Level Of Credit Risk Research Articles

The Political Economy of Financial Repression Policy-Dominated China’s Overheated Housing Market

Chinese government has adopted financial repression policy for a very long time as a necessary step to stimulate domestic growth and help eliminate domestic and external risks. In China, a series of financial repression policies have been implemented, such as explicit or indirect capping of interest rates and protection of state-owned enterprises. However, its side effects are inevitable simultaneously. Under these financial repression policies, state-owned enterprises (SOEs), banks and governments could be the three biggest beneficiaries since they can easily get founds and profits to finance themselves through the policies while private and small firms are actually discriminated and can get very little benefit from the policy. At the same time, the long-term implementation of repression policy has triggered domestic housing speculation since 2008 when financial crisis caused by U.S subprime crisis swept the world, which then further fueled an expansion in debt that makes Chinese banks quite risky. Thus, in the past several years, the over high housing price and the huge amount of bank loans in real estate sector in China’s real estate market has become a controversial topic and arouse people’s attention all over the world. Policy makers and scholars are worried that China’s overheated housing market may lead to bank debt crisis in the near future like the U.S. Therefore, in this paper, we tried to answer two main questions: What kinds of side-effects have been caused by China’s financial repression policy after its economy boom? What kind of role did China’s financial repression policies play in inducing its domestic overheated housing market? Is the bank credit, or debts problem induced by housing purchasing and investing severe enough to lead to a higher level of credit risk in China?

Nowhere to Run, Nowhere to Hide: Asset Diversification in a Flat World

We present new international diversification indexes across equity, sovereign debt, and real estate. The indexes reveal a marked and near ubiquitous decline in diversification potential across asset classes and markets for the post-2000 period. Analysis of panel data suggests that the decline is related to higher levels of market credit risk and volatility as well as to technology and communications innovation as proxied by internet diffusion. The decline in diversification opportunity is associated with sharply higher levels of investment risk.

Credit Risk Assessment for Financial Institutions Activity

The authors have presented analysis fundamentals and credit risk assessment in international practice based on statistical data of Ukrainian enterprises, such as financial companies and credit unions. The authors have been proposed a technique of assessments of the following indicators that have a significant impact (provided by the author) to assess the credit and financial institution’s activity. To solve this problem the authors offer a geometric interpretation to determine the aggregation vector as a level of credit risk, whereas we must consider all the indicators. Because their quantity of these indicators is three, then they are convenient to interpret in the 3D execution.

Determinants of Problem Loans: Non-performing Loans vs. Loan Quality Deterioration

<p class="1main-text">The growing literature on credit risk determinants provides results that are based on the set of bad loans present in the bank's assets especially non-performing loans. Besides this classic proxy, the present paper examines the determinants of loan quality deterioration by using a qualitative measure. Actually, we take advantage of a detailed dataset containing information on the quality of loans contracted by banks to different Tunisian firms. The study aims to detect if credit risk determinants are different through quantitative and qualitative proxies. We take into account bank-specific indicators that are likely to affect banking credit risk. Overall, the results show that cost inefficiency, bank profitability is common determinants of the credit risk level and the loan quality deterioration, that are differently influenced by bank size and capitalization.</p>

Mortgage Rates and Credit Risk: Evidence from Mortgage Pools

We study interest rates on mortgages using the segmentation adopted in the process of securitization: Mortgages securitized by government-sponsored enterprises; mortgages securitized by private institutions, in turn divided in prime and subprime mortgage pools; and, finally, mortgages held by intermediaries on their balance sheet. We find that, over the period that goes from the mid nineties to present, all mortgage classes were priced equally with the exception of subprime loans. Subprime loans were priced in function of the credit worthiness of the borrower. This process however, was not uniform over time. The crucial aspect of the pricing process is that credit risk becomes increasingly important from (at least) the mid-90's to the crisis of 2008. Moreover, through cointegration analysis we find that the dynamics of delinquencies and, to a lesser extent, housing price are reflected in the dynamics of subprime mortgage rates, and not in other mortgage categories. The evidence documents the importance of the subprime mortgage securitization process and indicates that the willingness of financial markets to support a higher level of credit risk is quantitatively important and dates back at least ten or fifteen years before the crisis.

PENGARUH DIVERSIFIKASI PORTOFOLIO KREDIT TERHADAP TINGKAT RISIKO KREDIT DENGAN GOOD CORPORATE GOVERNANCE SEBAGAI VARIABEL PEMODERASI (Studi pada Bank Umum di Indonesia)

A formal control system supports the success of loan portfolio diversifcation strategy. Good corporate governance as a formal control system can support the success of the implementation of loan portfolio diversifcation strategy. This will result in the low level of risk profle. The aim of this study is to explore the efect of loan portfolio diversifcation on the credit risk level with good corporate governance as a moderating variable. EViews 7.2 was used in the panel data analysis. General banks that had registered at BEI in the 2009-2012 period were used as samples. Data collection of 20 banks was based on certain criteria. The results of this research showed that good corporate governance moderate loan portfolio diversifcation strategy, so it can decrease t h e credit risk level. The positive efect of good corporate governance in moderating the efect of loan portfolio diversifcation on the credit risk level was consistent, not only based on the type of loan but also the economic sector.Keywords: loan portfolio diversifcation, credit risk, good corporate governanc.

Risk, Competition and Cost Efficiency in the Chinese Banking Industry

Using a sample of Chinese commercial banks over the period 2003-2013, this paper tests the interrelationships between credit risk, competition and cost efficiency in the Chinese banking industry under a three-stage least square estimator. The findings suggest that a higher level of competition leads to higher credit risk of Chinese commercial banks and a higher level of efficiency leads to lower credit risk. In addition, it is found that higher level of efficiency results in higher level of competition in the Chinese banking industry and higher levels of credit risk precede an increase in the level of competition. Finally, the results show that Chinese commercial banks with higher levels of credit risk have lower levels of cost efficiency and competition-efficiency hypothesis holds in the Chinese banking industry. The results provide policy implications to the Chinese Government and banking regulatory authorities.

Corporate Governance and Bank Credit Risk: Default Probability, Distance to Default

As the main function of bank is borrowing from their customers to make loans to others, so default risk is the oldest, the most important and primary risk in banking sector. Especially in these years after the recent financial crisis 2008, a huge amount of banks’ loan unfortunately became bad debt, default probability of banks consequently increases, and creditors also gradually lost their belief on banks, leading to an important restructuring in the Vietnamese banking sector nowadays. Therefore decreasing credit risk is a main job of manager and owners of banks, one tool is through corporate governance. This paper explores the relationship between default probability of banks due to their credit risks and the corporate governance structures of these banks from the perspective of creditors. The cumulative default probabilities and distance to default are estimated for a sample of Vietnamese commercial banks to measure their risk taking behavior. This paper works on a sample of 15 Vietnamese commercial banks from 2008 to 2012 to provide evidence that, after controlling for firm specific characteristics, commercial banks with smaller Board size of a bank, number of female shareholders in Board of directors, shareholder equity, and long term loan are associated with significantly lower credit risk levels. Larger number of Supervisory Board and short term debt has relationship with lower credit risk levels.

MONITORING IN SMALL BUSINESS LENDING: HOW TO OBSERVE THE UNOBSERVABLE

AbstractIn this article we investigate the determining factors of bank monitoring in small business lending. Unlike previous studies that rely on proxies of a bank's monitoring effort, we use a large and unique data set that includes the number of monitoring contacts per year between a European bank and a large number of small firms from 2009 to 2012. Our main results highlight that the frequency of a bank's monitoring effort is negatively related to the firm's reputation and the strength of the bank–firm relationship, and positively related to the bank–borrower proximity and the borrower's credit risk level.

Оценка уровня кредитного риска ипотечного кредитования в коммерческом банкеи предложения по его снижению (на примере ПАО «ВТБ24»)

Оценка уровня кредитного риска ипотечного кредитования в коммерческом банкеи предложения по его снижению (на примере ПАО «ВТБ24»)

Port Customer Credit Risk Prediction Based on Internal and External Information Fusion

Concerning the information asymmetry, subjectivity and other problems in the prediction of port customer credit risk level, a port customer credit risk evaluation system was designed, which provided the quantification base for port customer credit risk prediction. External-internal information fusion model was proposed for port customer credit risk prediction. Customers' internal history information and relevant external dynamic information were used as information sources. The prediction model fuses external and internal information to predict customers' credit risk level, therefore as- sisted port enterprises to estimate customers' credit risks level more accurately. Top 100 coal industry customers have been selected in experiment, and their operation data were extracted from Guangzhou Port group operation and manage- ment system. Relevant external information has also been crawled in experiments correspondingly. Experiment results show that port customer credit risk prediction model based on external-internal information fusion has a better prediction accuracy than non-information-fusion model.

Comparative credit risk in Islamic and conventional bank

In this paper, we consider the levels of credit risk in Islamic and conventional banks. One problem with existing studies is the use of accounting information alone to assess credit risk, and this could be especially misleading with Islamic banking. Using a market-based credit risk measure, Merton's distance-to-default (DD) model, we evaluate the credit risk of 156 conventional banks and 37 Islamic banks across 13 countries between 2000 and 2012. We also calculate the accounting information-based Z-score and nonperforming loan (NPL) ratio for the purpose of comparison. Our results show that Islamic banks have significantly lower credit risk than conventional banks as based on DD. In contrast, and as expected, Islamic banks display much higher credit risk using the Z-score and NPL ratio. These findings suggest that the measure chosen plays a significant role in assessing the actual credit risk of Islamic banks.

Impacts of capital regulation and market discipline on capital ratio selection: evidence from China

Purpose– The purpose of this paper is to examine the impacts of capital regulation and market discipline when China imposed most of the Basel I requirements between 2004 and 2010.Design/methodology/approach– Following Barrios and Blanco (2003) and Rime (2001), the authors apply disequilibrium and simultaneous measurements to identify the financial safety net underlying capital movements as well as the changes in credit risk levels in China’s banking sector.Findings– The authors discover that capital regulation outweighs market discipline by an average probability of 0.65-0.35 in the contribution to bank capital movements when banks significantly improve their capital buffers. In addition, the banking sector lowered its risk levels in the sample period.Research limitations/implications– The findings suggest that the largest bank-based economy has consolidated its financial system for future expansion.Originality/value– China’s banking sector requires closer examination of capital and risks provided by its emerging significance in the financial world. Thus, this study contributes to current literature.

Monitoring in Small Business Lending: How to Observe the Unobservable

This paper investigates the determining factors of bank monitoring in small business lending. Unlike previous studies that have relied on proxies of a bank’s monitoring effort, we use a large and unique data set that includes the number of monitoring contacts per year between a European bank and a sample of small firms over the 2009-2012 period. Our main results highlight that the frequency of a bank’s monitoring effort is negatively related to firms’ reputation and the strength of the bank-firm relationship, while it is positively related to the proximity and borrower’s credit risk level.

The credit-risk implications of home ownership promotion: The effects of public subsidies and adjustable-rate loans

This study analyzes the credit risk of housing loans with a particular focus on mechanisms that may help disentangling the financial constraints of low-income borrowers: public support and access to adjustable-rate loans. Using a large database of French housing loans covering the years 2000–2010, we show the following: supplying loans with financial assistance helps financially constrained borrowers to absorb income shocks, adjustable-rate loans are riskier on average, and the combination of public support and adjustable rates can lead to a concentration of risk in the lender’s portfolio. The risk measurement methodology used in this paper extends the one-factor economic capital model underlying the Basel 2 regulatory credit-risk formulas. This portfolio approach leads to the credit risk of housing loans being handled as a portfolio management issue for the lender. From this perspective, our results also illustrate that the ability to promote access to homeownership to low-income borrowers may be determined by the lender’s capacity to identify diversification benefits at the portfolio level. Thus, risky borrowers may have a limited credit-risk level from the lender’s perspective, which facilitates the supply of housing finance.

The Latest Case of Information Asymmetry Issue on the Retail Core Banking Services Market in the Czech Republic

The paper is focused on the latest information asymmetry issue in the Czech Republic on the retail banking services market. The problem considers credit union (savings cooperative) business that seemed stable after the problematic restructure 10 years ago. But during this January the payment from Deposit Insurance Fund of the Czech Republic had to compensate the consumers of the MSD credit union. This subject provided services with higher interest rates even during the last years of technically zero interest rate of the central bank. A question information asymmetry and the moral hazard arose again. All that is written in famous study for European central bank by VesalaetGropp supporting the explicit deposit insurance system is correct but the conditions has partially changed. Credit unions try to compete with banks undertaking a higher level of credit risk but still being within Basel II accords. The paper is considering the question of the future development – to try to compete with the conventional banks as FIO credit union successfully did or to return to “Austrian” model. Next future trend is outlined in sum up of the deposit insurance system characteristics backed by other several studies. Also the problem of information asymmetry overcome is being discussed with the result that mostly used monitoring indicator cannot be applied to credit union market.

Optimal versus realized bank credit risk and monetary policy

Standard banking theory suggests that there exists an optimal level of credit risk that yields maximum bank profit. We identify the optimal level of risk-weighted assets that maximizes banks’ returns in the full sample of US banks over the period 1996–2011. We find that this optimal level is cyclical for the average bank, being higher than the realized credit risk in relatively stable periods with high profit opportunities for banks but quickly decreasing below the realized in periods of turmoil. We place this cyclicality into the nexus between bank risk and monetary policy. We show that a contractionary monetary policy in stable periods, where the optimal credit risk is higher than the realized credit risk, increases the gap between them. An increase in this gap also comes as a result of an expansionary monetary policy in bad economic periods, where the realized risk is higher than the optimal risk.

The cost of deviating from the optimal monetary policy: A panel VAR analysis

Exploiting the panel VAR GMM estimator's features, macroeconomic country factors are combined with micro-economic bank data to test for the risk taking channel in the Euro Area. According to prior expectations based on an extended DSGE model, the analysis demonstrates that the monetary policy incentives bank risk taking by increasing the bank leverage, but it is not able to influence the level of credit risk. However, deeper investigations indicates the Taylor gap adds to the bank risk appetite in all its forms, while regarding the reactions to target variables, movements in the interest rate smooth the bank risk.

The Use of Derivatives and Bank Risk Taking in China

Our paper examines the effect of derivatives activities on credit risk taking in Chinese banks theoretically and empirically. We develop a model of financial intermediation where bank can engage in costly monitoring to reduce the credit risk in its loan portfolios. Our model incorporates three key features: (1) has two stages including the hedging stage and the lending stage in turn; (2) captures the main characteristics of the banking sector in China such as ceiling on the deposit rate; and (3) treats the bank as one of a large number of monopolists in the local lending market. From the theoretical model, we derive that using the derivatives for hedging market risk (e.g., exchange rate and interest rate risk) makes bank expose to more credit risk. In the empirical section, we use a Two-stage Least Squares (TSLS) regression methodology with semi-annual data of China’s listed banks from 2007 to 2013. We find that there is the positive effect on bank credit risk taking by not only the overall derivatives contract but also foreign exchange and interest rate derivatives. Furthermore, the results suggest that the positive effect of derivatives is statistically significant on the total credit risk, the mild and medium level of credit risk, but is weak on the severe level of credit risk. Our findings are also relevant for understanding the financial instability implications of derivatives activities in banking industry. In addition, Appendix of our paper provides a brief outline of the current Chinese banking sector.

Comparative Credit Risk in Islamic and Conventional Banks

This study considers whether Islamic banks and conventional banks have different levels of credit risk. One problem with existing research in this area is the dominance of accounting information to assess credit risk, and this could be especially misleading in the case of Islamic banking. Using Merton’s distance-to-default (DD) model, a market-based credit risk measure, we evaluate the credit risk of 156 conventional banks and 37 Islamic banks across 13 countries between 2000 and 2012. We also calculate the accounting information-based Z-score and nonperforming loan (NPL) ratio for the purpose of comparison. Our results show that Islamic banks have significantly lower credit risk than conventional banks when measuring credit risk with the DD. In contrast, and as expected, Islamic banks exhibit much higher credit risk using the Z-score and NPL ratio. Overall, the findings suggest that the methodology used plays a significant role in assessing the apparent credit risk of Islamic banks.