Causes Of Bank Failures Research Articles

Corporate Governance and Banks’ Capital Adequacy in Gambia: The Moderating Impact of Politics

Bank failures and banking crises create fears and anxieties in various stakeholders; and some of remote causes of bank failures across the globe are weak/poor corporate governance structures and practices, credit risk; government recapitalization regulation; corruption and embezzlement of banks’ assets; and weak legal/regulatory and political institutions. Undercapitalization is a symptom of banks’ capital inadequacy to withstand financial shock. Anchored on stakeholder-institutional theory; and secondary data, and general linear model, this study investigated the moderating impact of politics on the relationship between board effectiveness, management efficiency and capital adequacy of Gambia’s banking sector while controlling for financial leverage. The studied established that: the interaction of political stability and board effectiveness in risk management has significant negative effect on banks’ capital adequacy in Gambia; the interaction of political stability and management efficiency in profit maximization has significant positive effect on banks’ capital adequacy in Gambia; financial leverage has significant positive effect on banks’ capital adequacy in Gambia; board effectiveness in risk management has significant positive effect on banks’ capital adequacy in Gambia; and management efficiency in profit maximization has significant negative effect on banks’ capital adequacy in Gambia. The relevance of the joint stakeholder-institutional theory was established in this study. The work recommends that all political stakeholders in Gambia should strive to stabilize the country’s political system, and that the board of directors of banks in Gambia should ensure that their management teams apply prudent and best banking practices in declaring profit. This is because a positive profit should increase the capital adequacy of banks in a normal situation.

Saints, demons, wizards, pagans, and prophets in the collapse of banks in Ghana

The essence of banks in an economy cannot be underscored enough. However, poor institutional as well as unscrupulous banking and accounting practices could collapse a banking system and wreak an economy-wide havoc due to a contagion. Thus, the impact of bank failures/crises are grave. Given that this paper seeks to comprehensively discuss bank failures in the light of both agency and structural perspectives. Also, the study theorizes the causes of bank failures using Ayee's (2000) concepts and Pierre Bourdieu’s theory of social practice. The study adopted a qualitative methodology and used nine failed Ghanaian banks as cases. A latent content analysis on reports of these recent nine failed banks indicated the banking crises were a reproduction of old social actions, which include weak regulatory supervision, poor corporate gover-nance and risk management practices. Besides, the culture of weak enforcement explained the collapse of the local banks unlike their foreign counterparts who had internalized the culture of their parent companies and also possessed the right cultural capitals. Further, it was observed that weak saints, hungry and deceitful demons, lazy wizards, praise and attention-loving pagans and the neglect of prophets were the issues responsible for the bank crises or failures in Ghana.

A study of bank failure risk based on neural network model

This paper focuses on the analysis of bank failure causes i.e. prediction. Based on the neural network model, we use principal component analysis and fuzzy C-mean cluster analysis algorithm to achieve the evaluation of bank efficiency, the mining of bank insolvency causes, and the prediction of bank failure risk. By considering the literature search and production method together, we classify the 64 indicators of the indicator set into input indicator layer and output indicator layer. In the process of data analysis, we found that some of the higher weights do not objectively reflect the causes of bank failures. In order to avoid simply selecting 5 indicators from the 64 indicators, we used principal component analysis to reduce the dimensionality, set the number of extracted factors to 5, and consider the bank failure factors comprehensively through the 5 selected principal components, and calculate the percentage weights of the eigenvalues calculated for each principal component each year to complete the calculation of each bank's score. Whether a bank fails or not has a strong nonlinear relationship with 64 indicators, and considering that some of the data present exponential relationship, logarithmic relationship, less pure linear relationship between the data, and the indicator dimension is too large. Therefore, we decided to build a model based on BP neural network model, and continuously reduce the error by forward, backward transmission.

Impact of Insurance Companies Investment on Bank Liquidity and Economic Growth of Nigeria

The study examined the impact of insurance companies’ investment on bank liquidity and economic growth of Nigeria. This is basically to determine the extent of insurance companies contribution to liquidity formation in the banking sector which has being the major cause of bank failures as a financial intermediary and a dealer in short-term securities thereby mobilizing resources for real economic sector. The population of the study is made up of the fifty-nine Nigeria (59) insurance companies in Nigeria. Time series data from the central bank statistical bulletin on total insurance business investment was the source for secondary data. The study employed both inferential and Descriptive Statistics. The E-view statistical package was used for data analysis and test for three (3) hypotheses. The study reveals that there is no significant relationship between short-term investments of insurance companies and banks liquidity, that there exist no significant relationship between short term investment of insurance companies and liquidity formation of the Nigerian money market. The study also reveals that there exist a positive but not significant relation between insurance premium and Gross Domestic product in Nigeria. The study concludes that insurance companies in Nigeria do not impact significantly on the liquidity of banks, money market and economic growth in Nigeria. The study recommends that insurance companies be recapitalized to afford them more resources to expand their investment portfolios to stimulate liquidity formation. That the insurance companies should be more innovative and provide more services to courte public attention and participation to close the insurance gap. The National Insurance Commission (NAICOM) should also ensure compliance and adherence to regulations in the industry.

DOES ISLAMIC BANKING PROMOTE FINANCIAL STABILITY? EVIDENCE FROM AN AGENT-BASED MODEL

Islamic banking has come to the forefront as being one of the fastest growing branch of the global financial industry in recent years. In this study we evaluate whether coexistence of Islamic and conventional banks promote financial stability. In this respect, we evaluate two types of financial systems: (1) A system solely comprised of conventional banks, (2) a dual system in which conventional and Islamic banks coexist and interact with each other. Accordingly, we design two agent-based models representing aforementioned systems and examine possible contagious effects and causes of bank failures by employing the volatility spillover methodology. We find that Islamic banks greatly promote stability by providing liquidity during financial shocks and create more liquidity per asset compared to conventional banks. We also find that they tend to hold more cash than conventional banks, which cushion the effects of a possible liquidity squeeze. Conventional banks, on the other hand, tend to have reserve deficits, which intensify during shock periods. We conclude that coexistence of both bank types creates a win-win situation and contributes to financial stability.

Analysis of Quality of Management Accounting Information System to Improve the Implementation of Good Corporate Governance Principles (Case of Sharia Commercial Banks in Bandung City)

The main causes of bank failures include: poor bank management, too risky to take risks, and a lack of supervision which is conducted on fraud and embezzlement of funds. One way to overcome this is to improve the quality of management accounting information system (KSIAM) and the application of Good Corporate Governance (GCG) principles in banking institutions, one of which is sharia commercial banks. But in reality, there are still Sharia commercial banks that have poor KSIAM, which is characterized by there are still many complaints from users of the banking service information system, as well as the weak implementation of GCG principles as it is indicated by many cases of deviations in the form of fictitious customer financing facilities. This study aims to explain KSIAM and the application of GCG principles and to analyze KSIAM in improving the application of GCG principles in Sharia commercial banks in Bandung city. The research method is a case study and analytical descriptive with quantitative approach. Data collection techniques were carried out by distributing questionnaires and interviews. The study results showed that KSIAM at Sharia Commercial Banks in Bandung city is included in good categories. The GCG implementation in Sharia Commercial Banks in Bandung city is included in the very good category. Furthermore based on a descriptive analysis of the study results, it showed that KSIAM is able to improve the application of GCG principles in Sharia Commercial Banks in Bandung city. Keywords: Quality of Management Accounting Information Systems, Application of GCG Principles and Sharia Commercial Banks DOI: 10.7176/RJFA/11-6-10 Publication date: March 31 st 2020

The Root Causes of Bank Failures in Zimbabwe Since the Year 2008 to 2015

Since the year 2000, the Zimbabwean banking sector continues to experience unprecedented bank closures. The study seeks to identify the root causes that led to the banking crisis and to suggest solutions and measures that can be adopted to improve the financial sector. It also seeks to examine the effects of bank closures. The study finds that the root cause of bank failures in Zimbabwe is poor corporate governance practices. It was established that poor corporate governance resulted in other negative factors such as huge non-performing loans (NPLs) and poor credit risk management. The study also identifies weak and ineffective regulatory and supervisory framework, poor state of economy and under capitalization as other factors that caused the banking crisis. Loss of confidence and loss of employment were found to be the biggest effects of bank failures. Banks, government, the Reserve Bank of Zimbabwe (RBZ) and other responsible authorities should collectively institute measures to prevent future banking crisis. There is need to review and update financial sector policies and adopt prudential corporate governance practices.

Effect of Credit Risk Management Practices on Performance of Commercial Banks in Kenya

Credit default risk has been cited as the primary cause of bank failures in Kenya. Between 1984 and 1991 there were a total of 29 bank failures reported. This is an alarming rate given that it represents on average two or more bank failures per year during that period. Though this trend has been reversed, credit default risks continue to be a major challenge among banks. The main objective of the study is to establish the effect of credit risk management practices on performance of commercial banks in Kenya. Particularly, the study examined the effect of loan appraisal, lending requirements, credit management tools and loan recovery process on financial performance of commercial banks in Kenya. The study adopted descriptive research design. The target population were all the licensed commercial banks operating in Kenya by the year 2017 as reported in the Bank Supervisory Report 2017. The unit of observation comprised the credit officers and finance managers of the commercial banks. A census was adopted on all the 39 commercial banks hence a total of 78 respondents were targeted. The study used both primary and secondary data. The study findings revealed that loan appraisal, lending requirement, credit management tools and loan recovery process had a positive and significant relationship with the financial performance of commercial banks in Kenya. The study recommended that commercial banks need to establish an overall credit limits at individual borrowers as well as clearly establish a process for approving new and refinancing of existing credits. Further, there is need for follow-up on payment schedule of borrowers and reminding customers before maturity. The commercial banks also need to develop a well-documented lending procedure, do lending against its lending standards, set lending policies in line with the market requirement as well as develop well-established lending policies regarding interest rates

Drivers of US Bank Failures during the Financial Crisis

Hundreds of banks failed during the financial crisis of 2008 to 2010 causing significant social cost and enfeebling economic growth for years following. In the aftermath of the crisis, regulators responded, as always, with new regulations, the efficacy of which is debatable. For policy makers to enact effective regulation, they must understand the true cause of bank failures during crisis periods. We study the effects of 31 variables using univariate t-tests and probit regression to determine their influence on the probability of bank failure. We find that banks failed during the 2008 to 2010 financial crisis because of choices management made to accept more risk, specifically by having higher financial leverage, investing in higher risk loans in real estate and construction and by holding less liquid assets and fewer low risk loans like single family real estate loans. That is, the cause of US bank failures during the finance crisis was poor management.

Residential House Prices, Commercial Real Estate and Bank Failures

The Great Recession resulted in bank failures that exceeded the savings and loan (S&L) crisis in terms of percentage of institutions and the volume of assets of banks that failed. While much of the literature focuses “subprime” mortgages and its role in this financial crisis, we focus on the effects of residential housing prices. While construction and development loans have typically been a major cause of bank failures, we show that regional residential house prices and construction and land development loans are significant in explaining bank failures through 2011 but the regional residential house price movements have been significant through 2015. Furthermore, we show how the regional residential house price index (HPI) values have significant effects over the Great Recession, particularly in the South Atlantic and Pacific states (better known as the “sand states”).

Earnings and bank profitability in Nigeria

Bank earnings in form of retained profit help in the capital formation of banks. This is critical because capital inadequacy is often a cause of bank failures. During the banking crisis in Nigeria the gross earnings of many banks diminished considerably due to frauds and bad management. For example, in 2009 the Central Bank of Nigeria revoked the operating licences of fourteen banks which had huge nonperforming loans and were making losses. The fragility in the Nigerian banking system in the 1990s and beyond was compounded due to wide spread poor corporate governance practices and imprudent lending that led to the erosion of gross earnings and profitability. The study employed the exploratory research design. Data analyses were done through description statistics and the regression technique using the statistical package for the social sciences. The regression result was Y = 4.926 + 1.877x meaning that with an increase of 1 percent in gross earnings bank profitability increases by 1.88 percent. This is the crux of the study.

Bank branch location and stability during distress

Purpose – The purpose of this paper is to examine the impact of bank branch location on the likelihood of bank failure during the most recent financial crisis. Design/methodology/approach – This paper estimates the probit regression to identify the causes of bank failures and attempts to determine the role of branch location in bank performance. Findings – Using data from failed and surviving banks in Georgia and Florida, this paper finds that diversifying the balance sheet and operating in more competitive markets reduced failure rates, but branching intensity, measured by number of branches and distance of branches from the home office did not significantly reduce the probability of failure. This suggests that, at least in today ' s market, it is not important to bank stability to have a branching network a significant distance from the home office. Originality/value – This paper carefully considers the role of branch location in the likelihood of bank failure during financial distress. As such, it contributes to the historical policy debate regarding regulation prohibiting or minimizing banks ' ability to branch. It also contributes to our understanding of how banks structure their branching networks in the contemporary banking environment.

Coordinated Failure? A Cross-Country Bank Failure Prediction Model

This paper empirically investigates the causes of bank failures in Japan and Indonesia. Using logistic regression analysis of financial ratios, we explore the usefulness of domestic bank failure prediction models with a cross-country model that allows for cross-correlation of the error terms. Our results suggest that loans, both as a ratio to total assets, deposits and in some cases the ratio of non-performing loans, are the most significant predictors of bank failure in both Japan and Indonesia. Regulatory capital ratios, on the contrary, do not seem to be significant indicators of failure. In addition to the domestic models, we explore the usefulness of a cross-country model of bank failure prediction and find that this model outperforms the domestic models on several diagnostic tests.

Current Issues in Financial Economics: An Overview

The purpose of this paper is to provide an overview of a number of contemporary issues in financial economics. The issues analyzed include causes of bank failures, financing of small and medium size enterprise financing, convergence of international equity markets, the importance of CEOs to shareholders, the effects of Accounting Standard 158, the impact of credit cards on aggregate money holdings, and measures of industrial concentration.

Why Regulators Must Fight 'Control Fraud' Like Public Health Specialists

“Control fraud” is the leading cause of bank failures and financial crises. In “control fraud” the persons controlling a seemingly legitimate entity use it as a weapon to defraud. This essay analyzes the role of regulators in two epidemics of control fraud: the savings & loan debacle of the 1980s and the ongoing financial crises that first became acute in the nonprime mortgage sector. Effective regulation is essential to prevent and contain such epidemics. An epidemic is the natural outcome of a “pathogenic environment” which requires a reservoir of hosts for the pathogens to infect, and “vectors” to spread the pathogen. The anopheles mosquito is a vector for malaria. The financial world incurs epidemics of fraud when there is a “criminogenic environment.” Factors that make an environment criminogenic include non-regulation, assets that lack verifiable values, and compensation systems that create perverse incentives. The vectors of such epidemics include rating agencies, accounting firms, and appraisers. The symptoms include financial bubbles. They aid accounting fraud by creating fictional income to hide real losses. This feature of bubbles is analogous to infectious disease. Symptoms (coughing, sneezing) both spread disease and weaken the host, making him more susceptible to other infections.Effective regulation is essential to prevent epidemics of accounting fraud. Economists who determine regulatory policy have operated like faith healers instead of public health specialists. Their policies create, rather than prevent, criminogenic environments. They did so in the S&L debacle, the Enron/WorldCom scandals, Russian privatization, and “The Washington Consensus.” Economists’ failures are particularly tragic because there was a brief period (1983-1987) when regulators did act like public health officials. Those actions are largely unknown, as are the regulatory and Justice Department actions in 1990-92 that produced the largest number of convictions of white-collar criminals in U.S. history and prevented a subprime lending crisis.The Clinton and Bush administrations seemed unaware of these regulatory successes. Their deregulatory policies produced a criminogenic environment. Ending effective financial regulation was a key step in producing that environment and delaying the diagnosis of the resulting epidemic of mortgage fraud and other forms of accounting control fraud.

Les développements récents de l'histoire des crises bancaires aux Etats-Unis

The Recent Developments of the History of Banking Crises in the United States This paper surveys the recent literature on banking crises in the United States between 1838 and 1933. A more microeconomic analysis provided these main results : — contagious bank runs took place during the « Free Banking » era - solvent banks have been subject to runs during the National Banking era — during the Great Depression, the main cause of bank failures has been a deterioration of local and regional economic fundamentals.

Contagious bank runs

We present a model of the propagation process of bank runs. A bank failure alone is not sufficient to trigger a panic. In accord with the empirical evidence, runs become contagious only during periods of macroeconomic instability. In addition, we make a clear distinction between illiquidity and insolvency as possible causes of bank failures. We also show that, despite the possibility of runs, the deposit contract is superior to autarky.

The causes of bank failures: deflationary spells

Unexpected reductions in inflation induce debtor insolvency and bank failures with lags of up to eight years. Outside money is non-neutral because the default of marginal banks and the rising costs of surviving banks reduce the supply of monetary services.

Risk in Commercial Banking: Evidence from Postwar Failures

During the postwar years-1946 to 1976-a total of 171 commercial and savings banks (including 135 insured and 36 non-insured banks) failed-an average of about 5.5 failures per year. The sizes of these bankrupt institutions ranged widely-from one with $3.7 billion in total assets to two with less than $50 thousand in deposits. Far from declining in recent years, the number of failures seems to have increased. From 1970 to 1976, 54 banks failed (all but two of which were insured) for an average of more than 7 closings per year. During the past ten years failures have averaged 6.3 per year. (See Table I.) Moreover, as Benston [6] observes, in the 1960s and early 1970s there was a sharp increase in the proportion of active banks failing and in the proportion of the deposits of active banks failing. The few previous studies in existence imply that the principal causes of bank failures are: (1) self-serving loans to management or to owners; (2) general mismanagement of the loan case, defalcations or embezzlements; and (3) other manipulations by bank officials.' The notion that bank failures are a result of long-term financial or economic factors, and therefore, are predictable over a substantial period of time has been widely discounted. However, both economic and financial factors do appear to be correlated with the rate of bank failures. For example, an average of 5.6 U.S. banks failed during postwar recession years and only 4.5 banks closed in other years. In this paper, we examine in detail the financial characteristics of commer-