Big Banks Research Articles

Maturity mismatch and incentives: Evidence from bank issued wealth management products in China

Abstract Commercial banks in China issued a multitude of wealth management products (WMPs) from 2009 to 2016. These products are largely short-term, but a significant proportion of capital is allocated to long-term investments. In this paper, we first construct a measure of WMP maturity mismatch for each bank in each quarter using R2s from regressing expected yields of WMPs on expected yields of banks’ generally claimed investment assets. The degree of maturity mismatch is positively related to banks’ quarter-end non-performing loan ratio (NPLR), after accounting for time-varying bank characteristics, bank and time fixed effects. The result indicates that severer mismatch is associated with reduced NPLR. Cross-sectionally, the positive relation is stronger in big banks and when banks had a larger NPLR in the previous quarter. The results highlight the fact that regulated commercial banks use financial innovation and exploit maturity mismatch in their issued WMPs to evade regulator's credit risk monitoring.

Does Financial Innovation Increase Inequality? A Competitive Search Approach

The distribution of asset holdings among US banks is increasingly concentrated toward a few large banks at the top. Concurrently, the household wealth inequality has increased. This paper provides a theoretical link between these empirical facts, by developing a novel quantitative general equilibrium model that embeds the heterogeneous banking sector into a standard heterogeneous agent model with incomplete-markets. We introduce competitive search to the inter-bank market with adverse selection problem and endogenously generate three different rates of return: savings rate, borrowing rate, and the rate of return on equity. We show that financial innovation — defined as a technological progress that improves the intermediation efficiency — led by the big banks will intensify the adverse selection problem in the inter-bank market and increase the relative size of the big banks over their smaller counterparts. As a result, both the interest rates for borrowing and savings fall, creating even more incentive to borrow for credit constrained households, which ultimately propagates the household wealth inequality.

Heterogeneous Elasticities of Bank Loan Supply: Evidence from SBA Loan Guarantee Expansion

US Small Business Administration (SBA) temporarily expanded its loan subsidy program from 2009 to 2010 in an effort to stimulate loans to small businesses. We explore the heterogeneous bank responses following this policy change. Using a novel data that merges the quarterly bank-level call report to the subsidized loan data, we first show that big banks prefer to issue many loans of small size while small banks issue few loans of bigger size.Abstract which can be explained through a simple portfolio optimization model with fixed cost. Then, we show that small banks — especially those that were part of SBA's Preferred Lender Program — increased both the extensive (number of loans) and the intensive (average loan size) margin the most. Then, we show that these big banks that make up the majority of the loan volume were particularly inelastic in increasing loan supply in response to this positive policy shock. This has strong policy implications given that a sizable amount of taxpayer's money was used to fund this temporary expansion.

Depositors’ discipline, banks’ accounting discretion, and depositors’ expectations of implicit government guarantees

In this study, we examine the depositors’ tendency to apply financial discipline to banks that adopt discretionary accounting practices. We use estimates of discretionary loan loss provisions (DLLP)—the difference between an observed provision and a model-determined, notionally correct provision—to quantify the extent to which banks are engaging in discretionary accounting practices. We examine whether depositors perceive that discretionary accounting practices increase credit risk and punish such practices by withdrawing deposits or requiring higher interest rates. We also examine whether depositors’ expectations of implicit government guarantee moderate this relationship by comparing the differences in depositors’ responses depending on whether a bank is large or small. Using US commercial bank data from 2001Q1 to 2010Q4, we find that uninsured deposit growth is negatively associated with banks’ DLLP. The findings suggest that depositors punish banks’ discretionary accounting practices. We also find that within the non-too-big-to-fail (non-TBTF) banks, depositors react sensitively to DLLP practices during both the crisis and non-crisis periods. However, for those too-big-to-fail (TBTF) banks, depositors react sensitively to DLLP practices only during the non-crisis period, but not during the crisis period. In addition, we find that banks subject to US government bailout actions during the 2008–2009 crisis period received less depositor discipline than other banks. In general, our findings suggest that the uninsured depositors’ discipline did exist during the pre-crisis period. Depositors punish banks for their behavior in increasing the information asymmetry between the banks and outsider creditors. However, policies such as rescuing big banks or increasing the deposit insurance coverage may reduce such market discipline.

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

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.

Evolving banking market structure in Oman: should CBO approve the mergers?

PurposeIn 2013-2014, Bank Muscat and National Bank of Oman requested a merger and Bank Sohar and Bank Dhofar lodged a similar request. This paper aims to investigate the shape of the market structure, and it tries to answer whether approving such requests is good for the industry, economy and society.Design/methodology/approachThe study examines the market structure of Oman Banking Industry, and it also presents the shape of the market structure if there had been an approval for these mergers’ requests. The Herfindahl–Hirschman Index (HHI) and the biggest k-banks Concentration Ratio (CRk), which measure concentration changes over 17 years during the period 1998-2014, are used in this study.FindingsThe study finds that Oman’s Banking Industry is highly concentrated, which should cause concerns over these two requests of mergers or similar requests in the future. In general, the concentration ratio shows decreasing trend. The concentration ratio in the deposit market implies a concentrated market with CR2 and CR3 recording 67 and 85%, respectively, while HHI reached 2,864 points in the 1998. However, in 2014, the concentration ratio had decreased, to CR2 and CR3 recording 52 and 65% respectively, and HHI standing at 2,112 points.Research limitations/implicationsThe researcher suggests future investigation and further research in setting a benchmark index as a guideline for mergers’ requests.Practical implicationsExercising monopoly power, by fewer banks, is very harmful to the economy. Charging higher interest rates on business loans escalates the cost of production of products and services which will cause inflation; therefore, monopoly power will lead to slow growth of the economy.Social implicationsRegulators in Central Bank of Oman (CBO) or in any central bank should be very careful in granting mergers, especially among big banks, because it enables newly bigger banks to exercise monopoly power, thereby harming depositors who will be getting low deposit interest rates and harming borrowers by charging them high loan interest rate.Originality/valueEven though, this study discussed two requests of mergers between banks in Oman; however, it has presented formal approaches to the measurement of market structure in any country. Overall, it provides the policymakers in making the final decisions on mergers between banks in the future which are not limited to these banks or to Oman’s Banking Industry.

Auditors in the financial meltdown: an examination

Purpose This paper aims to investigate the financial crises and the role of auditors in those crises. The paper is concerned with the banking system, as the last financial crisis in 2008 was provoked by the mortgage business and the big banks and risks management. Design/methodology/approach The paper choses to use data from corporations, practices and professional websites. The authors use interviews that were available and related to the subject matter. Academic works are also used to discuss the literature review and various issues. Findings The paper explores the auditors’ responsibilities and finds that there is a growing concern for auditing. This research is complex, as it discovers that corporate executives in the banking business should be more responsible; this is confirmed by the high risks in the financial area that still persists. Research limitations/implications This is a very complex topic; however, the authors designed it so that it can be read and used by non-accountants, that is to say, CEOs and governmental agencies that are in charge of the regulatory system. Further research studies are needed to ensure ongoing discussions about the financial crisis. The Word is not free from such bad economic events. Practical implications The contribution is important; this research can be used by organizations, governments and academics. Social implications The paper includes implications for the banking and auditing industries. It extends to the public interest. Originality/value This paper contributes to the literature for academic and can be used for teaching purposes. Students can understand the paper, as the authors did not use a regression model.

Market concentration and bank competition in emerging asian countries over pre and post the 2008 global financial crisis

This paper examines the relationships between market concentration, bank competition, and efficiency in banking across six emerging Asian countries namely Bangladesh, India, Indonesia, Malaysia, the Philippines and Vietnam over the period 2005 to 2012. The countries selected for this study operate commercial banking activities with a comparatively large number of both publicly listed and private commercial banks providing a broad range of commercial banking services. For example, banks in Bangladesh, India and Vietnam used to be predominantly state-owned. But over the last few decades, governments have been issuing licenses to private owners. The methodological approach taken by our study provides an important and original contribution to the extant literature by testing various hypothesis that investigate the relationship between competition and efficiency across banks from a select group of Asian countries. We find that market concentration has a positive effect whereas competition has a negative effect on the efficiency of banks operating in these countries. This finding conveys a critically important message to the regulators of banks in these countries: there is a trade-off between quantity and quality. Our analyses also reveal that the effect of bank size on efficiency is positive whereas the effect of liquidity risk on efficiency is negative. This again supports the conventional wisdom that large banks are in a position to provide cost efficient services because they have the ability to attain economies of scale and scopes. Here again, the regulators have very important roles to play: while they have to put in place effective mechanism preventing big banks from being an oligarchy; at the same time, they should make sure that banks get liquidity support as funding pressure builds up.

The Optimum Leverage Level of the Banking Sector

Banks make profits from the difference between short-term and long-term loan interest rates. To issue loans, banks raise funds from capital markets. Since the long-term loan rate is relatively stable, but short-term interest is usually variable, there is an interest rate risk. Therefore, banks need information about the optimal leverage strategies based on the current economic situation. Recent studies on the economic crisis by many economists showed that the crisis was due to too much leveraging by “big banks”. This leveraging turns out to be close to Kelly’s optimal point. It is known that Kelly’s strategy does not address risk adequately. We used the return–drawdown ratio and inflection point of Kelly’s cumulative return curve in a finite investment horizon to derive more conservative leverage levels. Moreover, we carried out a sensitivity analysis to determine strategies during a period of interest rates increase, which is the most important and risky period to leverage. Thus, we brought theoretical results closer to practical applications. Furthermore, by using the sensitivity analysis method, banks can change the allocation sizes to loans with different maturities to mediate the risks corresponding to different monetary policy environments. This provides bank managers flexible tools in mitigating risk.

Collapse of Big Banks in Ghana:Lessons on Its Corporate Governance

Funding: National Natural Science Foundation of China (No. 71371087) Abstract The news that two indigenous banks, UT and Capital Bank have been taken over by GCB Bank has come as a shock to many Ghanaians, as just a year ago, Capital Bank was adjudged the Best Growing Bank, and Best Bank in Deposits & Savings at the15th Edition of Ghana Banking Awards while UT Bank was adjudged best bank in 2011 by the same institution. UT bank is one of Ghana’s most celebrated brands, after it evolved from a micro-finance company into a successful bank.The study reveals the weak compliance to common Corporate Governance practices within the two banks. Specifically, the two banks had small board size as compared to the standard size of the banking industry. Also, the boards did not have enough committees to discharge its operation. The independence of the boards was also impaired as in most of the directors are executives and the non-executive directors have a close relationship with the promoters and executives. Keywords: Corporate Governance, Collapse, Commercial Banks, Board of Directors DOI : 10.7176/RJFA/10-10-04 Publication date :May 31 st 2019

How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy by Mehrsa Baradaran

How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy by Mehrsa Baradaran

Forecasting credit losses with the reversal in credit spreads

López-Salido et al. (2017) find that there is predictable reversal in credit spreads. Because in theory credit spreads reflect expected future credit losses, we explore if the predictable reversal in credit spreads helps forecast loan charge-offs, particularly for big banks. Empirically, we find robust supporting evidence.

A new macro stress testing approach for financial realignment in the Eurozone

Contrary to the common approach of stress-testing under which banks are evaluated whether they are distressed, this empirical study chooses to move from the micro stress test approach to a wider new macro stress test category. By being able to stress testing the entire economy of the Eurozone, it will permit big banks to fail and, at the same time, will open room for new banking players to enter the sector, promoting the essence of a healthy destruction. The analysis performs a battery of stress tests, by implementing VaR, Cornish-Fisher VaR, Monte Carlo VaR, Expected Shortfall, Cornish-Fisher Expected Shortfall, and Monte Carlo Expected Shortfall. At the same time, it explicitly considers the new regulatory approach of IFRS9 to incorporate extreme values from forecasted series in the distributions. The analysis also performs two versions of stress tests, one including TARGET2 and one without it. The results document that future stress tests should include TARGET2 values in order to capture a better picture of the stressed economy. The findings from these stress tests clearly illustrate that although there has been a trough after the distress call of 2008, this trough ended. These are results derived without including the TARGET2 transfers. By including the TARGET2 transfers we receive a different picture that possibly acts as a protective mechanism against any future crisis. Caution is still advised, possibly due to some lingering imbalances within the Eurozone.

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.

Treating Apples Like Oranges

In response to the Financial Crisis of 2008 and the Great Recession that followed, Congress passed the Dodd–Frank Wall Street Reform and Con- sumer Protection Act in 2010. The Volcker Rule is a controversial section of the Dodd–Frank Act that prohibits all banks, no matter their size, from pro- prietary trading and entering into certain relationships with private equity funds. But the Volcker Rule forces banks to incur significant costs to ensure compliance. While Big Banks have the capital and infrastructure to comply with the Volcker Rule, small Community Banks often do not. This gives Big Banks an unfair competitive advantage over Community Banks. However, re- cently there has been renewed interest in the Volcker Rule, particularly regard- ing its effects on Community Banks. Both the legislative and executive branches are calling for changes to the Volcker Rule. But there is no consen- sus on how the Volcker Rule should be changed and what types of financial institutions those changes should affect. This Article will explore this issue. First, this Article will discuss the background of the Financial Crisis, Great Recession of 2008, Dodd–Frank, and the Volcker Rule. Second, this Article differentiates between the business models of Big Banks and Community Banks. Third, this Article examines the Volcker Rule’s effect on Community Banks. Fourth, this Article will consider recent proposals for changes to the Volcker Rule by the House of Representatives, Senate, and the Department of Justice. Finally, this Article will argue that Community Banks should be ex- empted from the Volcker Rule, preferably by a bill recently proposed by the Senate Banking Committee.

The Efficiency of Indonesian Islamic Rural Banks: A Stochastic Frontier Analysis

Banking plays an important role in economy acting as an intermediation institution and funding sources for business. When a bank is inefficient in the use of cost, there will be improperly used input, hindering the bank to realize its roles, functions, and objectives. Therefore, analysis of bank efficiency is strongly required. This study aims to measure and analyze the technical efficiency of Indonesian Islamic rural banks by using balanced panel data of Indonesian Islamic rural banksfromquartile I 2011 to quartile IV 2016. The sample includes 58 Islamic rural banks with total 1,392 observations. By using stochastic frontier analysis,the result shows that the average technical efficiency of IndonesianIslamic rural banksreached 86 percent and there are still 14 percent that can be optimized. Overall, the average efficiency of Indonesian Islamic rural banksincreases over the research period. In addition, this study also finds that big banks are more efficient than small banks.

A Bank Size and Competitive Advantage in the UK Banking Sector

To investigate the association between return to scale (RTS) and profitability in the United Kingdom banking sector, we adopted logistic regression analysis, using sample sizes of 135, 140, and 121 banks for the years 2016, 2015, and 2014, respectively. Our findings indicate a positive and statistically significant association between profits as measured by return on assets (ROA) and increasing RTS during the three years of the sample period. We also investigated the relationship between bank size as represented by the log of total deposits and RTS. Our findings also indicate that bigger banks show increasing RTS, but with decreasing rate, as represented by the negative coefficient of the square of the log of deposits. To investigate further the link between bank size and operating cost with ROA, we employed panel data regression, covering the sample period (2011-2016) for the largest 25 banks. Our results show that there is a positive and significant association between ROA and the total assets of the largest banks, but the operating expenses impact negatively on the ROA. More specifically, 1% increase in total assets increase ROA by 2, and 1% increase in the operating expenses reduce ROA by 1.7%. These results imply that bigger banks in the United Kingdom’s banking sector are able to gain competitive edge in attracting deposits as they operate along the downward sloping portion of average operating cost curve.

Efficiency dynamics of the Croatian banking industry: DEA investigation

The paper deals with the efficiency dynamics of the Croatian banking industry, covering the period from 2006 to 2015. We have implemented the intermediation approach, using interest and non-interest expenses and revenues as the input and output variables, respectively. The variable return to scale (BCC) Data Envelopment Analysis (DEA) output-oriented model has been implemented, and we have estimated the crisis-driven efficiency trends, as well as the impact of the EU membership. We further estimated the efficiency effects of the relative market power/size, ownership structure, and origin of capital. The global crisis had detrimental effects since the overall efficiency score dropped by about 3%. On the contrary, Croatian banks have largely benefited from the EU membership, and the efficiency score after the EU association increased by about 45%. The market leaders are more efficient than the competitive fringe, which is in line with the efficiency structure hypothesis. In addition, the biggest banks are the most efficient ones, meaning that the scale efficiency hypothesis has also been upheld. Contrary to the agency theory hypothesis, state-owned banks are permanently more efficient than private banks. Finally, the results support the home-field advantage hypothesis exclusively for the pre-crisis period (2006–2009).

Deposit Insurance System and the Commercial Bank Loan Loss Provisions

The article mainly analyzes the deposit insurance system in our country promulgated after the provision for the impact of bank loan loss provisions. Empirical study found that the deposit insurance system in our country was promulgated in 2015, the bank’s loan loss provisions increased, among them, the big bank loan loss provisions significantly increased. After separating the manipulated loan loss provisions, we found that the manipulated loan loss provisions increased. Further study found that, following the promulgation of the deposit insurance system, managers in commercial bank weakened the motive of income smoothing, but the bank’s capital management behavior does not.

Epilogue: It's Not Over

Epilogue:It's Not Over Bill Broyles (bio) and Bruce J. Dinges (bio) When a writer dies, what's left to do? Chuck Bowden died at age sixty-nine while napping on the couch at the home of his companion and writing partner Molly Molloy. He had cut down on cigarettes and started working out again, but years of red wine, unfiltered Lucky Strikes, and missed checkups had taken their toll. A call was made, paramedics came, more calls were made, and the word echoed among his friends and readers that they had lost someone special in their lives. Memorials were held, where family and friends showed up to say a few words, to console and be consoled. Photos of Chuck were displayed, some of his garb was laid out, and candles were lit. On a panel at the 2015 Tucson Festival of Books, Jim Harrison, Clara Jeffery, and Luis Alberto Urrea paid tribute, told stories, and pondered the meaning of Chuck's work (see the transcript of "Charles Bowden's Southwest," moderated by J. C. Mutchler, in this issue). At the suggestion of Chuck's friend Ray Carroll, the Pima County Board of Supervisors renamed the visitor-recreation center near the summit of the range featured in Frog Mountain Blues the Chuck Bowden Mount Lemmon Community Center. ________ We can anticipate a biography someday, though readers can hardly expect it to contain any hidden secrets—Chuck was famous for announcing his sins in his own books, repeatedly, to the delight of readers and dismay of family, friends, and lovers. His public persona was his private ego. There was no secret lifestyle, cache of diamonds, or double-agent life. If anything, he revealed more in his books than he did in close conversation, but the man wearing the fleece jacket and jeans, hunched in the cab of a mini pickup truck, sleeping on the ground or a thin [End Page 217] mattress on the floor, was the same Chuck Bowden that readers knew. A cup of coffee at the ready, laptop computer ever-charged, and bursting with questions, he rushed to his next interview eager to meet the looming deadline. He left behind no big bank account, no dreams unfulfilled, just stories yet to be written. Fortunately, Chuck's literary legacy promises to endure. The University of Arizona Press has reissued Blue Desert, with an introduction by Francisco Cantú, and Frog Mountain Blues, with an introduction by poet Alison Hawthorne Deming. With backing from Mary Martha Miles, Chuck's literary trustee, and the Lannan Foundation, the University of Texas Press is reprinting Chuck's other books that have gone out of print, along with perhaps eight unpublished manuscripts. ________ It's a disservice to Bowden's talent and interests to pigeonhole him as a "southwestern" writer. He was that, but along the way he earned a national audience. He gained broad attention with his first book, Killing the Hidden Waters (1977), written in the vein of Rachel Carson's Silent Spring, with Chuck sounding the alarm to impending water crises in the West and Midwest. Today, virtually every community in America faces a water problem of one kind or another. The breadth and immediacy of his feature stories for the Tucson Citizen brought Chuck to the attention of the Pulitzer Prize and Robert F. Kennedy Book Award committees. Concurrently, he began contributing freelance editorials and book reviews to USA Today, the New York Times, and the Los Angeles Times, while filing stories with High Country News, Wild Earth, Buzzworm, Outside, Arizona Highways, and Phoenix Magazine. These, in turn, brought Chuck to the attention of editors at GQ, Harper's, the Atlantic, Esquire, Aperture, and National Geographic, where his articles ran alongside the work of Jim Harrison, Jon Krakauer, Barry Lopez, Malcolm Gladwell, Terry Tempest Williams, Ann Zwinger, Rick Bass, Annie Dillard, and Paul Ehrlich. Radio and television producers frequently sought his opinions on topics such as the U.S.-Mexico border or America's addiction to recreational drugs. Chuck invariably obliged with a pithy quote or a firsthand perspective that often clashed with government reports. Bowden's books, especially the later ones, likewise addressed national and international issues. Although better...