Domestic Banking Sector Research Articles

Interbank market, stock market, and bank performance in East Asia

This paper investigates the role of stock and interbank markets in measuring bank performance in Korea, Malaysia, and Thailand. Research on whether financial markets served in terms of assessment and discipline of banks has been done in advanced countries; however, there has been limited research on this question as it applies to banks in East Asian countries. The stock price of individual banks can reflect a bank's risk profile, interbank loans to domestic banks with higher risk and bad performance may decline, and interbank borrowing rates charged to banks can respond to bank performance. This functioning of the stock and interbank markets is particularly important from the view of maintaining and strengthening the domestic banking sectors and the financial system in East Asia. This paper employs panel regression techniques and examines whether interbank transactions and stock prices of domestic commercial banks responded to bank risk and performance in those Asian countries. The regression results suggest that interbank borrowing, the borrowing rate, and foreign currency borrowing were affected by bank risk variables subsequent to the 1997 crisis in Thailand. In Korea, foreign currency borrowing of domestic banks may respond to bank risk after the crisis. In the case of stock markets, the regression shows that bank risk influenced each bank's stock price in Korea and Malaysia. The results for Thailand suggest that bank risk and cost affected bank stock prices after the crisis. These findings imply that improving both the interbank market and the stock market may play a role in establishing a sound banking system through market discipline effects.

Using independent component analysis and network DEA to improve bank performance evaluation

Given the importance of accurate performance evaluation for the banking industry, this paper uses data on Taiwanese domestic banks and investigates whether it is useful to construct an integrated performance model in order to address the problems of efficiency-analysis with the aid of an independent component analysis (ICA) and a network slacks-based measure (NSBM). ICA is related to the search for latent information; in it, independent components (ICs) from the observed data and selected statistically unrelated ICs are used as new input, intermediate, and output variables for the NSBM. The NSBM is then used in the investigation of multiple-dimension efficiencies, along with operating performance, in the Taiwanese domestic banking sector. The results show that the proposed ICA-NSBM model provides sufficient information to determine the main sources of inefficiency at the dimensional level and demonstrates excellent significant discriminative capability.

The Politics of Financial Regulatory Agency Replacement

As the global financial crisis has shown, regulatory agencies can at times spectacularly fail to fulfill their regulatory mandates. Yet, the conditions under which governments respond to regulatory failures by terminating and replacing their regulatory agencies have so far remained largely unclear. This article offers an explanation for the significant variation in governments’ propensities to dismantle and replace their banking regulatory agencies. Failures to ensure financial stability or international competitiveness make it electorally profitable for governments to replace their incumbent banking regulators. However, governments’ incentives to respond to regulatory failures by replacing their regulatory agencies are significantly conditioned by the extent of private or public ownership in the domestic banking sector. The analysis of an original data set of 65 banking regulatory agencies in 29 OECD countries between 1975 and 2010 supports these theoretical predictions.

Foreign banks and the export performance of emerging market firms: Evidence from India

This paper assesses the case for foreign banks as part of a program of institutional reform geared toward export promotion in emerging market economies. It does so by empirically evaluating the impact of foreign bank participation on the export performance of emerging market firms. It hypothesizes that foreign bank participation will not have a statistically significant moderating effect on the anticipated positive relationship between firm size and export sales. Using an unbalanced panel of 930 firm-year observations for Indian chemical firms over the period 1997–2005, it employs the two-stage least squares (2SLS) method with fixed effects to estimate a simultaneous equations model. The empirical evidence suggests that higher foreign bank participation in the domestic banking sector may attenuate the positive firm size–export sales relationship; however, this mediating effect is not significant in both statistical and economic terms. The main policy implication is discussed.

The Impact of Foreign Bank Penetration on the Domestic Banking Sector: New Evidence from China

This study proposes a Foreign Banks’ Branch Networks Index (FBBNI) to capture bank-level exposure to competition from foreign banks in terms of geographical proximity. The index takes account the rapidly expanded branch networks of both foreign and domestic banks in China and therefore serves as a better proxy to study the impact of foreign bank penetration on the performance of domestic banks. Based on a sample of three types of Chinese commercial banks from 2002 to 2011, we find that the expanded branch networks of foreign banks help to stimulate the improved profitability of domestic banks, as a result of higher achieved efficiency, and the increased non-interest income of domestic banks, as a result of knowledge transformation from foreign banks. These positive relationships are more pronounced among joint-stock banks (JCBs). Finally, foreign bank penetration has been found to play a significant role in stimulating the risk-management improvement of domestic banks, especially these with foreign strategic investors.

Comparative analysis of the impact of variations in total assets of banks on HPR exposure to interest rate risk: Developed financial market vs. financial market of the Republic of Serbia

Variations in total assets of banks generate a statistically significant influence on their interest rate exposure. The results of empirical research that are presented within this paper confirm the existence of positive co-relation between the size of banks that operate on the developed financial markets (US banks) and interest rate risk exposure, which is in accordance with the theoretical starting point. On the other hand, the research of domestic banking sector confirms negative relationship between the bank shares yield and variations in total assets which suggests that larger banks in the Republic of Serbia prefer more secure business operations in relation to their smaller competitors. In the context of protection from exposure of the market value of bank shares to interest rate risk, it can be concluded that developed financial markets should reduce HHI index while the developing financial markets should reduce the number of banks on the market while avoiding their concentration.

The Effects of Foreign Bank Entry on the Jordanian Domestic Banking Sector:Empirical Analysis from 1992 to 2006

The Effects of Foreign Bank Entry on the Jordanian Domestic Banking Sector:Empirical Analysis from 1992 to 2006

Sliding Doors Cost Measurement: The Net Economic Cost of Lax Regulation of the Irish Banking Sector

AbstractThis paper develops a restrictive procedure for evaluating economic policy decisions, by comparing actual economic history with a simulated history where a specific policy decision is replaced with a counterfactual, but credible, alternative. We apply the procedure to the mistaken decision to impose excessively lax banking sector risk regulation in Ireland during the period 2003–08. We measure the differences in banking sector stability and national income that would have occurred if the stricter regulatory approach enforced in Ireland in 2009 had been put in place six years earlier. We find that a few simple, reasonably prudent regulatory controls on the Irish banking sector would have greatly limited the vulnerability of the domestic sector to the 2008 global credit freeze and almost certainly prevented the 2008–09 collapse of the domestic banking sector and the consequent deep Irish recession of 2009–10. On the other hand, the risky and unsustainable inflow of foreign capital mediated by the domestic banks accounts for a substantial part of Irish economic growth during the 2003–07 period. Without this net foreign borrowing inflow, cumulative gross domestic product over the early period would have been substantially lower.

Financial Liberalization and Foreign Bank Entry on the Domestic Banking Performance in MENA Countries

Abstract: This study examines the impact of financial liberalization and foreign bank entry on the domestic banking sector from 1996 to 2007, and builds upon and expands the work of Lee (2002). We find that foreign bank entry, financial liberalization, ownership structure and degree of openness of foreign bank entry positively impact domestic banking system operating efficiency, capitalization, risk management, long‐term soundness, financial performance as well as economic and financial development. However, foreign bank entry is associated with reduced profit margins and increased operating costs of domestic banks in countries with less developed capital markets. Empirical evidence seems to support the argument that foreign bank presence leads to better allocation of capital and eliminates connected lending practices.

Doomsday for the Euro Area: Causes, Variants and Consequences of Breakup

In this paper we describe the genesis of a doomsday scenario and discuss potential causes and motivations for a breakup of the euro area. For this purpose, we differentiate between the departure of weak and strong countries, and examine the impact of the reintroduction of a national currency on domestic debt, the domestic banking sector, EU membership and the freedom of trade. We also briefly analyze the social and political costs of the accompanying social disorder.

Foreign Banks in India: Liabilities or Assets?

Using data on Indian banks for 1996–2007, this article examines the impact of foreign banks on the domestic banking sector. The analysis suggests that foreign bank penetration improves profitability and asset quality, although it dampens spreads. The results are robust to alternate measures of foreign bank presence. In addition, foreign banks appear to impact the maturity of credit portfolio of domestic banks. Finally, the results also support the fact that foreign banks typically charge lower interest rates as compared to domestic banks.

The Politics of Financial Regulatory Agency Replacement

As the global financial crisis has shown, regulatory agencies can at times spectacularly fail to fulfil their regulatory mandates. Yet, the conditions under which governments respond to regulatory failures by terminating and replacing their regulatory agencies have so far remained largely unclear. This paper offers an explanation for the significant variation in governments' propensities to dismantle and replace their banking regulatory agencies. Failures to ensure financial stability or international competitiveness make it electorally profitable for governments to replace their incumbent banking regulators. However, governments' incentives to respond to regulatory failures by replacing their regulatory agencies are significantly conditioned by the extent of private or public ownership in the domestic banking sector. The analysis of an original data set of 65 banking regulatory agencies in 29 OECD countries between 1975 and 2010 supports these theoretical predictions.

The Financial Crisis of 2008 - 2009 and the Arab States Economies

This paper will examine the impact of the global financial crisis on the Arab counties during the period(2008-2009). The paper has shown that increasing inter-connected world economic and financial matters meansmore effects on countries with high exposure to the rest of the world.The study finds that the various economies of the Arab countries were impacted by the crisis. The impacts variedbetween the Arab countries according to the nature of their economies and the degree of openness and theassociation with the global economy. Some governments in the region have moved to reassure depositors that theirmoney is safe in addition to the overall economic reforms carried out. The study classified Arab countries intothree groups depending on their economies structure.The effects of the crisis spread to the Arab economies through several local and external factors. The paper foundout that the direct impact of the crisis was less dramatic in the financial sectors of some Arab countries due to thelow level of interlink ages with the international system. One important lesson from the crisis is to preventfinancial contagion from crippling their domestic banking and non-banking financial sectors in addition to theneeded work to restore macroeconomic stability and sustainable growth and to work together to face the currentand future economic and financial crisis.

IMPACT OF FREEZING OF FCAS: THE CASE OF PAKISTAN

Foreign investment and foreign exchange reserves have ample importance for developing countries. So, there is a needed to encourage the foreign and domestic investors whose confidence was suffer by the unexpected decision of freezing of FCAs. The purpose of this study was to identify the areas that were affected after the decision of freezing of FCAs. Moreover, the impact of freezing decision on economy of Pakistan also indicated. More sophisticated impact on banking sector, balance of payment, foreign exchange reserves, foreign debt, and foreign investment. Study found the negative impact of freezing decision of FCAs on foreign banking and positive impact on domestic banking but Pakistan banking sector was disconnected from the international banking; insatiability in balance of payment was increased; the foreign investment and exports was reduced. Resultantly, foreign exchange reserves were reduced and foreign exchange rates was increased. Therefore, it is suggested to increase the confidence of foreign investors in order to increase the foreign investment and foreign exchange reserves. Discussion of conclusions and recommendations were also provided.

The Determinants of Vulnerability to the Global Financial Crisis 2008 to 2009: Credit Growth and Other Sources of Risk

In this paper, we identify initial macroeconomic and financial market conditions that help explain the distinct response of the real economy of a particular country to the recent global financial crisis. Using four measures of crisis severity, we examine a data set with over 90 potential explanatory factors employing techniques that are robust to model uncertainty. Four findings are of particular note. First, we find empirical evidence for the pivotal role of pre-crisis credit growth in shaping the real economy's response to the crisis. Specifically, a 1% increase in pre-crisis lending translates into a 0.2% increase in the cumulative loss in real output. Moreover, the combination of pronounced growth in lending ahead of the crisis and the country's exposure to external funding from advanced economies is shown to intensify the real downturn. Economies with booming real activity before the crisis are found to be less resilient to the global shock. Buoyant growth in real GDP in parallel with strong growth of credit particularly exacerbated the effects of the recent crisis on the real economy. Finally, we provide empirical evidence on the importance of holding international reserves in explaining the response of the real economy to the crisis. The effect of international reserves accumulation as a shelter to the global shock rises in credit provided by the domestic banking sector. The results are shown to be robust to several estimation techniques, including those allowing for cross-country spillovers.

Domestic banking sector development and cross border mergers and acquisitions in Africa

Recently, economists have started taking a closer look at cross border mergers and acquisitions (M&As) due to its phenomenal rise in the past two decades. This study investigates the relation between banking sector development and cross M&As in Africa. Our sample consists of 11 African countries with data covering the period, 1993–2008. We use a Baltagi panel instrumental variable Error Component Two Stage Least Squares (EC2SLS) estimator with the Baltagi-Chang estimators of the variance components to deal with endogeneity. The results of the study indicate that banking sector development promotes cross border M&A activity in Africa. We also document evidence suggesting that cross border M&A activity drives banking sector development in Africa. Overall, our evidence suggests a two-way causation between banking sector development and cross border M&As.

Financial Sector in Resource-Dependent Economies

This paper examines financial sector characteristics in resource-dependent economies. Using a unique dataset covering 133 countries, we present empirical evidence that the banking sector tends to be smaller in resource-dependent economies, even when controlling for several other factors which have been shown to have a significant effect on financial sector development in previous studies. Moreover, the threshold level at which the increasing resource-dependence begins to be harmful for domestic banking sector is very low. We also find evidence that the use of market-based and foreign financing is more common in resource-dependent economies. Further, we argue that a relatively small financial sector used to cater the needs of the resource sector might be unfavorable for emerging businesses, thereby hampering economic diversification and reinforcing the resource curse.

Financial Intermediation and the International Business Cycle: The Case of Small Countries with Big Banks

We examine the transmission mechanism of banking sector shocks in a twocountry DSGE model. Assuming that the home country is small relative to the rest of world, we nd that spillovers from foreign banking sector shocks are modest unless banks in the small country hold foreign banking assets. The correlation between home and foreign GDP rises with the exposure of the of the domestic banking sector to foreign bank assets.

After the global financial crisis: key competition law developments in Australia, the United States, the EU and the UK

This article has been written by way of follow-up to an article entitled ‘The Impact of the Global Financial Crisis on Competition Policy in the Australian Banking Sector' (2009) 3 Law and Financial Markets Review 449. As discussed in that article, responses to the global financial crisis included government bailouts of institutions (largely but not limited to those in the banking and financial sector); the provision of cash injections into financial systems to keep credit flowing; the encouragement of mergers in the financial sector resulting in the creation of “mega banks”; requiring competition authorities to “relax” enforcement of competition rules in the interest of financial stability. This meant that political pressure became increasingly influential for the implementation of competition law and policy. For example, the European Commission was essentially forced to shift its policy on the application of state aid rules in relation to financial institutions in response to rescue measures taken by European governments to support their financial sectors. Australia was luckier than most countries, in that the strength of its domestic economy and banking sector helped it to withstand the severity of the impact of the crisis. However, Australian markets were also affected. This article now examines how Australia and other key jurisdictions (notably the United States, the European Union and the United Kingdom) have responded to the global financial crisis, and focuses particularly on competition law responses to the crisis.

Real Deposit Insurance Coverage: An International Study

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">Recently several countries have implemented explicit deposit insurance systems. In most countries the adoption of an explicit deposit insurance system followed a banking crisis. This paper examines the impact of demographic, social, and political factors on the presence of an explicit deposit insurance system in a country. Moreover, for a subset of countries with explicit deposit insurance system we try to identify demographic, political, economic, and financial factors that affect the level of deposit insurance coverage. The findings suggest that life expectancy and political rights are related to whether an explicit deposit insurance system is in place or not. For countries with explicit deposit insurance systems the level of income, the importance of the banking sector within the financial system, and the development of domestic banking sector have a significant impact on the level of deposit insurance coverage level. The level of income, deposit money bank assets to GDP ratio, bank overhead costs to total assets ratio, presence of co-insurance, and type of administration are statistically significant in explaining differences in the level of coverage among countries. </span></span></p>