Bank Financial Stability Research Articles

Board busyness, performance and financial stability: does bank type matter?

ABSTRACTThis study examines the impact of board busyness (i.e. multiple directorships of outside board members) on the performance and financial stability of banks in a dual banking system (Islamic and conventional). We consider banks from 14 countries for the period 2010–2015. The results provide strong evidence that conventional banks with busy boards exhibit high bank performance (i.e. high profitability and low cost to income) and greater financial stability (i.e. low insolvency risk, credit risk, liquidity risk, asset risk, and operational risk). These findings are in line with the reputation hypothesis, which asserts that the expertise and connections of busy outside directors lead to better decision making, more efficient resource utilisation and more effective monitoring. In contrast, Islamic banks’ performance and stability are adversely affected by the presence of busy board members, with Islamic banks show low profitability, high cost to income and high risk-taking. This result might be attributed to the complex governance structure of Islamic banks and the uniqueness of their financial products, which require additional effective monitoring.

Loan portfolio diversification, market structure and bank stability

This paper examines whether the choice of bank loan diversification and market concentration are associated with a bank's financial stability. This study also investigates how the effect of loan diversification on bank stability varies depending on the level of the concentration or the competitiveness of the banking market. We find that increased loan diversification has a positive impact on the bank's financial strength. We show that market concentration is negatively associated with bank insolvency risk, consistent with the “concentration-stability” view. The results using interaction terms between loan portfolio diversification and market concentration indicate that diversifying banks operating in highly concentrated markets are more financially stable compared to those in less concentrated markets.

Ризик-орієнтований підхід у забезпеченні фінансової стійкості банків

Ризик-орієнтований підхід у забезпеченні фінансової стійкості банків

Концептуальні підходи до визначення сутності поняття фінансової стабільності банку

Концептуальні підходи до визначення сутності поняття фінансової стабільності банку

Stress-testing as a method of macroprudential policy and information security in banking sector

The article contains an overview of the essence, history, components, scenarios, methodology and results of stress testing of the Ukrainian banking system. The purpose of this paper is to explore and analyze existing approaches to stress testing as a method of macro-prudential policy of the Central Bank, to determine the results of quantitative risk assessment and financial stability of banks and their readiness to have sufficient capital to cover losses in various macroeconomic scenarios, as well as to develop a model of integrated assessment and rating of banks based on the results of stress testing. In order to summarize the results of the study, a model of integrated assessment was developed and a rating of banks was built based on the analysis of their financial stability, capital adequacy and readiness to withstand the crisis. To solve the problem of qualitative analysis of the stress-testing results in terms of a significant number of indicators and calculations a simulation of the integral indicator is proposed which helps information users group the data, obtain a generalized assessment and form a rating of banks according to the financial stability reserve.

FINANCIAL STABILITY OF A BANK - FACTOR OF STABILITY OF BANKING SYSTEM

The article is devoted to the analysis of the financial stability of Ukrainian banks at the present stage of development and the identification of the main factors of influence that are associated with it. The main tendencies of development of the banking system of Ukraine are considered. The present state of the banking system of Ukraine is determined. Financial stability plays a significant role in planning the activities of commercial banks. In general, its indicators reflect the level of riskiness of the functioning of the entity of the banking system. Managing financial sustainability has a significant impact on the functioning of banks. That is why it is necessary to create special control departments in banking institutions. The research of financial stability of banks is based on financial sustainability indicators developed and used by the IMF and the World Bank as the basis for the "Integrated Financial Sector Development Program until 2020". The necessity of applying different methods for evaluating the financial stability of commercial banks has been established in order to identify a wider range of problems related to the efficiency of the functioning of the banking system. The description of two main groups of factors, under the influence of which the financial stability of banks undergoes changes, is presented. It was revealed that external factors have a more significant impact on the financial stability of a bank. In particular, the factors of mega environment have become more important when banks enter the international financial space. Internal factors lie mostly in the management plane, and it is just the inefficient management of the bank that leads to the disruption of its stable financial condition. Specific features of management of financial stability and methods of its evaluation are considered. The analysis of economic standards of the banking system of Ukraine is carried out. The measures are proposed to minimize the risks and maintain the stability of banking institutions at the required level for normal functioning in modern conditions. It has been proved that providing, supporting, analyzing and evaluating the financial stability of commercial banks is a driving force in the development of the banking system, and hence the entire Ukrainian economy.

ПІДХОДИ ДО ОЦІНЮВАННЯ АНТИКРИЗОВОЇ ФІНАНСОВОЇ СТІЙКОСТІ БАНКІВ

У статті здійснено порівняльний аналіз основних підходів до визначення економічного змісту поняття «антикризова фінансова стійкость банку». Уточнено підходи до відбору адекватних показників для визначення рівня антикризової фінансової стійкості банку. Апробовано результати запропонованої методики на прикладі ПАТ АБ «Південний». Отримано висновок про те, що на перших стадіях виникнення кризи основним напрямом у забезпеченні антикризової фінансової стійкості є попереджувальні заходи – стримування агресивного розвитку, обрання стратегії якісного зростання, а не максимізації ринкової частки; забезпечення формування захисного буфера власного капіталу шляхом створення загальних резервів з отриманого прибутку.

Threefold Policies for Bank Development: Do Independence and Transparency Matter?

A well-developed banking sector is crucial to achieve a sustained economic growth. To attain this goal, both central banks and government have embraced operational and institutional arrangements. In this paper, I offer an empirical lookup on how monetary independence and transparency of macroprudential and fiscal policies are linked to bank development. Drawing upon a panel dataset for the period 1998-2014, I find that both macroprudential transparency (proxied by central bank financial stability transparency) and fiscal transparency are positively related to the share of credit granted by banks to the private sector, implying that more transparency enhances bank development. More independence from central banks seems, however, to decrease the ratio of bank credit to GDP. By considering interactions, the marginal effect of central bank financial stability transparency on bank credit/GDP, conditional on the levels of independence, is positive but decreases under a particular range of independence values. If central bank independence interacts with fiscal transparency, the marginal effect of fiscal transparency is positive and significant over a specific range of the degree of central bank independence but there is no statistical support that the marginal effect decreases within the same range unless I use the independence index of Garriga (2016).

Indicators of effective bank performance

The essence of the concepts of return and profitability of the is investigated. The analysis of rate of return and profitability indicators of Raiffeisen Bank Aval JSC is carried out. Recommendations are given on raising the income level of Raiffeisen Bank Aval JSC for the future. In this research: – the essence of the concepts rate of return and profitability of the are defined. – theoretical aspects of the bank's rate of return and profitability are grounded. – the peculiarities of forming the income of Raiffeisen Bank Aval JSC by 2016 are analyzed – the main profitability indicators of Raiffeisen Bank Aval JSC are evaluated. – areas for increasing Raiffeisen Bank Aval's income level for the future are identified. The profitability of the banking system of Ukraine is constantly under the control of the NBU, it requires improvement of the procedures for reorganization and liquidation of banks, so that these measures will not reduce the population's distrust of banks. The object of research is the analysis of rate of return and profitability indicators of Raiffeisen Bank Aval JSC. As a result of the research, such research methods as: analysis and synthesis, logical generalization, analogy and comparative comparison are used. Disclosure of the essence of the concepts of rate of return and profitability, as well as the definition of specific indicators allows both shareholders, investors and customers of the bank to orient themselves in the results of the bank's activities and its prospects, without conducting an in–depth analysis of the bank's activities in the areas. After all, the analysis of indicators in the dynamics indicates the effectiveness or not the effectiveness of management of the bank's resources. It is the analysis of these key indicators – indicators that allows to see trends and prospects in the bank's activities, and in time to receive a signal regarding further actions. Exceeding the critical values of rate of return and profitability indicators, the implementation of aggressive credit policy, the lack of formed reserves in the required volume in accordance with credit, interest, currency, investment and other risks, failure to comply with the requirements of banking legislation leads to a deterioration in the bank's financial stability, which can create a real threat of non–fulfillment its obligations to customers, and in the future may lead to bankruptcy. Among the promising areas for further research on the theoretical, practical and advisory aspects of justifying the features of profitability management of the bank is the implementation of the details of the components of the profitability calculation and determining the impact of changes in each of them on the change in the profitability of the banking institution as a whole.

Relation between marketing expenses and bank’s financial position: Ukrainian reality

PurposeThe purpose of this paper is to determine relation between marketing expenses and bank’s financial position. Factor and cluster analyses were applied to unify different financial variables into financial clusters. Each cluster has specific long-term and short-term financial position and is allocated to appropriate rating position of new rating system. Using rating positions, it is possible to determine whether overall bank position is fragile or stable, and which financial position is vulnerable. Comparing marketing expenses with financial positions, it is possible to evaluate how effectively banks manage their financial resources, and what impact marketing activity has on the financial position.Design/methodology/approachFinancial statements of Ukrainian banks for last five years are analyzed. Database of financial documents are reviewed. Coefficient, principal components, and hierarchical cluster analyzes are applied to elaborate new rating system. “Bartlett’s Test of Sphericity” and “Kaiser-Meyer-Olkin Measure of Sampling Adequacy Test” validate input data. Box-and-whisker plots are used to describe graphically interaction between marketing expenses and bank financial positions.FindingsThe new rating system describes short-term and long-term bank financial positions. In their marketing activity, Ukrainian banks mostly have uneven distribution of marketing expenses in context of financial positions. Such pattern disrupts long-term stability of Ukrainian banking system. Each financial variable has different impact on marketing activity; however, the correlation level is insignificant. In general, Ukrainian banks do not consider financial positions in marketing planning.Practical implicationsNew rating system can be used by the National Bank of Ukraine, the main supervisory bank of Ukraine, to determine fragile banks and to predict their bankruptcy. Banks may use findings to analyze their financial positions and to find optimal marketing expenses.Originality/valueThis paper contributes into the scientific literature in novelty of marketing-finance interaction in the Ukrainian banking system. New rating system of Ukrainian banks considers different aspects of bank financial stability: liquidity level, credit risks, deposit portfolio, and bank’s ability to attract additional financial resources on financial markets. Cluster analysis helps to allocate similar financial factors to different clusters and to evaluate financial risks in conjunction. As legal regulations concerning banking market, are also considered, the rating system can be adjusted to different countries. In addition, marketing expenses are analyzed in context of banks’ financial positions.

Sentiment in Central Bank's Financial Stability Reports

Using the text of financial stability reports (FSRs) published by central banks, we analyze the relation between the financial cycle and the sentiment conveyed in these official communications. To do so, we construct a dictionary tailored specifically to a financial stability context, which assigns positive and negative connotations based on the sentiment conveyed by words in FSRs. With this dictionary, we construct a financial stability sentiment (FSS) index. Using a panel of 35 countries for the sample period between 2005 and 2015, we find that central banks' FSS indexes are mostly driven by developments in the banking sector and by the indicators that convey information about the health of this sector. We also find that the sentiment captured by the FSS index translates into changes in financial cycle indicators related to credit, asset prices, and systemic risk. Finally, our results show that central banks' sentiment deteriorates just prior to the start of banking crises.

MONITORING THE CREDITWORTHINESS OF BORROWERS, AS AN ANTI-CRISIS MANAGEMENT MECHANISM

In the process of lending to borrowers, it is important for banks to assess their creditworthiness. The article considers the importance of creditworthiness and the process of lending borrowers. A comparative analysis of the widely used foreign and Russian methods for assessing creditworthiness was carried out, their differences and features of the creditworthiness analysis of the borrower were revealed, and recommendations were given for a more complete accounting of the borrower's financial condition when assessing creditworthiness. The necessity of conducting anti-crisis monitoring of borrowers as a mechanism for ensuring the financial stability of banks is substantiated.

ФІНАНСОВА СТАБІЛЬНІСТЬ БАНКУ ТА НАПРЯМИ ЇЇ ЗАБЕЗПЕЧЕННЯ В СУЧАСНИХ УМОВАХ

У статті розглядаються поняття «стабільність банку» та «фінансова стабільність банку». Узагальнені основні підходи щодо розкриття сутності фінансової стабільності банку. Сформульовані основні критерії, що визначають фінансову стабільність банку, а також фактори, що впливають на її рівень. Коротко розглянуто інституційну будові забезпечення фінансової стабільності в Україні. Окремо досліджено сучасні ризики банківського сектору, які впливають на показники його діяльності та створюють ризики його нестабільності. Серед ризиків виділені кредитний, юридичний, валютний ризики, а також ризики ліквідності, прибутковості та достатності капіталу. У підсумку статті запропоновані групи заходів для підвищення рівня фінансової стабільності банків в сучасних умовах економічної нестабільності. Серед запропонованих заходів виділені заходи стабілізації з боку НБУ, з боку банків та з боку органів влади.

Total Factor Productivity Change in Turkish Banking Sector During The Crisis Periods

The precondition of the increase in the efficiency of the banks depends on their ability to compete. Through the banking sector with high competitive power, economic dynamism is promoted, and economic stability is ensured. The alteration in macroeconomic conditions affects the performance of the banking sector and financial stability. This study was used the malmquist productivity index to analyze the efficiency of 19 commercial banks operating in Turkey during the period of 1990 - 2012 for intermediation and profit approach. Banks have experienced productivity loss according to both approaches in times of crisis. The efficiency of intermediation function in the banking sector have increased owing to the regulations made ??under the restructuring program of the Turkish banking sector and the disinflation process. The regression analysis results reveals that the impact of credit / deposit ratio, ROA, ROE and inflation rate is positive on bank’s total factor productivity. As ROE increases, banks' total factor productivity has decreased under the intermediation approach. Increase in GDP has led to increase in bank’s technical efficiency for intermediation and profit approach.

Fair Value Measurement and Bank Financial Stability

Fair Value Measurement and Bank Financial Stability

Bank Culture and Financial Stability: Evidence from Bank Lending Channels

We examine the effect of bank culture on financial stability through the lens of bank lending decisions. Using the Competing Value Framework developed in organizational behavior research, we measure bank culture along four distinct dimensions: compete, create, control, and collaborate. We find that compete-dominant banks are associated with riskier lending practices – higher approval rate, lower borrower quality, and fewer covenant requirements. These banks exhibit higher loan growth, but incur larger loan losses. As a result, they make greater contributions to systemic risk. We find the opposite results among control-dominant banks, whose culture emphasizes control and safety. Our findings cannot be explained by the bank business models, CEO compensation incentives and CEO characteristics. To establish causality, we use the exogenous shock to the US banking system during the Russian crisis of Fall 1998.

Developing Crisis Management Model for Second-Tier Banks in the Post-Crisis Period of Economy Development in the Republic of Kazakhstan

In the context of an ineffective crisis management system, the development of the banking sector of Kazakhstan in the post-crisis period is characterized by the impaired financial stability of second-tier banks. This situation creates the threat of systemic risk in the national banking system as a result of the critical slowdown in economy crediting by 49.5% and a reduction in bank assets by 47.2% of GDP. The article develops a diversified model of anti-crisis management aimed at increasing the financial stability of commercial banks. In contrast to other studies, the author’s approach is based on the argumentation of cause and effect links of financial, social and technical anti-crisis measures, the subordination of tactical objectives, which will provide an optimal level of financial stability of banks. Achieving the optimal level of financial stability of banks will determine the maximum rate of development of the national banking system in the post-crisis period. The objectivity and accuracy of the results is an advantage of this approach, it takes into account the specificity of the post-crisis period of the banking system functioning and is consistent with the international practice of strategic management.

Financial fragility of banks, ownership structure and income diversification: Empirical evidence from the GCC region

This paper investigates the role that ownership structure and diversification of income plays in the financial stability of banks from the GCC region. We find evidence that suggests that higher concentration of ownership in any type of shareholding is associated with higher insolvency risk. However, this higher insolvency risk is not associated with any specific type of shareholders. Higher financial fragility is also associated with the size and whether the bank is an Islamic bank. Banks engaged in substantial fee-based activities are more financially stable as compared with banks that predominantly generate their incomes from traditional intermediation activities.

The Influence of Competition on the Financial Stability of Banks in the Gulf Cooperation Council Countries

This paper tests the average relationship between competition and bank stability for 70 banks operating in the Gulf Cooperation Council Countries during the period 2001-2011. Our results show that an increase in competition contributes to bank fragility and that its contribution depends on the strength of regulations. In particular, the impact on bank soundness will be stronger the lower the capital requirements, the weaker the supervisory power, the stricter the regulations imposed on bank activities, and the less transparency and market discipline. These findings carry important policy implications for banks’ stability in the Gulf Cooperation Council Countries.

Zoning Regional Banking Sector as a Factor of Its Financial Stability

This article deals with the problem of assessment of commercial banks financial stability. In the framework of the article are approved methodology for assessing financial stability on the example of regional banks of the Republic of Tatarstan, as well as conclusions about the sustainability of the regional banking system in a worsening debt crisis and the increasing volatility in global financial markets are drawn. Economic and statistical techniques were used: grouping, ranking, a probabilistic assessment, analysis of volume indicators. We have produced results, indicating that there are problems in the activities of the regional banks that undermine stability of the regional banking system and also Russian banking sector as a whole.