Deposit-taking Institutions Research Articles

Australia’s Thin Capitalization Regime: Financial Entities and Authorized Deposit-Taking Institutions (ADIs) are Put on Notice

Australia’s Thin Capitalization Regime: Financial Entities and Authorized Deposit-Taking Institutions (ADIs) are Put on Notice

Shadow Banking in the United States: Emerging Factors, Operation Modes and the Current Situation of Supervision - Based on the Comparison with Chinese Shadow Banking System and Market

In 2009, Ben Bernanke, chairman of the Federal Reserve, described shadow banking as a financial intermediary that converts savings into investments in addition to regulated deposit-taking institutions. To put it simply, the essence of shadow banking is a financial innovation that breaks through traditional financial institutions in order to maximize profits in the financial market environment. In this paper, we compare the U.S. and Chinese shadow banking system and their market system. From that, we analyze their similarities and differences from the aspects of emerging factors, classification and scale, and operation mode. Based on the above analysis, we then discuss the current situation of supervision of shadow banking in the United States and find that the U.S. shadow banking is negligent in institutional constraints and has practical difficulties in legal supervision. Finally, we put forward some suggestions on the future development and financial structure optimization of shadow banking.

Regulating Accountability: An Early Look at the Banking Executive Accountability Regime (Bear)

Following its enactment in early 2018, the Banking Executive Accountability Regime (BEAR) came into force for the largest Australian banks from July 2018, and for all other authorised deposit-taking institutions (ADIs) from July 2019. This research examines the experiences of ADIs in implementing the BEAR. The research specifically considers benefits and drawbacks of the BEAR and moderators that might prevent it from achieving its goals.

A methodology for enterprise-wide risk assessment in small banks and credit union

PurposeThis paper aims to provide an easy to follow, practical guide for small traditional banks and credit unions to conduct an enterprise-wide risk assessment of the financial institution’s anti-money laundering compliance program.Design/methodology/approachInformation was collected from relevant documents published by global standard setters in the disciplines of anti-money laundering, financial crime prevention and risk management. The data was integrated with common challenges experienced by small financial institutions to produce an application-based guide that practitioners can readily implement.FindingsThough not a new concept, macro-level financial crises and institutional level financial crimes have influenced the rapid evolution of risk management in financial institutions over the past three decades. Small unsophisticated banks and credit unions are expected to now perform an internal risk assessment. An abundance of information is available on risk assessment, but small institutions remain challenged in finding a turnkey document that is readily actionable to stimulate a less arduous undertaking, especially given the institutions’ limited resources.Research limitations/implicationsThe setting reflects small deposit-taking institutions with traditional services. It is tailored for easy understanding and practical use by the institutions.Originality/valueThis could influence small institutions to conduct enterprise-wide risk assessments and formulate and use more specific risk management policies.

Measuring Financial Performance for the Sustainability of Microfinance Institutions in Sierra Leone before the Ebola Outbreak

This paper uses an accounting ratio technique to evaluate the financial performance of microfinance institutions in Sierra Leone before the Ebola outbreak, with particular emphases on profitability, sustainability, asset and liquidity management, portfolio quality, efficiency and productivity using the parameters of other deposit-taking institutions. The survey considered Community Banks (CBs) and Financial Service Associations (FSAs) and their clients in the four (4) districts of Kenema, Kailahun, Kono and Koinadugu. A sample of 3 FSAs per district and a total of 5 CBs were in the 17 institutions for the survey. Profitability basis, the performance of the sampled FSAs showed a steady improvement in ROCE, ROA and NOPM for the period 2011 to 2012 but slumped drastically in 2013. Among other reasons, the catalyst for high performance in 2011 period was that the institutions’ loan portfolio grew exponentially alongside favourable interest rates coupled with low operating costs and extremely low provisions for bad loans. Operational Self-Sufficiency (OSS) in the periods 2011 and 2012, of 166%, and 114% respectively appeared stable and encouraging but as profit dwindled, the OSS fell sharply in 2013 to 45%; implying that the sampled FSAs could only cover 45% of operating expenses from revenue generated from operations. If the situation persists, the need to subsidize operations of the FSAs may be inevitable in the near future. Portfolio at Risk (PAR) kept an upward trend over the years. The ratio grew from 0.03 in 2010 to 0.06 in 2011 and doubled again to 0.12 in 2012, implying that the collection effort of the sampled FSAs had not been robust enough to keep pace with the growing size of loan disbursement. If the trend continues, sustainability could be threatened as the need for further huge write-off in subsequent years might be inevitable.

One Size Fits Some: Analysing Profitability, Capital and Liquidity Constraints of Custodian Banks Through the Lens of the Srep Methodology

Custodians play a key but discrete role in the global financial market infrastructure. In Europe, they are licensed as “credit institutions ”, a legal requirement for European deposit-taking institutions, and therefore they face the same prudential requirements as “traditional” banks. However, their business model and risk profile are different from those of traditional banks since the core of their activity does not encompass balance sheet transformation and the associated risks. JEL Classification: G15, G21, G28, L22

China’s policy target rates: a preliminary comparative analysis

ABSTRACT The People’s Bank of China began to discuss the importance of DR007 (the 7-day repurchase rate by deposit-taking institutions at China’s interbank market) from 2016. This study compares the performance of the fixed DR007 (FDR007) to that of the other popular policy target rate, the FR007 (the fixed 7-day repurchase rate by both deposit-taking institutions and non-deposit-taking institutions). This is the first known study to make this comparison. Using a variety of methodologies, and based on daily datasets for January 2018 – December 2019, this study concludes that the FDR007 outperforms FR007 with respect to policy target rates.

Canada

The Technical Note focuses on sizeable mortgage exposures and persistent housing market imbalances. The review evaluated oversight of deposit-taking institutions (DTIs) in federal jurisdiction, as well as in British Columbia and Québec. There are many good, well-functioning mechanisms in place for cooperation. Areas that warrant improvement about DTI regulation and supervision include policy development, especially between Office of the Superintendent of Financial Institutions (OSFI) and Autorité des marchés financiers, coordination of data collection, and exchange of useful prudential information between different agencies. The authorities should explore how to remove barriers that prevent close and meaningful cooperation. Risk weights on mortgage lending appear too low for insured mortgages and may not be sufficiently through-the-cycle for banks using the Internal Ratings Based approach. A common forbearance definition and monitoring framework for credit risk (in the context of loan restructuring by DTIs should be adopted across all jurisdictions in Canada. A similar definition, in line with the guidance of the Basel Committee for Banking Supervision, and consistent data will help improve risk monitoring especially given the importance of debt restructuring for managing problem real estate exposures. Finally, OSFI’s guideline on asset pledging should ensure enough unencumbered assets to support the claim of depositors.

Canada

This paper on Financial Safety Net and Crisis Management for the Canada reviews the stress testing and financial stability analysis. The paper highlights that the financial system’s performance has been strong. The insurance sector has remained financially sound even in the low interest rate environment. Major banks, life insurers, and pension funds have expanded their footprints abroad. Canada has strong financial linkages with the United States. Macrofinancial vulnerabilities—notably, elevated household indebtedness and housing market imbalances—remain substantial, posing financial stability concerns. Major deposit-taking institutions would be able to manage severe macrofinancial shocks; however, mortgage insurers would probably need additional capital. Major deposit-taking institutions also hold enough liquidity buffers to withstand sizeable funding outflows. However, increased balance sheet complexity and reliance on wholesale and foreign exchange funding, and the extensive use of derivatives are some areas of concern that would warrant closer monitoring by the competent authorities and a more comprehensive quality assurance in the context of supervisory or macroprudential stress testing exercise.

Key Risk Determinants of Listed Deposit-Taking Institutions in Malaysia

Risk management is a critical function in banking operations in the wake of several banking crises. However, we find few studies on risk management and a lack of empirical investigation on factors affecting the risk of Malaysian banks. These gaps have motivated us to identify the main factors associated with the risk of locally listed deposit-taking institutions. The findings show that three factors were significantly associated with unsystematic risk, while the systematic risk and the total risk of these deposit-taking institutions were significantly affected by four main factors. These four factors namely non-performing loans, cost of funds, loan to deposit ratio and inter-bank offered rate however, were found to have a more profound effect on the total risk than on the systematic risk or the unsystematic risk of Malaysian deposit-taking institutions.

Examining the role of institutional framework in promoting financial literacy by microfinance deposit-taking institutions in developing economies

PurposeThis paper aims to examine the role of institutional framework of regulative, normative, and cultural-cognitive in promoting financial literacy by microfinance deposit-taking institutions in developing economies with a specific focus on rural Uganda.Design/methodology/approachData were collected from a total sample of 400 respondents who are clients of promotion of rural initiatives development enterprises microfinance deposit-taking institution using a questionnaire and analysis of moment structures (AMOS) was adopted to analyze the data to examine the role of institutional framework of regulative, normative, and cultural-cognitive in promoting financial literacy by microfinance deposit-taking institutions in developing economies with a specific focus on rural Uganda.FindingsThe results indicated that institutional framework of regulative, normative, and cultural-cognitive significantly and positively promotes financial literacy by microfinance deposit-taking institutions in developing economies, especially in rural Uganda. The existence of institutional framework of regulative (codified rules and laws), normative (shared beliefs/values and norms), and cultural-cognitive (shared conception and interpretation) promotes financial literacy by microfinance deposit-taking institutions in rural Uganda. The structural equation model constructed by use of AMOS revealed that the institutional framework of regulative, normative, and cultural-cognitive explains 27 per cent of the variation on the role of microfinance deposit-taking institutions in promoting financial literacy in rural Uganda.Research limitations/implicationsThis study was purely cross-sectional with data collected at a specific point in time. Therefore, future studies through longitudinal research design can be adopted to test for the hypotheses derived under this study. In addition, only quantitative data collected by use of a semi-structured questionnaire was used in this study. Further studies may consider the use of interviews to get in-depth responses from the respondents.Practical implicationsAdvocates of financial literacy programs in developing economies should consider the existence of institutional framework of regulative, normative, and cultural-cognitive, which helps in promoting financial literacy by microfinance deposit-taking institutions. Indeed, the existence of state legislation to teach people about how to manage their money can promote financial literacy. Besides, normative behavior among individuals within a social setting can lead to increased likelihood that they will engage and participate in a particular financial literacy drive. Correspondingly, cognition, especially fluid intelligence that changes as people age may also help individuals to invoke several dimensions of cognitive skills to make informed financial decisions.Originality/valueThe current study adds to the existing body of knowledge by examining the role of institutional framework of regulative, normative, and cultural-cognitive in promoting financial literacy by microfinance deposit-taking institutions in developing economies. There is deficiency in the link between the institutional framework under the theory of institutions and financial literacy, especially in developing economies where there is great need for financial literacy among the poor.

Thailand

Banks represent a sizable share of the financial sector in Thailand, but other deposit-taking institutions and NBFIs have grown significantly in the last decade. While assets of banks represented 46 percent of total financial assets at end-2018, the government-owned SFIs and TCCs now play a key role in providing credit to households. Assets of the insurance and mutual fund sectors have doubled as a share of GDP over the last decade, and capital markets are largely on par with regional peers. Financial vulnerabilities appear to be contained, but household indebtedness is relatively high and there are signs of weaknesses in some corporates and SMEs. Weaker-than-expected growth in China and advanced economies, sharp rise in risk premia, and entrenched low inflation would adversely impact the financial system. Despite these risks, the banking sector is resilient to severe shocks. Stress tests results and sensitivity analysis indicate that the largest banks can withstand a shock broadly as severe as the Asian financial crisis. While data is limited, deposit-taking SFIs appear to be vulnerable to asset concentration and interest rate risk. Systemic and contagion risks stemming from interlinkages across banks and nonbanks are limited. Risk analysis could benefit from data improvements, including on liquidity and SFIs, and from the development of tools to assess concentration risk at an entity level.

Financial Inclusion of the Poor in Developing Economies in the Twenty-first Century: Qualitative Evidence from Rural Uganda

ABSTRACT The main purpose of this study is to examine financial inclusion of the poor by formal financial services’ providers in developing economies with data obtained from rural Uganda. Exploratory research design was used in this study and 50 poor households’ heads were interviewed to get their responses on being financially included by microfinance deposit-taking institutions (MDIs) in Uganda. The qualitative data collected from the interviews were analyzed using NVivo software and verbatim text were used to explain emergent themes and sub-themes from this study. The findings revealed that suitable initial account opening fees, minimum deposit requirement, limited eligibility requirements, permanence of use, depth of financial services and products, relevance of financial services/products in terms of convenience, flexibility, reliability, continuity, safety, dignity of treatment (clients’ protection), and welfare improvement are important determinants of financial inclusion of the poor in developing economies, especially in rural Uganda.

The impact of government guarantees on banks' wholesale funding costs and lending behavior: Evidence from a natural experiment

This study compares the effects of the introduction and subsequent removal of a unique government Wholesale Funding Guarantee Scheme (WGS) in Australia on the funding costs and loan growth of authorised deposit-taking institutions (ADIs). Our identification strategy exploits the voluntary adoption of the WGS by ADIs using a difference-in-differences estimation approach. We find strong causal evidence to indicate that the government guarantee helped large ADIs to reduce their funding costs relatively more than for smaller ADIs. Furthermore, large ADIs continued to benefit from the WGS beyond the official removal of the government guarantee due to market perceptions of continued implicit government support for the too-big-to-fail banks. We also find that the guarantee encouraged large banks to shift their loan portfolios into housing loans thereby reducing their riskiness. Further tests using guaranteed and non-guaranteed bonds issued by ADIs show that the largest banks experienced a net reduction of 6.2 bps from adopting the government guarantee.

Restricted Banking Licences: An Opportunity to Be Seized

In August 2017, the Australian Prudential Regulation Authority (APRA) launched a public consultation concerning a new licensing regime for authorised deposit-taking institutions (ADI). This article argues that the new Restricted ADI licences proposed by APRA should, if implemented, serve to promote competition and innovation in Australia’s financial system. However, such promotion must preserve the integrity of the market and, crucially, ensure that Australians are not affected in case of possible failures of the new entrants. The integrity of the new licensing regime, which follows a global trend of creating new opportunities for businesses to enter the banking market, will ultimately depend on APRA’s response to the underlying challenges highlighted in this article.

Association between Key Management Personnel Remuneration and the Performance of Authorized Deposit-Taking Institutions in Australia

The study investigates the association between each component of key management personnel remuneration (short-term and long-term remuneration) and total remuneration, and the performance of Authorized Deposit-taking Institutions (ADIs) in Australia. Data were collected from 91ADIs regulated by the Australian Prudential Regulation Authority. The study provides evidence that total key management personnel remuneration, short-term key management personnel remuneration and long-term key management personnel remuneration are significantly associated with the performance of ADIs, while the pay-performance association is weaker for long-term remuneration as compared to total remuneration and short-term remuneration. In addition, size of the board, existence of remuneration board committee and composition of remuneration board committee is significantly associated and composition of the board is partially associated with the performance of ADIs in Australia. The findings of the study also suggest that the pay-performance association is more sensitive for short-term remuneration as compared to long-term remuneration, indicating that although long-term remuneration is widely used by ADIs, short-term remuneration is an important part of key management personnel remuneration.

A stochastic dominance approach to financial risk management strategies

The Basel III Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one of a range of alternative risk models to forecast Value-at-Risk (VaR). The risk estimates from these models are used to determine the daily capital charges (DCC) and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realized losses exceed the estimated VaR. In this paper we define risk management in terms of choosing sensibly from a variety of risk models and discuss the optimal selection of the risk models. Previous approaches to model selection for predicting VaR proposed combining alternative risk models and ranking such models on the basis of average DCC, or other quantiles of its distribution. These methods are based on the first moment, or specific quantiles of the DCC distribution, and supported by restrictive evaluation functions. In this paper, we consider robust uniform rankings of models over large classes of loss functions that may reflect different weights and concerns over different intervals of the distribution of losses and DCC. The uniform rankings are based on recently developed statistical tests of stochastic dominance (SD). The SD tests are illustrated using the prices and returns of VIX futures. The empirical findings show that the tests of SD can rank different pairs of models to a statistical degree of confidence, and that the alternative (recentered) SD tests are in general agreement.

Contagion Risk for Australian Authorised Deposit-Taking Institutions

This paper investigates the contagion risk for Australian-owned authorised deposit-taking institutions ( ADIs) spilling from the US and UK banks. We hypothesised that Australian ADIs are prone to extreme shocks experienced by their US and UK counterparts. We define four discrete events for the Australian banking sector in terms of the number of banks exceeding an extreme value at some time. The extreme value is defined as the 90th percentile on the negative tail of the distribution of changes in the distance to default obtained through the Black-Scholes-Merton formula. Then we fit a multinomial logistic model ( MLM) to relate these events to the number of exceedances (extreme events) occurring in the US and the UK in the previous day for the time period from September 2006 to September 2011. The MLM estimates reveal strong contagion effects for Australian ADIs from the US and UK banks.

Facilitating Consumer Payment Innovation through Changes in Clearing and Settlement

This paper addresses concerns that the U.S. payment system is not keeping up with the rest of the digital economy in providing new methods of payment that give consumers immediate access to and use of their deposits held in accounts with banks and other deposit-taking institutions (banks for short). An international reference model is developed for an immediate funds transfer system that meets consumer needs in the digital economy. It is shown that despite a vision provided 35 years ago, and despite evidence of consumer demand dating back a decade or more, and notwithstanding successful commercial experience in a number of countries around the world, the U.S. payment system does not appear close to implementing immediate funds transfer capabilities. Governance issues appear to be the primary barrier to innovation in clearing and settlement that would support immediate completion of digital payments in the U.S. Four public policy recommendations are directed to the Federal Reserve, Treasury, and U.S. Congress that are action steps leading to upgraded payment services to consumers in the digital economy.

Has the Basel Accord improved risk management during the global financial crisis?

The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing from a variety of risk models, and discuss the selection of optimal risk models. A new approach to model selection for predicting VaR is proposed, consisting of combining alternative risk models, and we compare conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008–09 global financial crisis. These issues are illustrated using Standard and Poor's 500 Composite Index.