Banking Crisis Research Articles

Bank Crisis Boosts Bitcoin Price

Bitcoin (BTC) represents an emerging asset class, offering investors an alternative avenue for diversification across various units of exchange. The recent global banking crisis of 9 March 2023 has provided an opportunity to reflect on how Bitcoin’s perception as a speculative asset may be evolving. This paper analyzes the volatility behavior of BTC in comparison to gold and the traditional financial market using GARCH models. Additionally, we have developed and incorporated a bank index within our volatility analysis framework, aiming to isolate the impact of financial crises while minimizing idiosyncratic risk. The aim of this work is to understand Bitcoin’s perception among investors and, more importantly, to determine whether BTC can be considered a new asset class. Our findings show that in terms of volatility and price, BTC and gold have responded in very similar ways. Counterintuitively, the financial market seems not to have experienced high volatility and significant price swings in response to the March 9th crisis. This suggests a consumer tendency to seek refuge in both Bitcoin and gold.

Unravelling the Urban Co-operative Bank Crisis in India examining the Socio-economic and Psychological Impact on Customers

The Urban Co-operative Bank (UCB) crisis has emerged as a significant challenge in the financial landscape. This study aims to unravel the complexities of the crisis, focusing on its origins, progression, and the subsequent repercussions on both a socio-economic and psychological level for the bank's customers. The research employs a multi-dimensional approach to analyze the extent and nature of the crisis. Financial data, regulatory reports, and customer interviews will be utilized to assess the economic impact, including financial losses, disrupted transactions, and potential long-term financial consequences for the affected individuals. Utilizing psychological surveys and interviews, the research seeks to uncover the emotional and mental health implications of financial uncertainty, loss, and disrupted trust in financial institutions. Understanding the psychological dimensions is crucial for designing effective interventions and support mechanisms for affected individuals.

New Technologies and the Future Governance of Bank Run Risk

ABSTRACT The banking turmoil in March 2023 and the associated public interventions to prevent or reduce the risk of a systemic fallout underscore the fact that despite banking systems being in a much better shape in many countries relative to the position prior to the global financial crisis, some bank run risk remains. In fact, bank run risk may be increasing. As fintech and new technologies transform banking, uninsured deposits may become near-perfectly mobile, making bank runs all but inevitable if the governance of the financial system is not appropriately adapted. In this article we discuss how digitalization and new technologies can affect bank run risk and we look at approaches to adapting governance to containing related systemic vulnerabilities in the banking system. We also briefly consider how central bank digital currencies could fit into future frameworks. We conclude that there is no silver bullet, but that adjusting frameworks will become necessary if bank deposit mobility increases.

Voluntary insurance vs. stabilization funds: An experimental analysis on bank runs

Banking crises have recurrently emphasized the crucial need for establishing effective mechanisms to prevent bank runs, and different organizations are exploring a range of potential measures. With the aim of contributing to this debate, we run a laboratory experiment to study the effectiveness of two untested devices: Stability funds that automatically limit depositors’ possibility of withdrawing their assets, and voluntary individual insurance against the risk of default. Depositors start the interaction with a monetary endowment deposited in a bank. They can then withdraw money before and after the bank suffers a liquidity loss. Such a loss can be either permanent or temporary, but its nature will only be discovered at the end of the interaction. The bank defaults if the desired withdrawals exceed its available liquidity. Our results show that the only effective mechanism in reducing bank defaults, compared to the baseline, is the stability fund with high coverage. When groups have a high share of female depositors, there is a significant reduction in the likelihood of bank runs, which can be explained by women’s higher propensity to buy insurance. When a critical liquidity signal is issued, indicating a dangerous situation, women’s lower propensity to withdraw disappears, bringing it to levels similar to that of men.

Banking regulation with risk of sovereign default

Banking regulation routinely designates domestic government debt as safe, even when this debt is risky. We show, in a parsimonious model, that this failure to recognize the riskiness of government debt induces domestic banks to “gamble” with depositors’ funds by purchasing risky government bonds and assets correlated with them. Sovereign defaults then result in banking crises; however, by permitting banks to gamble, the regulator lowers the government’s borrowing costs ex-ante. Thus, the government has an incentive to ignore the riskiness of the sovereign bonds. We derive a set of testable implications and present supporting empirical evidence from sovereign debt crises in Russia, Argentina, and the Eurozone.

What explains the recovery speed of financial markets from banking crises?

Less is studied about the determinants of the impact of banking crises on the recovery speed of financial markets. In this paper, based on the members from Asian Infrastructure Investment Bank (AIIB), we measure the recovery speed of financial markets from banking crises by financial stress index (FSI). Then the Kaplan-Meier (K-M) survival analysis methodology is applied to depict the stylized features of the recovery speed of financial markets. Further, the Cox proportional hazards model is introduced to investigate the effect of a variety of influencing factors on the recovery speed of financial markets from banking crises. The results indicate that certain factors, such as stationary macroeconomic environment, sound government finance, stable exchange rate regime, moderately open financial market, global financial market with high panic prior to banking crises, and expansionary monetary policy with the price rule after banking crises, contribute to fast recovery of financial markets.

What Matters for Comovements among Gold, Bitcoin, CO2, Commodities, VIX and International Stock Markets during the Health, Political and Bank Crises?

This paper analyzes the connectedness between gold, wheat, and crude oil futures, Bitcoin, carbon emission futures, and international stock markets in the G7, BRICS, and Gulf regions with the outbreak of exogenous and unexpected shocks related to health, banking, and political crises. To this end, we use a wavelet-based method on the returns of different assets during the period 2 January 2019, to 21 April 2023. The empirical findings show that the existence of time-varying linkages between markets is well documented and appears stronger during the COVID-19 pandemic. However, it seems to diminish for some associations with the advent of the Russia-Ukraine War. The empirical results also show that investor risk perceptions measured by the VIX are negatively and substantially linked to stock markets in different regions. Other interesting findings emerge from the connectedness analysis with the outbreak of Silicon Valley bankruptcy. In particular, Bitcoin tends to regain its role as a safe-haven asset against some G7 stock markets during the bank crisis. Such findings can provide valuable insights for investors and policymakers concerning the relationship between different markets during different crises.

Has Japan Failed? Examining the role of the BOJ in post-crisis Japan

Abstract: Over the last 3 decades, Japan has suffered from persistent economic malaise which are without precedent in economic history, and as interesting as the circumstances leading to the demise of Japan as a major economic power are, they are but secondary to the mystery of the constant failure of measures to alleviate the situation. The question that this paper will attempt to answer, with the aid of advanced econometric tools is why the expansionary monetary policy measures taken by the Bank of Japan genuinely failed to stimulate the Japanese economy? The hypothesis I would like to outline is that the Bank of Japan DID fail to ameliorate the economic situation in Japan, due to several shortcomings such as a constant misunderstanding of the economic climate, the sudden drop in effective demand due to the emergence of Asian competitors, and the flawed policy of continually supporting insolvent banks.

Risk-taking and systemic banking crisis in Africa: do regulatory policy framework provide new insight in threshold models?

Risk-taking and systemic banking crisis in Africa: do regulatory policy framework provide new insight in threshold models?

Panel III – Cross-Border Bank Resolutions and its challenges

Abstract The third Panel of the SRB Legal Conference, moderated by Tuija Taos, focused on various aspects of cross-border bank resolutions and how events have shown that a banking crisis can occur very quickly. There was consensus on the importance of being very well prepared to react with the same speed. Authorities and institutions must have solid plans and always be prepared for the unexpected. This was the first time since 2008 that a global systemically important bank was under severe stress and the resolution framework was put to the test. When facing cross-border bank resolutions, legal regimes need to be credible and workable. There is no doubt that the authorities currently have the necessary powers and tools.

Bank resolution and national insolvency law: the case of group financing

Abstract This article explores the complex interplay between bank resolution and national insolvency law, with a specific focus on intra-group financing. We discuss group financial support agreements under BRRD, prudential requirements under the CRR, iMREL under BRRD, and harmonisation of national bank insolvency laws. We conclude that without harmonisation, the dependence of bank resolution on national insolvency laws continues to result in legal diversity and uncertainty, and thus may jeopardise effective resolution.

The good, the bad, and the not-so-ugly of credit booms?: capital allocation and financial constraints

We provide international empirical evidence that periods of rapid expansion in credit—credit booms—lead to both a relaxation of financial constraints and a worsening of capital allocation. These two effects are related, suggesting a more prominent role for the investor sentiment views of the credit cycle. Firms more likely to be financially constrained because of their size, industry, or country experience stronger misallocation in booms. At the macro level, credit booms with higher capital misallocation result in a higher probability of experiencing a banking crisis and poor economic and financial performance after the boom ends.

China's crisis management and market exit mechanism for banks—What is the way forward?

AbstractAs China's crisis management and market exit mechanism for banks (CMME mechanism) is still at an early stage of development, the legislation governing the mechanism is far from sufficient or satisfactory. With the aim of exploring how the holistic framework of China's CMME mechanism can be improved, this article systemically examines the mechanism from the perspectives of the major procedural components and the specially designed funding sources. Based on the analysis, three major types of weaknesses in the current mechanism are pointed out: ‘missing elements’, ‘unfit elements’ and ‘uncoordinated elements’. To be specific, some essential elements are missing from the current mechanism; some elements in the mechanism are unfit when applied to banks; and some elements are uncoordinated with each other within the mechanism. It is necessary that an overhaul of the mechanism be carried out to address these weaknesses. In addition, given that governments' involvement was demonstrated to be helpful in resolving bank crises in past cases, it would be better to institutionalise this experience in the CMME mechanism. Only with a well‐crafted CMME mechanism can bank crises be resolved in an orderly, effective and efficient manner.

Macro level literature analysis of Islamic banking and finance in Covid-19 crisis

Purpose The purpose of this study is to conduct a systematic content review and bibliometric analysis of the current research trends, core concepts and knowledge mapping on the topic Islamic Banking and Finance (IBF) during Covid-19. Apart from highlighting the contributions of prolific authors, prominent institutions and countries, a comprehensive review of a significant number of documents using co-citation and co-word analysis is carried out for the science mapping. Design/methodology/approach A data set of 125 papers was collected published in Scopus database during the period December, 2019 and January 5th, 2023. Yearly publications, most-cited papers and authors, active sources, affiliations and countries are highlighted with descriptive analysis. Knowledge structure of the topic was mapped with investigating the social, intellectual and conceptual structures of IBF research. Content analysis is carried out to uncover the underlying research clusters that shape the scientific knowledge structure of studies. Findings A diverse group of authors and institutions contribute to the growing body of knowledge on the topic. IBF is adopting new paradigms and frameworks to integrate FinTech, crowd funding and Islamic social finance to provide sustainable solutions in both crisis and normal periods. The research on IBF is classified in to three themes: “financial markets in Covid-19,” “modeling risk and market regimes” and “FinTech and Islamic social finance.” Research limitations/implications This study collects data only from Scopus database. Future studies must include research articles from other databases such as, Web of Sciences. Originality/value This study highlights research gaps in the existing literature and provides directions for future research.

Communication and group size on bank run games

This study examines the impact of communication and group size on bank run games, with a strategic focus on three-player games. In the baseline treatment group, communication is not allowed in two-player and three-player games. The main treatment consists of costless communication, cheap communication, and costly communication. The sender's action becomes more predictable with the increasing communication costs due to a lack of incentives to deceive. We find that in the non-cooperative, two-player bank run game, communication fosters cooperative behavior with the learning effect in the repeated interaction. However, coordination is far more difficult to achieve with Nash Pareto dominant equilibrium in three-player games due to its complexity in decision-making in larger groups. The ultimate result presents the limitation of communication as an efficiency-enhancing mechanism. A public recommendation is that policymakers should increase public transparency and ensure public confidence in banking systems to mitigate the risks and uncertainty of bank runs. In sum, the study presents the following:•In a three-player bank run game, communication is less effective than in a two-player scenario.•Policymakers should ensure public confidence and increase public transparency of banking systems.

Optimal Reporting Systems in Bank Runs

ABSTRACT We study the role of reporting systems in the context of bank runs. In our model, a bank receives an early but imprecise estimate of its investment performance, and its financial reporting system generates a report. We find that, from a financial-stability standpoint, the optimal reporting system requires full disclosure when the bank’s early estimate is below a certain threshold, but no disclosure otherwise. Importantly, such optimal reporting threshold should be tailored to the bank’s exposure to bank-run risk. In particular, the threshold is nonmonotonic and U-shaped in the bank-run risk. We also relate our results to current accounting standards and discuss their implications for policy-making and empirical research. JEL Classifications: G21; G28; M41; M48.

Are The Sudanese Banks Financially Sound?

This study attempts to investigate whether the banks operating in Sudan are solvent and financially sound as well as to examine whether there are roots for a banking panic. The research is also intended to determine whether there are candidate bankrupt banks. The study employs quantitative and qualitative research methods and utilizes both secondary and primary data and covers the eight-year period 2013-2020. The annual audited financial reports of banks published for the period under study represent the source of the secondary data and the primary data is collected through questionnaires distributed to depositors. The sample comprises 30 banks out of a total population of 37 banks. Also, responses from 416 participants in the questionnaire are considered for constructing the depositors’ confidence index. To test the hypotheses a number of quantitative models, namely, univariate financial ratios models, Ahmed (2003) Z-score model, Altman (2002) emergent markets Z-score model, and depositor’s confidence index (DCI) model are utilized. The statistical results of three out of the four models, namely, the univariate financial ratios model, Ahmed (2003) Z-score model, and depositor’s confidence index, document that banks operating in Sudan are financially unsound and financially distressed and none of those banks is thoroughly healthy. However, the results of EM Z-score model show that banks operating in Sudan can be categorized as healthy and financially sound and that there are no roots for a banking panic in the country.

Mediating effect of corporate sustainability on corporate governance and performance of banks in Ghana: a post banking crisis perspective

Mediating effect of corporate sustainability on corporate governance and performance of banks in Ghana: a post banking crisis perspective

Populist Inclusion of Ecuadorian Emigrants under Rafael Correa’s Presidency

Abstract This article studies Rafael Correa’s populist inclusion of Ecuadorian emigrants. It unpacks Correa’s inclusionary populism toward the emigrants at symbolic, political, and material levels. The article utilizes a qualitative content analysis of Correa’s weekly TV show, the Citizen Link (2007–2017). The findings reveal that Correa considered the emigrants as part of “the people,” who were forced to leave the country after the 1999 Banking Crisis. In line with his left-wing populist leadership, Correa viewed them as the victims of neoliberalism and the financial elite. Moreover, Correa politically included the emigrants by extending their voting rights and creating permanent seats in the National Assembly. Finally, Correa materially included the Ecuadorian emigrants by increasing the number of embassies, consulates, and cultural houses as well as facilitating the emigrants’ return. These findings have implications for the relationship between populism and emigration in Latin America and other migrant-sending regions.

Mutual insurance for catastrophe hazards: Case of deposit insurance

AbstractDeposit insurance involves catastrophe risk because bank failures spike during a banking crisis. Although mutual insurance is ill‐suited for catastrophe risk, the US government structures deposit insurance like a mutual company owned by policyholders. Furthermore, an intertemporal mispricing resulting from a dividend‐surcharge arrangement produces several problems. Most importantly, it worsens moral hazard. Through dividends and surcharges, deposit insurance transfers the premium burden from high‐risk banks to low‐risk banks and in effect erodes the charter value of low‐risk banks. In addition, high‐risk banks taking catastrophe risk can outperform low‐risk banks for many years in a row, putting pressures on managers of low‐risk banks. Owing to these factors, an underpricing of catastrophe risk before its realization can ratchet up risk‐taking by banks. Other problems with the intertemporal mispricing include making the banking business more procyclical, distorting the prices of banking products, and exposing taxpayers to asymmetric downside risk. To ensure fair competition and improve economic efficiency, the government should set the insurance premium based not on the realized loss but on the expected loss.