Higher Capital Ratios Research Articles

Consumer protection and firm valuation: A study of overdraft protection and US banks

This study investigates the impact of regulatory and voluntary overdraft protection (ODP) reductions on bank valuations. Using event study methodology and cross-sectional regression analysis, we find that banks have significantly positive cumulative abnormal returns (CAR) as a result of regulatory ODP reductions. The CAR is higher for banks with higher reliance on ODP income. The positive valuation effect diminishes for larger and well-capitalized banks. For voluntary ODP reductions, the valuation effect is negative, and more pronounced among highly profitable banks. The valuation decrease is attenuated for banks with higher capital ratios, and higher betas. These findings highlight the nuanced financial implications of consumer protection activities on bank valuation.

Determinants of Liquidity Risk in Vietnamese Commercial Banks

Liquidity risk, which tends to compound other risks such as credit and market risks, has become one of the principal risks in banks. Thus, this study examined the determinants of liquidity risk measured by the loan deposit ratio (LDR). The sample included 30 commercial banks in Vietnam based on secondary data coverage from 2017-2021. Descriptive statistics were used to determine the general situation of the banks' assets, liabilities, and business performance. The random effects model (REM) was chosen to determine factors affecting liquidity risk. The results show the huge gap in the business performance of the four state-owned banks and the rest of the joint-stock commercial banks, and the state-owned banks always accounted for over 50% of the total credit, assets, and deposits of the whole banking system. The average banks’ credit and profit growth rates were around 17% and 30%, respectively, and the bad debt ratio was about 2%. Increasing a bank’s credit growth rate and profitability would push up its liquidity risk. On the other hand, holding several liquid securities that banks could sell immediately to meet solvency requirements and maintaining a high capital adequacy ratio (CAR) would reduce their liquidity risk. These findings are valuable to the banks in understanding how to minimize liquidity risk, such as controlling the credit growth rate and CAR, setting appropriate profit targets, and investing in liquid securities. Additionally, by conducting monetary policies, the State Bank should regulate market liquidity and bank liquidity for the safe operation of the financial system.

Evaluating the impact of COVID-19 on the profitability metrics of Saudi Arabian banks: A panel data analysis

This study aims to evaluate the impact of the COVID-19 pandemic on the profitability of Saudi Arabian banks from Q1 2015 to Q2 2023. Using quantitative analysis of panel data from ten banks, the study assesses profitability through Return on Assets (ROA) and Return on Equity (ROE). Independent variables include bank-specific factors (Capital Ratios (CPTL), Operational Efficiency (OPEF), Deposits (DEP), Bank Size (SIZE)) and country-specific factors (Inflation (INF), Gross Domestic Product (GDP)), with the pandemic as a moderating factor. The findings reveal varied relationships between these variables and bank profitability. A significant negative relationship is observed between CPTL and ROE, suggesting that higher capital ratios may decrease profitability. OPEF and SIZE also show significantly negative relationships with both ROA and ROE, indicating that increased operational efficiency and bank size could lead to lower profitability. Conversely, DEP positively correlates with ROE, implying that banks with higher deposits achieve better equity returns. Interestingly, GDP and INF do not significantly affect bank profitability. These insights highlight the resilience and operational dynamics of the Saudi banking sector during COVID-19, emphasizing its robustness. The findings offer practical implications for policymakers, regulators, and banks in preparing for future systemic shocks and ensuring the sector's sustainability and stability.

Technical Efficiency of Handloom-based Micro-enterprises in Assam, India: A Stochastic Frontier Analysis

Improving technical efficiency is one of the most effective ways to boost output in any manufacturing process. The efficiency level of enterprises can be improved by identifying their sources of inefficiency. The present article examines the technical efficiency and tries to identify the factors causing technical inefficiency in handloom-based micro-enterprises in Assam. The article used primary data and collected from 312 micro-level handloom enterprises spread across four districts of Assam. The stochastic frontier production with an inefficiency effects model is used for the purpose of analysis. Labour, capital and material inputs are found to be significant and labour is the most effective factor for increasing of output level. The mean technical efficiency of overall enterprises is 0.67 and a wide variation in the level of technical efficiency among the sample handloom enterprises is observed. Inefficiency model shows that a high yarn capital ratio, lower product diversity, entrepreneurs with training, a higher number of employees and adoption of promotional practices tend to reduce the technical inefficiency of the handloom enterprise significantly.

The Influence of Working Capital Turnover and Debt to Equity Ratio on Return on Asset

The Covid-19 pandemic in 2020 caused the performance of the pharmaceutical subsector to fluctuate. From these results, it can be seen that the Return on Assets of pharmaceutical subsector companies has decreased and Working Capital Turnover has also decreased. The low working capital turnover was due to a decrease in current assets and an increase in current debt used to finance company projects. A low working capital turnover ratio means that working capital processing is not running well, whereas a high working capital turnover ratio means that the company's working capital is functioning effectively. This research aims to know the influence of Working Capital Turnover and debt-debt-equity ratio on Return on Assets in companies' subsector pharmacy period 2017-2022. Data analysis techniques used that is analysis Descriptive and Verifiable using the Assumption Test Classic, Multiple Linear Regression Test, Analysis Coefficient Correlation, Analysis Coefficient Determination, and Hypothesis Testing. The results of this research show that the Working Capital Turnover Variable has partially no influence on the Return on Assets and the Debt to Equity Ratio variable has Partial influential negatively on the Return on Assets Overall Simultaneous Working Capital Turnover and Debt to Equity Ratio affect the Return on Assets.

The impact of bank capital, liquidity and funding liquidity on sustainable bank lending: Evidence from MENA region

This research analyzes the impact of bank capital, liquidity and funding liquidity on sustainable bank lending in the Middle East and North Africa (MENA) region. An unbalanced panel dataset covering 55 banks using ESG scoring criteria from 2010–2020 was employed for this purpose. Results indicate that higher capital and liquidity ratios hinder the MENA banking sector’s ability to improve its sustainable lending capacity. Funding liquidity has a positive and significant effect on sustainable bank lending growth, which suggests that funding liquidity raises sustainable bank lending capacity. Furthermore, the impact of funding liquidity on sustainable bank lending growth remains positive and statistically significant to all capital ratios. It implies that bank capital improves the relationship between funding liquidity and banks’ capacity to issue loans in the MENA region. Finally, the results of too-big-to-fail banks indicate that bank lending growth is positively affected by higher capital ratios. Hence, it may help them to increase their capacity to issue sustainable bank loans in the market. Overall the results are robust to principal component analysis and other estimation techniques like bootstrapped-based bias correction fixed effects.

Financial technology and bank stability in an emerging market economy

Using a sample of 141 banks in Indonesia during the 2004–2018 period, we investigate the impact of financial technology (FinTech) firms on bank stability. We find that more FinTech firms tend to enhance bank stability regardless of types of FinTech firms and the measurement of bank stability. Meanwhile, we also find that small banks and non-listed banks tend to benefit more from the presence of FinTech firms. Specifically, small banks and non-listed banks exhibit lower riskiness and higher capital ratios following an increase in the number of FinTech firms. This paper, therefore, emphasizes that FinTech development might be beneficial for financial stability, particularly when FinTech companies with small banks or non-listed banks.

Determinants of Bank Profitability in the Context of Financial Liberalization: Evidence from Morocco

This article aims, in the context of financial liberalization, to examine the impact of several internal and external factors in relation to the profitability of banks listed on the Moroccan stock exchange. The study uses the panel data method on a sample of the six banks with the largest market shares over the 2010–2019 period to investigate the influence of ownership structure, bank governance, capital structure, prudential regulation, and also a macroeconomic variation on bank profitability. Accordingly, the empirical results indicate a negative relationship between concentration, foreign ownership, and bank profitability. Further, high capital structure ratios, especially solvency, liquidity, and capitalization ratios appear to have an undesirable effect on the performance of Moroccan banks. In contrast, the impact of domestic institutional ownership is positive, implying that profitability is more favored by domestic ownership than by foreign ownership. Our findings also highlight the importance of independent directors and board size. Therefore, liberalizing ownership and opening up the board to the expertise of outside directors is essential for the banking sector’s development. In terms of policy implications, central banks and regulators need to ensure that banks rigorously adhere to specified leverage and fixed capital adequacy ratios while ensuring optimal liberalization for bank performance.

An Analysis Of The Credit Risk Determinant Using Internal Factor And Macroeconomy Data

This study analyzes the influence of internal bank factors and macroeconomic factors on non-performing loans (NPL) using data from the listed banks in Indonesia. We apply panel data analysis. The bank's internal and macroeconomic variables used in this study include inflation, GDP, BOPO, CAR, bank size, LDR, and ROA. The sample includes all listed banks that cover 40 banks for the period 2016 to 2021. The analysis technique uses descriptive analysis and linear regression analysis. The results of the study show that banks with a high capital adequacy ratio (CAR) own a low credit risk (NPL). While the inefficiency (BOPO) is positive and significant confirming the bad managed bank also having bad credit risk management. GDP growth has a positive coefficient but statistically not significant. Internal variables such as Bank Size, LDR and ROA are all not significant. The result confirmed that well capitalized bank take less risk and inefficient banks have bad credit risk management.

Bank business models, size, and profitability

To examine the relation between profitability and business models (BMs) across bank sizes, the paper proposes a research strategy based on machine learning techniques. This strategy allows for analyzing whether size and profit performance underlie BM heterogeneity, with BM identification being based on how the components of the bank portfolio contribute to profitability. The empirical exercise focuses on the European Union banking system. Our results suggest that banks with analogous levels of performance and different sizes share strategic features. Additionally, high capital ratios seem compatible with high profitability if banks, relative to their size peers, adopt a standard retail BM.

Examining the Impacts of Environmental Characteristics on Shariah-Based Bank’s Capital Holdings: Role of Country Risk and Governance Quality

This study investigates the effects of environmental characteristics, namely the quality of country-level governance and domestic risk on Islamic banking capital decisions. To do so, this study selects 29 listed Islamic banks operating in Arab markets for the wide range between the 2003-2018 period by performing the System-GMM dynamic panel technique. The results underscore that higher country-level governance quality is linked with higher capital ratios and Islamic banks increase capital ratios specifically by improving methods of anti-corruption, political stability, government effectiveness, and legal systems. Moreover, the results reveal that Islamic banks increase capital ratios by the rise of a country’s vulnerability, particularly by increasing financial and economic risks. However, the results suggest that decreasing political risk also corresponds with higher capital ratios. Overall, the results confirm that environmental characteristics have a pivotal role in determining Islamic bank capital ratios. The results are robust and the findings of this study are likely to open new discussions in the banking literature.

Euro area banks' interest rate risk exposure to level, slope and curvature swings in the yield curve

We investigate the interest rate risk exposures of euro area banks during times of crises and very low interest rates. First, we assess sensitivities of banks' stock prices to changes in the level, slope and curvature of the yield curve using the Bayesian DCC M-GARCH model. Our findings reveal that stock price sensitivities change over time and that, on average, banks benefit from increases in the level, slope and curvature of the yield curve. Second, we observe that banks with higher capital ratios, more customer lending and less deposit financing are particularly sensitive to interest rate movements.

A note on regulatory responses to COVID-19 pandemic: Balancing banks’ solvency and contribution to recovery

We discuss the implications on banks and the economy of prudential regulatory intervention to soften the treatment of non-performing exposures (NPEs) and ease bank capital buffers. We apply these easing measures on a sample of Globally Systemically Important Banks (G-SIBs) and show that these banks can play a constructive role in sustaining economic growth during the COVID-19 pandemic. In addition, an empirical analysis shows that prudential regulatory responses to COVID-19 along with high regulatory capital and low non-performing loans ratios are positively associated with economic growth. Thus, banks should maintain high capital ratios in the medium-term horizon to absorb future losses, as the effect of COVID-19 on the economy might take time to fully materialize.

The Impact of E-Procurement Implementation on Public Procurement’s Corruption Cases; Evidence from Indonesia and India

The huge spending on public procurement makes public procurement is very vulnerable to corruption. Many governments around the world have adopted Electronic Procurement (E-Procurement) to increase transparency, improve accountability, and reduce corruption with variable success. Government of Indonesia adopted E-Procurement in 2008, while Government of India introduced E-Procurement in 2012. Even though E-Procurement has been implemented for quite a long time in those two emerging countries, only limited research exist on the impact of E-Procurement in reducing procurement corruption. By using the combination between quantitative and qualitative methods, this study attempts to assess the extent to which the impact of E-Procurement implementation on procurement corruption cases in Indonesia and India. The findings suggest that Indonesian provinces with high capital expenditure ratio, are more vulnerable to corruption and implementation of E-Procurement was impactful on reducing the number of procurement corruption cases in such provinces. Meanwhile in India, the effect of E-Procurement was not impactful enough to reduce a notably large number of procurement corruption at the state governments because E-Procurement implementation at the state level in some degree was bothered by low competency and professionalization staff and also high political interference in state administrations. The study contributes to limited empirical research on the effect of E-Procurement on corruption.

The Role of Equity Financing on the Profitability of Indonesian Islamic Banks

Islamic banks provide financing in the form of equity financing and non-equity financing. Equity financing is profit-loss sharing financing which is the main core of Islamic bank business consisting of Mudharabah and Musyarakah. This paper examines the extent to which equity financing affects the profitability of Islamic banks in Indonesia with the control variables consisting of bank-specific variables such as capital adequacy ratio, cost-income ratio, non-performing financing, and macroeconomic conditions such as domestic output, exchange rate. This study employs aggregate data of Islamic banks from January 2010 to December 2019. The estimation method is the Autoregressive distributed lag (ARDL) model. The results prove evidence of the long-run relationship between the dependent andindependent variables. The results show that total equity financing increases Islamic banks' profitability in Indonesia, but only Musyarakah financing significantly boosts profitability. Furthermore, the bank-specific variables affecting profits are capital, efficiency, and nonperforming financing. High capital adequacy ratio (CAR) reduces profit and inefficient Islamic banks and non-performing financing lower profit. Evidence also highlights that worse economic conditions through the economic downturn and sharp depreciation obviously lower the profitability of Islamic banks. These results imply that Islamic banks must capitalize on Musyarakah financing to support the performance of Islamic banks.

Does It Matter How to Fund?: A Research on Turkish Deposit Banks

The Aim of this paper is to examine the possible relationship between liability structure and bank performance. In this context, panel data regression method is used to analyze relationship between bank performance and liability structure of banks. The main data source in this study is The Banks Association of Turkey’s banking statistics between 2005-2018. In the analysis, liability preferences of Turkish banks are used as independent variables and CAMELS performance scores of banks are used as dependent variable. Additionally, variables that are admitted in literature as bank performance determinants are taken into consideration in bank performance model as control variables. According to the results, the banks’ performance is affected by several liability structure variables. Use of loans-especially long term loans- and to have high saving deposits/total deposits positively affect bank performance; while extensive use of non-deposit liabilities, third alternative liability sources, long-term deposits, and foreign currency loansnegatively affect bank performance. As with other liability structure variables, high capital adequacy ratio and leverage also have negative effect on bank performance. Moreover, as control variables GDP per capita, inflation rate, interest rate, bank size, bank efficiency, bank liquidity, bank risk and bank market share have a statistically significant effect on bank performance.

Determinants of European banks’ default risk

Using bank CDS spreads, we examine three types of determinants of Euro Area bank default risk in the period 2008–2019: bank characteristics related to new regulation, the bank-sovereign nexus and the monetary policy stance. We find that Basel 3 regulation improves the banks’ risk profile since higher capital ratios and more stable deposit funding contribute significantly to lower CDS spreads. We confirm the persistence of the bank-sovereign interconnectedness and find that sovereign default risk is transmitted to bank risk with an amplification factor. The ECB monetary policy stance is neutral with respect to bank risk, hence we find no evidence of perceived excessive risk-taking behavior.

Pengaruh Credit Risk Management Pada Financial Performance Bank Konvensional Yang Terdaftar di BEI

The purpose of this study is to analyze the impact of credit risk management on the financial performance of Indonesian conventional banks in 2016-2020. The sample in this study was 32 conventional banks from 160 observations using purposive sampling technique and secondary data. The dependent variable in this paper is measured by profitability using the return on assets proxy while credit risk management as an independent variable. From the research results, LDR and NPLR have no effect on financial performance. CAR has a positive influence on financial performance so that bank managers are expected to be able to maintain their capital adequacy ratio in accordance with the provisions set by Bank Indonesia to maintain their financial performance because a high capital adequacy ratio is considered safe and tends to meet its financial obligations, while CIR and LDR negative effect on financial performance. By increasing the ratio of costs to income indicates a low level of efficiency in banking operational costs, and low liquid assets will increase cash reserves to reduce liquidity risk. Investors can invest their funds in banks that have a high capital adequacy ratio, cost of income ratio and liquidity ratio to avoid financial risk.

Legal rules, information transparency and Islamic bank capital decisions

ABSTRACT To what extent does the formal institutional environment influence Islamic bank capital decisions? We answer this question by assessing the effect of the legal rule index on a sample of 100 Islamic banks in 28 countries from 1999 to 2013. Our econometric analyses show that legal rule index positively and significantly influences capital ratios. The results can be explained by the idea that effective legal rules incentivize Islamic banks to hold higher capital ratios to signal better monitoring to depositors and regulators. In addition, we find that this positive association can be enhanced through strong information transparency channels, democratic and stable political institutions. These results provide insight into how a formal institutional environment can shape Islamic bank capital ratios. It further suggests that the formal institutional environment serves as a constraint on policymakers, as any given capital guideline may function very differently depending on the complexity of the formal institutional environment.

Higher purpose, banking and stability

This paper provides survey evidence on higher purpose for individuals and organizations and develops a theoretical model consistent with the evidence. The survey of 1,019 individuals in the U.S. sought to learn about their commitment to and perceived value from personal and organizational higher purpose. One striking finding from the survey is that when an organization has a written statement of higher purpose, its employees tend to trust their leaders to not only be socially responsible, but also to make better business decisions, i.e. corporate governance is perceived to be better by the employees. We then develop a simple theoretical model that provides an economic rationale for this finding. In the model, an investment in higher purpose credibly signals the firm owner's ability/marginal productivity and elicits higher employee effort. When put in a banking context, the model shows that optimal contracting within a bank that pursues a higher purpose leads to higher wages for employees, higher monitoring effort and a lower probability of bank failure when the bank has more equity capital, even though the bank's capital does not affect the bank's higher purpose investment. Even absent a signaling motivation for investing in higher purpose, these results are qualitatively sustained if the bank's employees care about its purpose. Additionally, in this case, banks that invest more in higher purpose pay lower wages, elicit higher employee effort and have lower failure probabilities for any given capital ratio. Banks with higher capital ratios still pay higher wages, but the effect of capital on wages becomes weaker as the bank's higher purpose investment increases. The decrease in the exposure of the deposit insurer due to higher capital goes beyond the direct impact of capital on the bank's probability of failure.