Bank Failures Research Articles

The Effect of Corporate Governance Medied by Capital Adequacy and Credit Risk on Financial Performance (Study on Commercial Banks Listed on the Indonesia Stock Exchange)

This study discusses the causal relationship between bank corporate governance, capital adequacy and the probability of bank failure due to credit risk from the creditor's perspective on the bank's financial performance. The probability of failure of commercial banks in measuring risk-taking behavior. The special characteristics of commercial banks with smaller board sizes, shareholder equity, and long-term loans are associated with significantly lower levels of credit risk. Larger supervisory boards and short-term debt are associated with lower levels of credit risk.This study aims to examine and prove the effect of corporate governance on capital adequacy, and corporate governance directly and mediated by capital adequacy and credit risk impact on financial performance. Test and prove that corporate governance affects credit risk. Test and prove the effect capital adequacy to credit risk, as well as capital adequacy directly and mediated by credit risk have an impact on financial performance. Test and prove the effect of credit risk on financial performance. The analysis technique uses Generalized Structured Component Analysis (GSCA). The unit of analysis is 30 conventional commercial banks listed on the Indonesia Stock Exchange for the period 2016-2020, using panel data, namely time series and cross sectional data, with a number of observations of 30 x 5 years = 150 financial statements.The findings of this study are expected to contribute to the development of science in the study of financial management, especially the theory of corporate governance and credit risk management, namely: corporate governance as a source of value creation, ensuring capital adequacy as a buffer for the risk of losing credit portfolios and managing credit risk at a minimum level. to maintain financial stability and increase Profit which ensures financial performance remains in good or healthy condition. This study concludes that corporate governance has a significant influence on capital adequacy and financial performance, because good corporate governance will manage an optimal capital structure and the availability of capital adequacy that makes the company more able to operate and invest optimally, so as to generate maximum profit to improve financial performance. The influence of corporate governance on bank financial performance is also mediated by capital adequacy. Corporate governance has no significant effect on credit risk. Corporate governance cannot determine credit risk, because credit risk is the responsibility of company management in order to control risk in banking operations. Capital adequacy has a significant influence on credit risk and financial performance, because capital adequacy for the company's operations and investments will improve the bank's financial performance. Capital adequacy has a direct and mediated effect of credit risk on financial performance. Sufficient capital is able to reduce credit risk and improve financial performance, because credit risk which has a negative impact on financial performance has been successfully reduced. Keywords: Corporate Governance, Capital Adequacy, Credit Risk, Financial Performance. DOI: 10.7176/RJFA/12-20-06 Publication date: October 31 st 2021

Analysis of the stability of the Xingguang bank slope in the Xiluodu Hydropower Station, China, under dry–wet cycles

The first impoundment of the Xiluodu Hydropower Station on the Jinsha River in Southwest China commenced in May 2013. A month after the first impoundment, the Xingguang bank slope began to deform and continues to do so to this day. This endangers the lives and properties of residents as well as the operation of the reservoir. The change in the shear strength index of the rock mass in the water level fluctuation zone under multiple saturation and drying conditions was studied using the dry–wet cycle test, and it was concluded that after 25 cycles, the shear strength index of the rock mass in the water level fluctuation zone of the bank slope decreased to the minimum. The cohesion and internal friction angle decreased by 29.77% and 20.31%, respectively. The Fast Lagrangian Analysis of Continua in three dimensions (FLAC3D) software was used to analyze the influence of water level change on bank slope stability. According to the simulation calculation, the stability coefficient of the bank slope decreased from 1.87 to 1.76 when the water level increased from 540 m to 600 m. However, the interior of the bank slope did not develop into a consistent shear strain increment concentration zone, indicating that an increase in the water level resulted in a decrease in the stability coefficient of the bank slope, but the bank slope remained stable as a whole. The results of the dry–wet cycle test were introduced into the numerical simulation. The results demonstrate that when the calculation time was more than 25 years, the maximum displacement of the extremely strong dumping area of the bank slope suddenly increased from 169 cm to 1691 cm, and the stability coefficient decreased to 1.11. According to the dry–wet cycle test and numerical simulation results, it can be determined that water storage in the reservoir area is a major cause of bank slope deformation and failure, and the bank slope may be unstable in the next 25 to 30 years. The bank slope may be destroyed in advance if the reservoir water level rises and falls frequently.

Analysis and numerical simulation of toppling deformation and failure characteristics of anti-dipping rock slope under impoundment

High dam engineering is characterized by high water head, steep slope and complex geological conditions. Excavation or water storage will destroy the original equilibrium state of the bank slope and induce the deformation of the bank slope. Based on the monitoring data, this paper analyzes the spatio-temporal evolution of slope deformation during the impoundment of a reservoir bank in China. On this basis, considering the influence mechanism of water pressure, temperature, rainfall, seepage, rock mass rheology and other factors on slope deformation in the process of water impoundment, a statistical regression model of slope deformation is established, and the regression analysis of the deformation process of typical measuring points is carried out, and the main influencing factors of slope deformation are analyzed. Based on regression analysis, the slope deformation and failure process under impoundment are simulated and the influence degree of effective stress change and parameter weakening of rock mass on bank slope deformation and failure in the process of seepage field change is studied to reveal the main inducement of slope deformation under impoundment through the fractured rock mass seepage-stress-rheology coupling finite element analysis method. The results show that the slope deformation is the rheologic deformation triggered by the decrease of effective stress at slope toe caused by the rise of water level and the softening of rock mass, and the toppling form is the dominant one in space.

Residential House Prices, Commercial Real Estate Lending and Bank Failures

We investigate factors leading to bank failures during and after the Great Recession and banking crisis (2008–2015). The FHFA residential real estate house price index (HPI) for each of the 9 Census regions is used to interact with bank mortgage loans and bank financial statement variables. We find that these variables isolate different regional effects on the likelihood of a bank failing. Since we use changes from region to region, we find that regional location and HPI changes have an effect on banks’ commercial lending activity. Other more traditional and associated factors, like construction and land development lending or multifamily real estate lending, similarly explain bank failures during the main period of the banking crisis. By using this approach we better isolate the relationship between residential house prices and builders’ and land developers’ desire to borrow and the willingness of banks to concentrate portfolio lending in commercial real estate.

Modelling Macroeconomic and Bank-Specific Determinants of Credit Risk in the Nigerian Banking Sector: Evidence from Bounds Test Approach to Co-Integration

Credit risk, represented in this study by the ratio of non-performing loans to total loan (NPL), is considered as one of the critical factors that causes bank distress and failure. This study examines the macroeconomic and bankspecific determinants of credit risk in the Nigerian Banking sector from the period 1998Q1 to 2018Q4 using the bounds test approach to co-integration. Literature survey in this subject area using Google Scholar resources reveals that there seems to be a consensus of findings in terms of the negative relationship between credit risk and Gross Domestic Product (GDP) growth rate, while other macroeconomic and bank-specific factors tend to have a random pattern relationship with credit risk attributable to various countries’ economic peculiarities. This study shows that GDP growth rate, return on asset, return on equity, interest rate, unemployment rate, and real exchange rate have a negative relationship with NPL. On the other hand, inflation rate, loan deposit ratio, and ratio of bank capital to asset have positive relationship with NPL. The relationships between the three variables and NPL were found to be individually insignificant to explain credit risk trends in the long run. Moreover, the Wald short-run causality test reveals that the macroeconomic and bank specific indicators jointly influence credit risk in the Nigeria banking sector in the short run. This study, however, recommends that since the macroeconomic and bank specific factors were found to be individually insignificant to explain credit risk trend in the long run, consideration should be accorded to some psychological, political, and socioeconomic factors such as the borrower’s attitude, business climate, social dislocations and distortions, availability of good infrastructural facilities, and the direction of government policies. These factors can affect borrowers’ ability to honor their debt obligations and, thus, determine the level of credit risk in the Nigerian economy.

Impact of mobile banking failure on bank customers' usage behaviour: the mediating role of user satisfaction

PurposeThis study seeks to observe the association between mobile banking failures, use of m-banking and customer engagement to determine the contribution of user satisfaction towards m-banking as mediator between the aforementioned relationship.Design/methodology/approachThis study proposes a Mobile Banking Failure Model (MBFM) by integrating four failure dimensions (functional, system, information and service) based on Tan's failure model and DeLone and Mclean's Information Success model. In this paper, data was gathered from 338 respondents, who were the customers of banks and regular users of m-banking services of their respective banks in India. A survey method was employed to collect data. Structure equation modelling (SEM) was used to analyse the collected data.FindingsThe results suggest that all m-banking failure dimensions (functional, system, information and service) affect the use of m-banking, which in turn affects user satisfaction towards m-banking and customer engagement. Additionally, this study found that user satisfaction towards m-banking acts as a partial mediator between the use of m-banking and customer engagement.Research limitations/implicationsThe banking failure and its use by customers have been examined in the context of mobile banking in India only and thereby limits the generalization of results to other industry and country contexts.Practical implicationsThe results of this paper will guide bank managers and policy planners in implementing MBFM in the Indian banking context, specifically for their m-banking apps.Originality/valueThe use of m-banking, user satisfaction towards m-banking and customer engagement have been added as three supportive variables to the basic Tan's failure model and DeLone and Mclean's Information Success model to examine the impact of m-banking failure on bank customers' usage behaviour. This is a novel addition to the extant literature, as most empirical works in this domain are from industries other than banking (specifically m-banking) and with differing contexts.

Contingent Convertible Bonds and Macroeconomic Stability in a Stock-Flow Consistent Agent-Based Model

In this paper, we assess the effects of contingent convertible bonds (CoCos) in terms of stability of the banking sector and the economy as a whole. The analysis builds upon a stock-flow consistent agent-based model. The paper argues that the bail-ins that result from the activation of CoCos in a crisis not only partially replace costly bailouts for the taxpayer, but also effectively prevent bank failures and contribute to higher average capital adequacy ratios. This stabilization of the banking sector is positive for the economy as a whole as long as the volume of CoCos in circulation is not too high. Above a certain volume, their activation negatively affects macroeconomic aggregates, as CoCos reinforce the effects of a crisis rather than mitigate them. It is therefore in the regulator's interest to control the expansion of the CoCo market.

Were the US banking failures of the 1930s caused by illiquidity or insolvency?

Were the US banking failures of the 1930s caused by illiquidity or insolvency?

Slope stability of streambanks at saturated riparian buffer sites.

Saturated riparian buffers (SRBs) reduce nitrate export from agricultural tile drainage by infusing drainage water into carbon-rich riparian soils where denitrification and plant uptake occur. The water quality benefits from SRBs are well documented, but uncertainties about their effect on streambank stability have led to design standards that limit the maximum bank height and minimum buffer width, thus reducing the number of suitable candidate sites. In this study, the relationship between SRB design and streambank stability was examined through numerical slope stability modeling and validated using field sites. At the study sites, the addition of SRB flow increased the probability of failure by less than 3% for both simulated dry and rainfall scenarios. Furthermore, the simulations provide no evidence to support excluding potential sites based on bank height alone. Multivariate analysis of dimensionless parameters developed for SRB flow conditions was used to predict the factor of safety as a function of the SRB site and design conditions. The equation presented allows designers to assess the stability of a potential site where bank failure poses a heightened risk. The results of this study alleviate the need for extensive geotechnical evaluations at future SRB sites and could increase SRB implementation by expanding the range of eligible sites.

Competing risks proportional-hazards cure model and generalized extreme value regression: an application to bank failures and acquisitions in the United States

ABSTRACT Several commercial banks in the United States disappeared during the last decades due to failure or acquisition by another entity. From a survival analysis perspective, however, the high censoring rate suggests that some institutions are likely to be immune to failure and/or acquisition. In this study, we use a competing risks proportional-hazards cure model in order to measure the impact of bank-specific and macroeconomic variables on the probabilities of being susceptible to these events (i.e. incidence) and on the survival time of susceptible banks (i.e. latency). Moreover, we propose to model the incidence distribution using Generalized Extreme Value regression and compare the results with the ones obtained by the usual logistic regression model. The proposed methodology is evaluated by means of a simulation study and then applied to a dataset of more than 4000 United States commercial banks spanning the period 1993–2018.

Go Preventive or Go Home – The Double Nature of MREL

Abstract Bank Resolution is considered a cornerstone of the post-crisis financial regulation; however, it is also widely considered ineffective and inefficient in handling bank failures. This article analyses the preventive potential of the resolution framework, specifically focusing on the minimum requirement for own funds and eligible liabilities (MREL). We argue that MREL has a double nature. On the one hand, it should ensure the feasibility of resolution in case of a bank failure. On the other hand, it aims at restricting the funding model of banks, similarly to the other (preventive) capital requirements. By analysing the 2019 reform of the EU banking regulation, we contend that MREL represents an important complement to the rest of the preventive regulatory framework and that the latest reform unleashes such potential. We demonstrate that the new rules on MREL determination and enforcement allow the resolution authority to look after the build-up of systemic risk. The analysis reveals that MREL can serve both micro- and macro-prudential purposes. Finally, we argue that the current institutional architecture represents the main impeding factor for the new regulation to efficiently work, curbing the positive preventive potential of MREL.

Towards Harmonised Frameworks for the Liquidation of Non-Systemically Relevant Credit Institutions in the EU?

Abstract As part of its ongoing consultation on the European crisis management and deposit insurance framework currently available for the management of bank failures within the EU generally and the Banking Union in particular, the European Commission has called for the respondents’ views as to the need for further harmonisation of resolution arrangements for banks that currently do not qualify for resolution under the auspices of the Single Resolution Mechanism. In this respect, the consultation takes up a broader discussion on the need for harmonised bank insolvency regimes within the EU, which also ties in with an earlier international debate on the functional characteristics of optimal bank insolvency regimes initiated by international standard setters in the early 2000s. Against this backdrop, the paper analyses the case for further reform, and identifies potential impediments (both technical and political) to be expected in this regard. It argues that, while a full harmonisation of resolution powers and the centralisation of decision-making powers can be expected to address relevant concerns regarding the status quo, a comprehensive harmonisation can also be expected to meet with substantial political opposition, which in turn requires a better understanding of the functional requirements to be met by less ambitious reforms.

Forecasting Bank Failure with Machine Learning Models: A study on Turkish Banks

Forecasting bank failures has been an essential study in the literature due to their significant impact on the economic prosperity of a country. Acting as an intermediary player, banks channel funds from those with surplus capital to those who require capital to carry out their economic activities. Therefore, it is essential to generate early warning systems that could warn banks and stakeholders in case of financial turbulence. In this paper, three machine learning models named as GLMBoost, XGBoost, and SMO were used to forecast bank failures. We used commercial bank failure data of Turkey between 1997 and 2001, where we have 17 failed and 20 healthy banks. Our results show that the Sequential Minimal Optimization and GLMBoost provide the same performance when classifying failed banks, while GLMBoost performs better in AUC and SMO when considering total classification success. Lastly, XGBoost, one of the most recent and robust classification models, surprisingly underperformed in all three metrics we used in research.

High liquidity creation and bank failures

We formulate the “High Liquidity Creation Hypothesis” (HLCH) that a proliferation in the core activity of bank liquidity creation increases failure probability. We test the HLCH in the context of Russian banking, where many failures occurred albeit not triggered by swings in business cycles or an exogenous shock such as a crisis. Using Berger and Bouwman (2009) liquidity creation measures, we find that high liquidity creation is associated with greater probability of bank failure and this finding survives multiple robustness checks. Our results suggest that regulatory authorities can mitigate systemic distress and reduce the costs to society from bank failures through early identification of high liquidity creators.

Predicting Bank Failures with Machine Learning Algorithms: A Comparison of Boosting and Cost-Sensitive Models

Predicting bank failures has been an essential subject in literature due to the significance of the banks for the economic prosperity of a country. Acting as an intermediary player of the economy, banks channel funds between creditors and debtors. In that matter, banks are considered the backbone of the economies; hence, it is important to create early warning systems that identify insolvent banks from solvent ones. Thus, Insolvent banks can apply for assistance and avoid bankruptcy in financially turbulent times. In this paper, we will focus on two different machine learning disciplines: Boosting and Cost-Sensitive methods to predict bank failures. Boosting methods are widely used in the literature due to their better prediction capability. However, Cost-Sensitive Forest is relatively new to the literature and originally invented to solve imbalance problems in software defect detection. Our results show that comparing to the boosting methods, Cost-Sensitive Forest particularly classifies failed banks more accurately. Thus, we suggest using the Cost-Sensitive Forest when predicting bank failures with imbalanced datasets.

Simple banking: it is not that complicated

In an ever-changing, and ever more cumbersome, regulatory environment banks face increased risk management costs, and in the wake of the banking failures of 2008 and more recent banking scandals related to money laundering, the question that looms ahead is whether the need for a different approach to risk management, mitigation and transformation is warranted and whether such an approach can reduce risk, improve profitability and offer true value to customers. Safety and security are the staple of banks, without which they will run into trouble. This paper proposes a different approach to retail banking, built on an 80-year-old economic theory. The idea of narrow banking, or full reserve banking, centres on keeping deposits 100 per cent secure by offsetting them with risk-free assets on the bank’s balance sheet. This paper will discuss the feasibility of this approach and how it can be implemented to tackle some of the most critical issues and concerns from a regulatory perspective in banking.

Georgia: Financial Sector Assessment Program-Technical Note-Financial Safety Net, Resolution and Crisis Management

Since the prior FSAP the authorities have comprehensively updated the legal, policy and procedural framework for failing bank resolution. In 2019 both the NBG and Banking Laws were amended to provide the authorities with powers to resolve banks that in the past might have been deemed too-big-to-fail; this eventuality is now greatly diminished. In 2017 a Deposit Insurance System Law was adopted to provide protection to natural person depositors when a bank fails and is liquidated. In 2020 the NBG published a series of rules specifying its policies and procedures for the use of its new powers, and jointly with the MoF published regulations addressing the use of temporary public funding to mitigate the potential systemic implications of bank failures.

Juridical Analysis of the Institutional Relationship between the Financial Services Authority and Bank Indonesia Related to the Bank's Soundness Level

Under Article 7 of the Financial Services Authority Act, the Financial Services Authority declares that the Financial Services Authority has the authority to regulate and supervise the Bank's institutions which include licensing for establishment of a bank. In this Coordination Protocol as a forum for reconciliation between the Ministry of Finance, Bank Indonesia, the Financial Services Authority and the Deposit Insurance Corporation in a coordination forum called the Financial System Stability Committee (KSSK). Coordination in this committee is made if it is not possible to handle banking problems by the Financial Services Authority in relation to the settlement and handling of a failed bank that is suspected to have a systemic impact. The Financial Services Authority also requires the controlling shareholders or investors to increase the capital of the Systemic Bank and be able to convert the type of debt or investment to increase the capital of the systemic bank if faced with potential crisis.

Factors related to the failure of FDIC-insured US banks

PurposeThis study aims to analyze the factors related to the failure of 535 Federal Deposit Insurance Corporation (FDIC)-Insured United States banks in conjunction with the 2008 financial crisis.Design/methodology/approachThe research consists of an analysis of the following three five-year partitions: pre-crisis (2002–2006), crisis (2007–2011) and post-crisis (2012–2016). The main hypothesis is that the factors explaining bank failures vary by period. Using logistic regression analysis, the authors identify the desirable models by period based on three model selection strategies.FindingsLiquidity and non-risk-based capital ratios are important explanatory factors in all three periods. As the authors can see from the results, when comparing the full period (2002–2016) and the three five-year period partitions (2002–2006, 2007–2011 and 2012–2016), the ratios change from period to period, but they measure the same financial areas of concern in different contexts as follows: liquidity, leverage/risk exposure and capital adequacy. Risk-based capital ratios are not effective predictors of bank failures.Originality/valueRecent academic studies have analyzed bank failures during periods that cover the years before, during and after the crisis, but most of these studies discuss bank failures in the forecasting context only. This study includes an analysis of failure determinants during pre-crisis, crisis and post-crisis subperiods based on the FDIC monitoring system of bank failures and identifies what ratios are more relevant during each period and how they change from period to period.

The Role of Audit Firms in Spreading Depositor Contagion

ABSTRACTAuditor credibility is important in the banking industry due to the opacity of bank assets and the use of financial statements by external parties to facilitate monitoring. Depositors monitor and discipline bank behavior, but they can also contribute to the spread of shocks from one bank to another. We argue that depositors perceive bank failure as an audit failure, which reduces their assessment of auditor credibility. We document that exposure to failure through the audit firm is associated with lower uninsured deposit growth following the failure, consistent with depositors perceiving failures as a negative signal of auditor credibility. We further document that this association is stronger when depositors perceive connection to failure to reflect a pervasive issue within the audit firm. Collectively, our results suggest that depositors consider accounting signals at other banks in assessing financial reporting credibility.JEL Classifications: G21; M41; M42.