given transaction. The financial industry's blockchains, however, are closed or, in their jargon, permissioned; to join one you must reveal your identity to a system administrator, who must then approve you.

The Impact of the Global Financial Crisis on China's Banking Sector

The banking sector had long been left at the fringes of China's reform policies. Major initiatives of the 1990 and early 2000s helped to balance the need for modernization and internationalization with the objective of preserving political control. When the Global Financial Crisis (GFC) erupted in 2007, it hit the Chinese economy but predominantly in its export sector and much less in its financial sector. Yet when exports collapsed and factories closed in the winter of 2008/2009, the Chinese leadership implemented an ambitious stimulus program and used its leverage over the financial sector to re-start economic growth. These factors – GFC and domestic stimulus – created a series of intended and unintended outcomes. Financial reform in China entered a new stage signalling a profound change in China's banking sector. These changes follow two sometimes contradictive, sometimes mutually reinforcing reform dynamics of top-down policies and bottom-up innovation. In this article we follow an institutional approach and discuss the intensified participation of China's big banks in the Go Out strategy, followed by a shift in the pattern of lending. One factor in this change is the rise of shadow banking and particularly an explosive growth in internet-based financial services. Thus, while the initial reaction to the GFC re-emphasized direct, top-down state involvement in the banking sector, the outcomes of the GFC, China's policies and business innovations have facilitated profound bottom-up changes.

COMPETITIVENESS ANALYSIS OF KAZAKHSTAN CONFECTIONARY SECTOR USING FINANCIAL DISCRIMINANT MODELS

Measuring competitiveness offers hundreds of analytical options. We have chosen to analyze and compare companies of confectionery sector in Kazakhstan. We opted to use bankruptcy and creditworthiness models and compare competitiveness through the financial situation of main competitors on that market. Companies analyzed comprise of two Ukrainian companies (Konti and Roshen), Russian companies (Nestlé Russian branch serving also Central Asian markets and KDV - Yaskino) and three local corporations Rakhat, Bayan Sulu and Konfety Karagandy. Models used for analysis are Altman z-score model, Taffler z-score model, IN99, IN01, IN05, and creditworthiness model. The IN models were created in the Czech Republic based on companies' data from the 1990s which was the period of higher inflation, small currency an big banking crisis, massive imports, developing competition and infrequent political turmoil. These models have comparably much greater benefits for analyzing companies in Kazakhstan because they are based on hundreds of companies in contrast to tens of companies on which Altman or Taffler based their famous and highly predictive models. We present an analysis of models in 2007 – 2016 period based on publicly accessible data. We show the IN models have valuable benefits for comparison compared with other older models and that they can disclose certain events or corporate situations in a clearer way than other Altman or Taffler z-score models and should be used in Kazakhstan and improved to suit better the local market environment.

How Enron Used Accounting for Prepaid Commodity Swaps to Delay Bankruptcy for One Decade: The Shadowy Relationships With Big Banks

Accounting standards for prepaid commodity swaps did not exist until 2003. This absence of regulation gave Enron the opportunity to have its own homemade accounting. Two actions facilitated this task for Enron: (a) The Securities and Exchange Commission granted Enron in January 1992 a unilateral privilege to use mark-to-market valuation for energy contracts. This private communication was made at a time when viable markets did not exist. (b) Big banks colluded with Enron’s top executives to design structured finance contracts that allowed Enron to report at least US$8.7 billion of loans as cash flow from operations. Seventy-one percent of the cash flow from operations reported in the last 5 years of Enron’s existence came from these loans. JPMorgan Chase and Citigroup effectively made it easy for Enron to carry out this fraud. The two banks established their own special purpose entities to give these loans the appearance of legitimate trade transactions using prepaid commodity forwards and swaps. This article outlines some of the schemes that the two banks devised to help Enron appear financially healthy when in reality it was near bankruptcy for years.

The Decline in Lending to Lower-Income Borrowers by the Biggest Banks

Data collected under the Home Mortgage Disclosure Act (HMDA) reveal that the largest banks have significantly reduced their share of mortgage lending to low- and moderate-income (LMI) households in recent years.

Italian bank hit with major breach

Italy's biggest bank, UniCredit, has been raided by hackers who took off with 400,000 customer records, including account, biographical and loan data. However, the bank insists that passwords were not compromised.

Contagion in a Network of Heterogeneous Banks

We consider a financial network where banks are heterogeneous in scales and each bank has only local knowledge regarding the network. Each bank must make counterparty and portfolio decisions while facing uncertainty regarding the network structure. Such uncertainty plays an important role in banks' risk management practices in minimizing the effect of exogenous liquidity shocks and hedging against possible fire-sale in asset markets. This results in an endogenous core-periphery structure which is optimal in mitigating financial contagion yet concentrates systemic risk at the core of big banks.

Do Big Bank Equityholders 'Pay' for Bailout Insurance Over the Economic Cycle?

Contrary to public perception and previous literature on public bailout subsidies, we find over the recent 43-year period equityholders in big banks paid fairly for TBTF bailout insurance in terms of equity returns. In normal (non-crisis) periods, after TBTF in 1984, big banks pay an “insurance fee” for protection against severe losses in a crisis accepting a higher net regulatory burden reflected in a -9% per annum lower equity return relative to small banks. Moreover, a measure of left-tail risk protection, conditional on a crisis, fully explains this Big−Small bank equity premium “fee” paid in normal times. During crises, big banks earn higher returns (a reversal of that observed in normal times), which on average offset the big bank equity return discount in non- crisis times. Over several economic cycles, there is no abnormal Big−Small bank equity premium and bailout insurance is fairly priced for equityholders in that there is no difference between big and small bank equity returns.

The Determinants of Banks’ Liquidity in Vietnam

This paper is aimed to identify the key determinants of commercial banks’ liquidity in Vietnam, testing the hypotheses of trade-off between bank liquidity and profitability. The random effect model (REM) is applied with data of 140 observations from 20 Vietnamese commercial banks in period 2008 to 2014. The key findings are: First, there is no trade-off between liquidity and profitability, as banks have better profitability will pay more attention to keeping liquidity in safe level. Second, interest rate policy has good and positive impact on bank liquidity, implying the importance of discount window and open market operation in providing liquidity to commercial banks. Third, however, opportunity cost of keeping liquid assets has negative impact on banks’ liquidity, which means that liquidity buffer should reflect the opportunity cost of keeping liquid assets instead of loans. Fourth, bank size is negatively related with banks’ liquidity, which means that smaller banks are more concerned about the liquidity problems than big banks. This is the signal for Vietnamese policy makers to start avoiding the “too big to fail” problem when restructuring the banking system and the plan for increasing the bank size to regional and international levels. Lastly, GDP growth has negative impact on banks’ liquidity. The better is the economic investment opportunities, the less the chance for banks to keep more liquidity. Customers will request more debts, while the demand of ithdrawing cash from banks will be lower. Therefore, managing bank liquidity in Vietnam needs to pay attention to these characteristics.
 Key words: bank liquidity, determinants, liquid assets, opportunity cost, profitability.

Who needs big banks? The real effects of bank size on outcomes of large US borrowers

We examine how bank size affects borrowers, when information asymmetry is not particularly severe. Our sample comprises 20,806 loan facilities granted to 3625 US public firms. After minimizing endogeneity concerns, we find that there is a positive relation between bank size and firm value, after the origination of the loan. Firms that borrow from large banks invest more, grow faster and have higher risk, proxied by earnings volatility. The effects are concentrated in borrowers which are ex-ante (pre-loan) safer (low leverage or high Z-score) and muted, but not negative, in riskier firms. We highlight the bright side of large banks.