Failure Of Financial Institutions Research Articles

Climate Change Stress Testing for the Banking System

717It is apparent that climate change is creating financial risks. These risks are of such a nature that they can be regarded as systemic: they are exogenous shocks which may simultaneously cause or contribute to the failure of multiple significant financial institutions. As a result, regulatory tools available to monitor and manage systemic risk have recently been deployed in the context of climate change risks. Such tools include stress testing and scenario analysis. This article examines international initiatives, such as those of the Network for Greening the Financial System, as well as specific central bank initiatives including those by the Bank of England. After some initial observations around climate data, stress test design, and central banks’ mandate, this paper continues to discuss further possible inclusion in the prudential regulatory framework. In particular, the question is raised if capital requirements should be adjusted and if changes should be made to the risk management and governance framework. This paper argues in favour of the latter, but is more cautious as regards the former.

Autonomous and Sustainable Service Economies: Data-Driven Optimization of Design and Operations through Discovery of Multi-Perspective Parameters

The rise in the service economy has been fueled by breakthroughs in technology, globalization, and evolving consumer patterns. However, this sector faces various challenges, such as issues related to service quality, innovation, efficiency, and sustainability, as well as macro-level challenges such as globalization, geopolitical risks, failures of financial institutions, technological disruptions, climate change, demographic shifts, and regulatory changes. The impacts of these challenges on society and the economy can be both significant and unpredictable, potentially endangering sustainability. Therefore, it is crucial to comprehensively study services and service economies at both holistic and local levels. To this end, the objective of this study is to develop and validate an artificial-intelligence-based methodology to gain a comprehensive understanding of the service sector by identifying key parameters from the academic literature and public opinion. This methodology aims to provide in-depth insights into the creation of smarter, more sustainable services and economies, ultimately contributing to the development of sustainable future societies. A software tool is developed that employs a data-driven approach involving the use of word embeddings, dimensionality reduction, clustering, and word importance. A large dataset comprising 175 K research articles was created from the Scopus database, and after analysis, 29 distinct parameters related to the service sector were identified and grouped into 6 macro-parameters: smart society and infrastructure, digital transformation, service lifecycle management, and others. The analysis of over 112 K tweets collected from Saudi Arabia identified 11 parameters categorized into 2 macro-parameters: private sector services and government services. The software tool was used to generate a knowledge structure, taxonomy, and framework for the service sector, in addition to a detailed literature review based on over 300 research articles. The conclusions highlight the significant theoretical and practical implications of the presented study for autonomous capabilities in systems, which can contribute to the development of sustainable, responsible, and smarter economies and societies.

The Macroeconomic Implications of Subprime Crisis

Finance is partly international since financial assets have such high liquidity. Many factors, including national financial institutions, financial markets, financial products, and others, contributed to the financial crisis. People's expectations for the future of the economy are pessimistic, the currency of the region has produced a sizeable budget, the scale and aggregate of the economy have been significantly reduced, domestic economic growth has been severely harmed, and many businesses have closed, driving up the unemployment rate. Moreover, there is some social unrest and political unrest along with a general decline in the social economy. On August 9, 2007, the global financial crisis, also known as the credit crisis and lasting from 2007 to 2009, began. After the early subprime home credit crisis arose, investors began to lose trust in the value of mortgage instruments, which caused a liquidity crisis. Despite continuously pumping large amounts of money into the financial system, the central banks of multiple different countries were unable to halt the financial crisis from beginning. The financial crisis had been under control up until September 9, 2008, but it had begun to spin out of control, leading to the failure of numerous significant financial institutions or government takeover.

Determinants of Going Concern in the Banking Sector: Evidence from Ghana and Nigeria

ABSTRACT Going concern of entity is of much concern to stakeholders, especially investors of financial institutions since the failure of financial institutions affects a wide range of sectors. The study sought to develop a model to predict going concern of financial institutions. The data were collected from the financial statements of selected banks in Ghana and Nigeria. The binary logistic regression model was employed as the data analysis technique. The model used financial ratios as predictors of going concern. The result revealed that working capital and earnings before interest and tax on total assets are crucial financial predictors for going concern in financial institutions. The implication is that management should maintain adequate working capital and improve upon its earning capacity to sustain the operations of financial institutions.

The Role of Islamic Financial Institutions in Establishing Social Responsibility: An Analytical Study

The study aims to know the social role entrusted to Islamic financial institutions, which is derived in its origin from the legal texts that urged cooperation and synergy between the groups of society with limited and no income, by trying to reach the embodiment of the legitimate purposes through zakat, good loan and others, whose results are directly reflected on Social development. We have relied on the descriptive analytical approach by collecting data issued in official reports of reliable scientific journals. The study came to the conclusion that Islamic financial institutions contribute very little to social responsibility globally, and the reason for this is the failure of Islamic financial institutions to disclose the size of zakat, charitable works, charity and others in their financial reports, as well as the small size of the sample approved in financial reports (360). Institution only), also the existence of customer risks associated with good loans granted by Islamic banks to their customers, which are moral risks that result in non-payment or default in the repayment of thegranted loans

Who Could We Blame? The Impact of Strategic Orientations on the Failure of Financial Institutions

We evaluate the impact of strategic orientation on the failure probability of financial institutions. Using the US credit union industry as the empirical setting, we find that credit unions which exhibit preferential treatment to borrowers are more likely to fail, whereas those who set operational strategies towards balancing the benefits between savers and borrowers experience a lower failure probability. The impacts appear to be more pronounced in small credit unions and in credit unions which have a lower operating experience. We also find that borrower-oriented credit unions generate lower interest margins while neutral behavior credit unions generate higher margins.

No-fault default, chapter 11 bankruptcy, and financial institutions

This paper analyzes the costs and benefits of a no-fault-default debt structure as an alternative to the typical bankruptcy process. We show that the deadweight costs of bankruptcy can be avoided or substantially reduced through no-fault-default debt, which permits a relatively seamless transfer of ownership from shareholders to bondholders in certain states of the world. We show that potential costs introduced by this scheme due to risk shifting can be attenuated via convertible debt, and we discuss the relationship of this to bail-in debt and contingent convertible (CoCo) debt for financial institutions. We then explore how, despite the advantages of no-fault-default debt, there may still be a functional role for the bankruptcy process to efficiently allow the renegotiation of labor contracts in certain cases. In sharp contrast to the human-capital-based theories of optimal capital structure in which the renegotiation of labor contract in bankruptcy is a cost associated with leverage, we show that it is a benefit. The normative implication of our analysis is that no-fault-default debt, when combined with specific features of the bankruptcy process, may reduce the deadweight costs associated with bankruptcy. We discuss how an orderly process for transfer of control and a predetermined admissibility of renegotiation of labor contracts can be a useful tool for resolving financial institution failure without harming financial stability.

No-fault Default, Chapter 11 Bankruptcy, and Financial Institutions

This paper analyzes the costs and benefits of a no-fault-default debt structure as an alternative to the typical bankruptcy process. We show that the deadweight costs of bankruptcy can be avoided or substantially reduced through no-fault-default debt, which permits a relatively seamless transfer of ownership from shareholders to bondholders in certain states of the world. We show that potential costs introduced by this scheme due to risk shifting can be attenuated via convertible debt, and we discuss the relationship of this to bail-in debt and contingent convertible (CoCo) debt for financial institutions. We then explore how, despite the advantages of no-fault-default debt, there may still be a functional role for the bankruptcy process to efficiently allow the renegotiation of labor contracts in certain cases. In sharp contrast to the human-capital-based theories of optimal capital structure in which the renegotiation of labor contract in bankruptcy is a cost associated with leverage, we show that it is a benefit. The normative implication of our analysis is that no-fault-default debt, when combined with specific features of the bankruptcy process, may reduce the deadweight costs associated with bankruptcy. We discuss how an orderly process for transfer of control and a predetermined admissibility of renegotiation of labor contracts can be a useful tool for resolving financial institution failure without harming financial stability. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Impact of Bank Closings on Credit Extension to Businesses in Low-Income and Minority Neighborhoods

New research is surfacing since the last financial crisis, not only to help predict risks associated with bank failures but also to assess the impact of bank failures on the economy and local geographies. However, although bank failures occurred mostly among small (community) banks, much less is understood regarding how the closing of mission-oriented community banks, or minority-owned banks, affect traditionally underserved markets, areas such failed banks were designed to serve. We conduct an empirical investigation testing the effects of bank closings on local areas. We find that, as a result of bank closings, there are significant frictions with small businesses obtaining credit, which appear to be potent enough to cause cumulative declines in aggregate small business lending in neighborhoods, lasting up to 3 years. We also find evidence that such lending shocks have repercussions on small business growth. We find that the closing of large banks also has an impact on small business lending, consistent with previous research, which has shown that as small businesses lose credit from large banks, they are not able to switch easily to other banks, leading to a decline in aggregate lending in local areas. We find this to be true for low- or moderate-income (LMI) and minority businesses/neighborhoods. We also find that the failure of community development financial institutions (CDFIs) and minority depository institutions (MDIs) leaves a credit void that may not automatically be filled in LMI and minority neighborhoods.

The interbank payment network and financial system stability

Purpose The financial turbulence resulting from the global financial crisis sparked the interest in improving understanding of financial risks. The transmission of financial institution failures can be determined from the prevailing network structures between banks. The purpose of this study is to identify relationship between payment system network characteristics and financial system condition. Design/methodology/approach The characteristics of the interbank network structure in the payment system are identified using a graph theory and the relationship between the network characteristics of interbank transactions in the payment system and financial system stability is examined using a vector auto regression model. Findings This study shows that the connectedness of large-value payment transaction is more segmented compared to that of retail value payments. A significant relationship is observed between the characteristics of the network and the large-value payment transactions. Research limitations/implications This study found the connectedness of large-value transactions is more segmented when compared to retail-value transactions. It also shows a causal effect of the network characteristic on the financial system stability. Originality/value Unlike existing studies, this study considers both the connectedness in large-value transactions and retail-value transactions.

Bank Resolution 10 Years From The Global Financial Crisis: A Systematic Reappraisal

Since 2010 most Group of Twenty (G20) jurisdictions have introduced new recovery and resolution regimes to deal with bank failures. The common objective of these regimes is, first, to facilitate the orderly failure of financial institutions and, second, to redirect the bulk of losses to the private sector, thereby eliminating the need for public bailouts. Stringent creditor monitoring of bank risk is presumed to constrain excessive leverage because otherwise shareholders and managers will increase leverage to maximize returns on equity (ROE). Thus, the threat of a creditor bail-in should eliminate the TBTF subsidy and should also contain the governance costs that accompany excessive leverage curtailing managerial rents. Despite significant progress to meet resolution objectives, concerns remain on whether the present arrangements will work effectively in a systemic crisis. Such skepticism centres on whether bailing in the creditors of a cross-border institution, including the conversion of pre-funded liabilities such a TLAC and MREL, would prove sufficient to prevent the bailout of a global systemically important financial institution (G-SIFI). There are also concerns about the possibly undesirable consequences of bank bail-ins when the failure is systemic rather than idiosyncratic. Finally, it is not known to what extent resolution regimes are sufficient to mitigate moral hazard, especially in the absence of an ex post penalty regime for bank managers. This paper discusses these issues in context and tries to articulate the normative values attached to resolution regimes highlighting the prevalent lack of clarity and the overlapping and sometimes conflicting nature of resolution objectives under present frameworks. Then the paper focuses on the implications of draconian creditor bail-in regimes and advocates a more relaxed approach to the provision of liquidity in resolution to avoid fire sales.

The Evolution of Banking Regulation Since the Financial Crisis: A Critical Assessment

Following the 2008 financial crisis a major process of regulatory reform of the banking industry took place with the aim of increasing the resilience of the financial system. More specifically, the regulatory changes introduced after the financial crisis were aimed at pursuing three main objectives: (i) improve the resilience of individual banks, thereby reducing the risk of financial institutions to fail, (ii) improve the resilience of the financial system as a whole, limiting the risk of spillovers to the broader economy that would be triggered by the failure of large financial institutions, and (iii) reduce the risk for taxpayers to bear the cost of future banking crisis. Starting from an exam of the main weaknesses of the banking regulatory framework highlighted by the financial crisis, this paper provides a detailed analysis of the Basel 3 reform, its main goals, timing and technical features. It then examines the more recent revisions of the Basel 3 framework - often called “Basel 4” - and the new requirements associated to bank resolution policies, i.e. the “total loss absorbing capacity” (TLAC) and the “minimum required eligible liabilities” (MREL). These regulatory reforms are then critically discussed, both though the analysis of their impact on the banking industry, and with recourse to the available empirical evidence. This evidence shows that the banking industry did register a significant increase in the amount and quality of equity capital, mostly achieved through capital increases, and in liquidity. This led to a decrease in the probability of future large banks defaults and in the incentive for banks to take on excessive risks. Also, by introducing bail in mechanisms for banks’ liabilities, these reforms reduced the likelihood of future crisis being supported by taxpayers via government bail outs. However, a number of threats are still being faced by the banking industry. These include profitability, a necessary condition for a bank to be sustainable over time, the sovereign-banks “doom loop”, and the possibility of future recessions, as banks’ safety and soundness is inevitably linked to the state of the economy.

Resaleable debt and systemic risk

Many debt claims, such as bonds, are resaleable; others, such as repos, are not. There was a fivefold increase in repo borrowing before the 2008–2009 financial crisis. Why? Did banks’ dependence on non-resaleable debt precipitate the crisis? In this paper, we develop a model of bank lending with credit frictions. The key feature of the model is that debt claims are heterogenous in their resaleability. We find that decreasing credit market frictions leads to an increase in borrowing via non-resaleable debt. Such borrowing has a dark side: It causes credit chains to form, because, if a bank makes a loan via non-resaleable debt and needs liquidity, it cannot sell the loan but must borrow via a new contract. These credit chains are a source of systemic risk, as one bank’s default harms not only its creditors but also its creditors’ creditors. Overall, our model suggests that reducing credit market frictions may have an adverse effect on the financial system and even lead to the failures of financial institutions.

Government support of banks and bank lending

The extraordinary steps taken by governments during the 2007–2009 financial crisis to prevent the failure of large financial institutions and support credit availability have invited heated debate. This paper comprehensively reviews empirical assessments of the benefits of those programs—such as their effectiveness in reducing bank failures or supporting new lending—introduces a combined dataset of five key programs that provided term debt or equity to banks in the U.S., and assesses the effects of such support on lending by U.S. banks. The results, using an instrumental variable approach, suggest that bank loans did not increase at institutions receiving government support.

Internally Reporting Risk in Financial Services: An Empirical Analysis

The enduring failure of financial institutions to identify and deal with risk events continues to have serious repercussions, whether in the form of small but significant losses or major and potentially far-reaching scandals. Using a mixed-methods approach that combines an innovative version of the classic dictator game to inform prosocial tendencies with the survey-based Theory of Planned Behaviour, we examine the risk-escalation behaviour of individuals within a large financial institution. We discover evidence of purely selfish behaviour that explains the lack significance in pressure to adhere to the Subjective Norms of colleagues around intention to report risks. A finding that has potentially important implications for efforts to instil a high-error management climate and incentivise risk reporting within organisations where risk, if ignored or unchecked, could ultimately have consequences that extend far beyond the institutions themselves.

Overstating Moral Hazard: Lessons from Two Decades of Banking Crises

Over the past two decades a variety of banking system rescue approaches have been used, including in the 1997 Asian financial crisis, the 2008 global financial crisis, and the 2010 European debt crisis. By analysing the resolution of these crises as well as the approach to addressing bad loans in the People’s Republic of China, this paper provides a new perspective on the common belief that bailouts are invariably harmful to public funds or excessively conducive to moral hazard. Depending on the form of bailout, bank restructuring, and fiscal backstop, resolutions can be an effective means to restore a banking system. This paper argues that in a systemic financial crisis, a combination of balance sheet restructuring and the use of asset management companies to deal with non-performing loans is often the best choice. However, a fully-fledged resolution that triggers the bail-in procedure remains the best approach for non-systemically important financial institution failures which take place outside of systemic crises, namely when the failure is idiosyncratic.

The Analysis of the Collapse of Lehman Brothers

The causes of the failure of Lehman Brothers, preventive measures, and recommendations for going forward constitute the subject for discussion in this paper. The bankruptcy of Lehman Brothers in 2008 sent shock waves through the entire global banking and financial system across numerous and unexpected transmission channels when the price bubble in the US housing market tied to the subprime mortgage market suddenly burst. Actions, which largely relate to the risk return relationship, bad accounting treatment of financial transactions, and loose risk management policies and strategies at Lehman, led the financial conglomerate to its eventual collapse. Global stock markets, individual and corporate investors, and staff of the Firm and its other related businesses bore the brunt of the financial disaster in the form of huge losses, liquidations, job losses, reduction in asset prices and a subsequent global financial crises which could have been prevented. Strong corporate governance structures, robust risk management policies, and constant, effective monitoring and supervision of financial institutions, especially the larger ones by regulatory bodies are therefore highly recommended to ensure against failure of financial institutions.

Not All Financial Crises Are Alike!

The United States has experienced many financial crises, but the Great Depression, the prolonged thrift crisis of the 1980s, and the most recent Great Recession stand out. In this paper, the focus is on the differences the three crises exhibited in terms of the economic environment leading up to each crisis, the effects on financial institutions and financial markets, and the policy responses and how those responses evolved. The post-World War I macro environment leading up to the Great Depression was radically different than either the inflation environment of the 1970s and early 1980s or the housing collapse and role that subprime lending played in the Great Recession. Additionally, the financial institution failure experience was different in all three crises, as were the regulatory and legislative responses that followed. Perhaps most striking are two important differences. In the Great Depression, many very small rural banks failed. In the 1980s, the first round of failures hit mainly thrifts followed by largely smaller regional and community banks. In the Great Recession, the nation’s largest institutions were the main ones affected. Second, the runs on the institutions were also significantly different.

التنبؤ بالفشل المالي للمؤسسة بين مسؤولية المدقق والإدارة في ضوء معيار التدقيق الدولي رقم 570 " المنشأة المستمرة " والتشريع الجزائري

الملخص: يهدف هذا المقال إلى تسليط الضوء على الفشل المالي الذي قد يؤدي بالمؤسسة إلى الخروج من النشاط وبالتالي الزوال، خاصة في حالة عدم التنبؤ به في وقت مبكر، ومعرفة مسؤولية كل من المدقق والإدارة في التنبؤ بالفشل المالي للمؤسسة. ونظرا للدور الذي يلعبه مدقق الحسابات خلال قيامه بمهمة التدقيق للمصادقة على صحة وانتظامية الحسابات السنوية للشركة ومدى تعبيرها الصادق عن مركزها المالي ونتيجة نشاطها، فإن المعيار الدولي للتدقيق رقم 570 أوجب على المدقق القيام بمجموعة من الإجراءات الخاصة للتأكد من أن القوائم المالية تم إعدادها من طرف الإدارة على ضوء فرض الاستمرارية. كما سيتطرق المقال إلى نظرة المشرع الجزائري لدور ومسؤولية كل من المدقق والإدارة إلى التنبؤ بالفشل المالي للمؤسسة ومدى قدرتها على الاستمرار في الاستغلال. الكلمات المفتاحية: الفشل المالي، فرض الاستمرارية، المعيار الدولي للتدقيق رقم 570، مسؤولية المدقق، مسؤولية الإدارة، التشريع الجزائري. Abstract : This paper aims to shed light on the financial failure which may lead the company to the bankruptcy hence the decline, particularly if the company did not forecast this failure in earlier stages, and didn’t identify the responsibility of the auditor and the administration in the prediction the financial failure of the company. Considering the important role of the auditor during the audit to certify the accuracy and the consistency of the annual accounts of the company, this accurately represents the value of the company as well as its financial situation. The auditor should assess according to the ISA 570 that the principle of continuity in the preparation of the financial statements has properly applied by the administration. This paper will address also the view of the Algerian legislator toward the role and responsibilities of the auditor and administration to predict the failure of financial institutions and its ability to continue its activity in the market. Keywords: Financial failure, the going concern assumption, international standard on auditing n o 570, the auditor's responsibility, administration's responsibility, Algerian legislation.

Lehman's Derivative Portfolio

In the Fall of 2008, Lehman Brothers had a $35 trillion derivatives portfolio, representing about 5% of the worldwide derivatives market. It was a party to approximately one million trades, under more than 6,000 ISDA master agreements.Lehman’s derivatives were not the direct cause of its failure, but its derivatives, and the growth of the derivatives markets in general, led to the assumption of outsized risks and systemic weaknesses that did facilitate the crisis.In addition to the systemic problems caused by Lehman’s derivatives portfolio, derivatives have also been identified as a key source of value loss in the bankruptcy.The singular losses caused to Lehman’s bankruptcy estate by Lehman’s derivatives portfolio came from the safe harbors and the system of closeout netting the safe harbors support. While the safe harbors have been thoroughly studied and debated in the abstract, a close look at Lehman’s experience provides important insights for the future. In particular, the largest part of Lehman’s derivatives portfolio shows how financial institutions will again suffer when resolution is attempted in the traditional bankruptcy system. As such, I question the Dodd-Frank Act’s professed preference for “normal” bankruptcy process over specialized insolvency regimes like the new “Orderly Liquidation Authority.”And the abrupt closeout of Lehman’s cleared derivatives portfolio by CME, which Lehman’s examiner noted as the source of several obvious losses to the bankruptcy estate, also provides important insights, given Dodd-Frank’s strong preference for central clearing going forward.This paper looks at both issues, and suggests that the continuation of the safe harbors “as is” renders chapter 11 nonviable for larger financial institutions, and recent contractual attempts to work around the safe harbors are insufficient to solve the problem, while the increased role of clearinghouses in financial institution failures will force regulators to confront difficult choices. In short, the regulators will have to balance two competing systemic risks: the risk of an unruly resolution of the financial institution, balanced against increased risk to the clearinghouse.