High Non-performing Loans Research Articles

Banks' Survival during the Financial Crisis: The Role of Regulatory Reporting Quality

We investigate the relation between the quality of bank regulatory reporting prior to and bank stability during the financial crisis that erupted in 2008. Using a large sample of private and public commercial banks in the United States and the incidence of accounting restatements as a proxy for the overall quality of the reporting system, we find that reporting quality is positively associated with stability. We show that lower reporting quality before the crisis is associated with higher non-performing loans and lower profitability at the onset of the crisis. We document that banks with lower reporting quality are more likely to experience regulatory intervention through enforcement actions and bank failures during the crisis. We also find some evidence that higher reporting quality is associated with more effective regulatory enforcement actions. We corroborate our findings using an alternative proxy that focuses on the quality of the loan loss provision. A key implication of our findings is that good regulatory reporting is important for the success of the banking system.

Non-Performing Loans in CESEE: Determinants and Impact on Macroeconomic Performance

The paper investigates the non-performing loans (NPLs) in Central, Eastern and South-Eastern Europe (CESEE) in the period of 1998–2011. The paper finds that the level of NPLs can be attributed to both macroeconomic conditions and banks’ specific factors, though the latter set of factors was found to have a relatively low explanatory power. The examination of the feedback effects broadly confirms the strong macro-financial linkages in the region. While NPLs were found to respond to macroeconomic conditions, such as GDP growth, unemployment, and inflation, the analysis also indicates that there are strong feedback effects from the banking system to the real economy, thus suggesting that the high NPLs that many CESEE countries currently face adversely affect the pace economic recovery.

Non-Performing Loans in CESEE: Determinants and Impact on Macroeconomic Performance

The paper investigates the non-performing loans (NPLs) in Central, Eastern and South-Eastern Europe (CESEE) in the period of 1998–2011. The paper finds that the level of NPLs can be attributed to both macroeconomic conditions and banks’ specific factors, though the latter set of factors was found to have a relatively low explanatory power. The examination of the feedback effects broadly confirms the strong macro-financial linkages in the region. While NPLs were found to respond to macroeconomic conditions, such as GDP growth, unemployment, and inflation, the analysis also indicates that there are strong feedback effects from the banking system to the real economy, thus suggesting that the high NPLs that many CESEE countries currently face adversely affect the pace economic recovery.

Italian Sovereign Spreads: Their Determinants and Pass-through to Bank Funding Costs and Lending Conditions

Volatility in Italian sovereign spreads has increased since mid-2011. This paper finds that news on the euro area debt crisis and country specific events were important drivers of sovereign spreads. Movements in sovereign spreads affect CDS spreads and bond yields of Italian banks, and are transmitted rapidly to firm lending rates. Banks with lower capital ratios and higher nonperforming loans were found to be more sensitive to swings in sovereign spreads. Credit supply constraints due to bank funding shortages from the sovereign debt crisis were a major factor behind the lending slowdown in late 2011, while in 2012 weak demand appears to have been driving changes in credit more than supply.

Italian Sovereign Spreads: Their Determinants and Pass-Through to Bank Funding Costs and Lending Conditions

Volatility in Italian sovereign spreads has increased since mid-2011. This paper finds that news on the euro area debt crisis and country specific events were important drivers of sovereign spreads. Movements in sovereign spreads affect CDS spreads and bond yields of Italian banks, and are transmitted rapidly to firm lending rates. Banks with lower capital ratios and higher nonperforming loans were found to be more sensitive to swings in sovereign spreads. Credit supply constraints due to bank funding shortages from the sovereign debt crisis were a major factor behind the lending slowdown in late 2011, while in 2012 weak demand appears to have been driving changes in credit more than supply.

The relationship between Islamic banks' profitability and country income levels

This paper investigates the efficiency of 78 Islamic banks in 25 countries for the period 1992–2009. The Fixed Effect Model (FEM) that was used to analyse profitability proposed that profit efficiency is positive and statistically significant with operating expenses against asset, high income countries and non-performing loans against loans. Interestingly, the empirical results show that the more profitable banks are those that have higher operating expenses against assets, more equity against assets and concentration in high income countries. The finding is high income countries that engage more with banking products that can lead towards profitability of Islamic banks.

Panacea, Pandora's box, or placebo: Feedback in bank mortgage-backed security holdings and fair value accounting

We examine the relation between bank holdings of mortgage-backed securities (MBS) and MBS prices. Theory suggests feedback between MBS holdings and underlying asset markets can be aggravated by mark-to-market accounting. We measure feedback by the relation between asset returns and the changes in bank MBS holdings. Consistent with the existence of feedback effects related to mark-to-market, we find that for banks with high MBS, more nonperforming loans, and lower total capital ratio, changes in bank MBS positions are positively associated with changes in MBS prices and that this relation is reduced after the April 2009 mark-to-market rule clarification. To assess the effect of feedback on shareholder value, we test whether the stock-price response of banks to the announcement of the mark-to-market accounting rule clarification is associated with the intensity of feedback behavior. We find that the stock market reaction to the rule change is more positive for banks with more MBS, higher nonperforming loans and higher pre-rule-change feedback. We also find positive bond-price reactions to the rule change. Overall, our results suggest feedback related to mark-to-market accounting had a measurable effect on shareholder value.

Assessing the effects of the Asian financial crisis on banking performance in Southeast Asia

This study examines whether domestic banks perform better than their foreign-owned counterparts, by examining the banking system across eight Southeast Asian countries for the period 1994?2005. According to our results, banks' performance worsened in the post-Asian crisis period. The higher non-performing loan to total assets ratio is a sign of higher risk and is negatively associated with bank profits. Our results also suggest that multinational banks, possessing global advantage, are more cost efficient than domestic banks in developed countries, while the reverse seems to occur in developing countries. This home-field advantage pattern appears to be stable over time, while that for global advantage has changed: no such advantage was reported after the recovery from the financial crisis. As a result, the significant improvement in efficiency of state-owned and domestic banks may be due to the implementation of bank restructuring programmes and governments' financial support, following the 1997 financial crisis.

Comment on “US Credit Crisis and Spillovers to Asia”

Comment on “US Credit Crisis and Spillovers to Asia”

Total factor productivity change: An examination of the commercial banking industry in India and Pakistan

In the early 1990s, India and Pakistan introduced a series of financial liberalisation initiatives aimed at increasing the productivity of their financial services sector. Against a background of unprecedented change, which these initiatives heralded, the paper applies a DEA-type Malmquist total factor productivity change index to examine productivity growth, efficiency change, and technical progress in the commercial banking industries of India and Pakistan during 1992–98. Following Leightner and Lovell [1998], a Malmquist index is constructed for two different bank service specifications. The first is derived from the corporate objectives of the commercial banks, and the second from the policy objectives of the Indian and Pakistani governments. The analysis reveals that in both countries the improvement in total factor productivity was highest when the government's policy objective was used. In addition, the public sector banks showed very little improvement in total factor productivity due to their inability to adopt new technology and because of the presence of high non-performing loans. In contrast, foreign banks witnessed the highest improvement in total factor productivity due to an improvement in their efficiency and technological innovation.

Financial liberalization and bank efficiency: a comparative analysis of India and Pakistan

This paper provides a comparative analysis of the evolution of the technical efficiency of commercial banks in India and Pakistan during 1988–1998, a period characterized by far-reaching changes in the banking industry brought about by financial liberalization. Data Envelopment Analysis is applied to two alternative input–output specifications to measure technical efficiency, and to decompose technical efficiency into its two components, pure technical efficiency and scale efficiency. The consistency of the estimated efficiency scores are checked by examining their relationship with three traditional non-frontier measures of bank performance. In addition, the relationship between bank size and technical efficiency is examined. It is found that the overall technical efficiency of the banking industry of both countries improved gradually over the years, especially after 1995. Unlike public sector banks in India, public sector banks in Pakistan witnessed improvement in scale efficiency only. It is also found that banks are relatively more efficient in generating earning assets than in generating income. This is attributed to the presence of high non-performing loans. In addition, it is found that the gap between the pure technical efficiency of different size groups has declined over the years.

Total Factor Productivity Change in Commercial Banking Industry in India and Pakistan

In the early 1990s, India and Pakistan introduced a series of financial liberalisation initiatives aimed at increasing the productivity of their financial services sector. Against a background of unprecedented change, which these initiatives heralded, the paper applies a DEA-type Malmquist total factor productivity change index to examine productivity growth, efficiency change, and technical progress in the commercial banking industries of India and Pakistan during 1992-1998. Following Leightner and Lovell's (1998), a Malmquist index is constructed for two different bank service specifications. The first is derived from the corporate objectives of the commercial banks, and the second from the policy objectives of the Indian and Pakistan governments. The analysis reveals that in both countries, the improvement in total factor productivity was highest when the government's policy objective was used. In addition, the public sector banks showed very little improvement in total factor productivity due to their inability to adopt new technology and because of the presence of high non-performing loans. In contrast, foreign banks witnessed the highest improvement in total factor productivity due to an improvement in their efficiency and technological innovation.