Likelihood Of Bank Failure Research Articles

The Relationship between Liquidity Risk and Failure of Commercial Banks in Kenya

This study sought to establish the relationship between liquidity risk and failure of commercial banks in Kenya in the years 2013 to 2016. Additionally, the study endeavoured to establish the effect of capital adequacy, asset quality, management quality, earnings, sensitivity to market and size on the failure of banks in Kenya. To achieve this goal, secondary data was collected from the websites of operational banks while data for failed banks was collected from reports published by the central bank of Kenya, corroborated with publications in past years newspapers. Panel logit regression was used to analyze the data using Eviews 9.5 student version. The results of the regression revealed that there was a positive and significant relationship between liquidity risk and bank failure, implying that liquidity increased the likelihood of failure. The study also found a positive and significant relationship between bank failure and asset quality and earnings indicating that they increased the likelihood of failure. The study found a negative and significant relationship between bank failure and management quality and sensitivity to market implying that they decreased the likelihood of bank failure. Capital adequacy and bank size were found to have insignificant relationship with the failure of commercial banks in Kenya. These findings are valuable to managers in understanding how the variables of the study increase or decrease the likelihood of failure so that they may come up with appropriate strategies for managing the various risks facing their banks

Short-term safety or long-term failure? Empirical evidence of the impact of securitization on bank risk

Based on a sample of U.S. commercial banks from 2002 to 2012, this paper shows that bank loan securitization has a significant and positive impact on both Z-scores and the likelihood of bank failure, indicating a short-term risk reduction and a long-term risk increase effect. We also find disparate impacts between mortgage and non-mortgage securitization. Loan sale activities are found to have a similar impact to securitization.

Interbank Contagion with Suboptimal Bilateral Exposures: An ABM Approach to Endogenously Form Networks

The potential impact of interconnected financial institutions on interbank financial systems is an important financial stability issue for central banks and regulators. A number of algorithms/methods have been developed to extrapolate latent interbank risk exposures. However, most use highly stylized network models and reconstruction methods with global optimality lending allocation approaches such as maximizing entropy or minimizing costs. This paper argues U.S. bank lending and borrowing decisions are largely suboptimal and performance-driven. We present an agent-based model to endogenously reconstruct interbank networks based on 6,600 banks' decision rules and behaviors reflected in quarterly balance sheets. The model formulation reproduces dynamics similar to those of the 2007-09 financial crisis and shows how bank losses and failures arise from network contagion and lending market illiquidity. When calibrated to post-crisis data from 2011-14, the model shows the banking system has reduced its likelihood of bank failures through network contagion and illiquidity, given a similar stress scenario.

Interbank contagion: An agent-based model approach to endogenously formed networks

Abstract The potential impact of interconnected financial institutions on interbank financial systems is a financial stability concern for central banks and regulators. In examining how financial shocks propagate through contagion effects, we argue that endogenous individual bank choices are necessary to properly consider how losses develop as the interbank lending network evolves. We present an agent-based model to endogenously reconstruct interbank networks based on 6600 banks’ decision rules and behaviors reflected in quarterly balance sheets. We compare the results of our model to the results of a traditional stationary network framework for contagion. The model formulation reproduces dynamics similar to those of the 2007–09 financial crisis and shows how bank losses and failures arise from network contagion and lending market illiquidity. When calibrated to post-crisis data from 2011 to 2014, the model shows the U.S. banking system has reduced its likelihood of bank failures through network contagion and illiquidity, given a similar stress scenario.

Interbank Contagion: An Agent-Based Model Approach to Endogenously Formed Networks

The potential impact of interconnected financial institutions on interbank financial systems is a financial stability concern for central banks and regulators. A number of algorithms/methods have been developed to extrapolate latent interbank risk exposures. However, most use highly stylized network models and reconstruction methods with global optimality lending allocation approaches such as maximizing entropy or minimizing costs. This paper argues that U.S. bank lending and borrowing decisions are largely suboptimal and performance-driven. We present an agent-based model to endogenously reconstruct interbank networks based on 6,600 banks' decision rules and behaviors reflected in quarterly balance sheets. The model formulation reproduces dynamics similar to those of the 2007-09 financial crisis and shows how bank losses and failures arise from network contagion and lending market illiquidity. When calibrated to post-crisis data from 2011-14, the model shows the banking system has reduced its likelihood of bank failures through network contagion and illiquidity, given a similar stress scenario.

The Effect of Contingent Debt on Banks' Optimal Financing and Investment Policies

This paper provides a formal analysis of contingent debt (CoCo) on bank's optimal financing and investment policy. The effect of CoCo is studied both in the model with assets in place and in the model with a growth option. It is shown that bank optimally issues CoCo as long as its interest payments are taxed deductible. Comparing a bank that does not issue CoCo with the one that does, it is found that CoCo-issuing bank has higher total leverage, smaller amount of non-CoCo debt, lower bankruptcy costs, higher tax shields, and, thus, higher total value. Although, as intended CoCo does reduce both the likelihood of bank failure and the cost of resolution, it crowds out the amount of non-CoCo debt. Assuming that equity issuance is costly, bank is more likely to issue an EC CoCo than a PWD CoCo if it is less liquid, has relatively more volatile assets, faces relatively lower tax rate, has higher payout ratio, and finally, faces relatively high cost of resolution. In the model with a growth option it is shown that if bank finds it optimal to finance its investment with CoCo rather than junior debt, it will delay the investment. The model predicts that the investment with CoCo financing are more likely if resolution cost is high. Since less efficient resolution process is more likely to be found in less developed economies, the problem of banks delaying their investments is exacerbated by the fact that banking sector in such economies plays important role in providing funds.

Alternatives to FDIC Deposit Insurance

This paper considers potential alternatives to the Federal Deposit Insurance Corporation (FDIC) system of deposit insurance in the United States. We review the international and historical literature on deposit insurance which finds higher government involvement in the deposit insurance system increases the likelihood of bank failures and financial crises. We discuss three potential changes to the FDIC system. First, deposit insurance could be government mandated but privately administered as is done in most developed countries. Second, coverage levels could be lowered and supplemented by currently available private issuers. Third, the mandate on deposit insurance could be lifted and the supply of insurance privatized. Empirical evidence indicates these changes would reduce bank failures and financial crises.

Bank branch location and stability during distress

Purpose – The purpose of this paper is to examine the impact of bank branch location on the likelihood of bank failure during the most recent financial crisis. Design/methodology/approach – This paper estimates the probit regression to identify the causes of bank failures and attempts to determine the role of branch location in bank performance. Findings – Using data from failed and surviving banks in Georgia and Florida, this paper finds that diversifying the balance sheet and operating in more competitive markets reduced failure rates, but branching intensity, measured by number of branches and distance of branches from the home office did not significantly reduce the probability of failure. This suggests that, at least in today ' s market, it is not important to bank stability to have a branching network a significant distance from the home office. Originality/value – This paper carefully considers the role of branch location in the likelihood of bank failure during financial distress. As such, it contributes to the historical policy debate regarding regulation prohibiting or minimizing banks ' ability to branch. It also contributes to our understanding of how banks structure their branching networks in the contemporary banking environment.

Do Female CEOs and Chairs Constrain Bank Risk-Taking? Evidence from the Financial Crisis

This paper examines whether bank capital ratios and default risk are associated with the gender of the bank’s Chief Executive Officer (CEO) and Chairperson of the board. Given the documented gender-based differences in conservatism and risk tolerance, we postulate that female CEOs and board Chairs should assess risks more conservatively, and thereby hold higher levels of equity capital and reduce the likelihood of bank failure during periods of market stress. Using a large panel of U.S. commercial banks, we document that banks with female CEOs hold more conservative levels of capital after controlling for the bank’s asset risk and other attributes. Furthermore, while neither CEO nor Chair gender is related to bank failure in general, we find strong evidence that smaller banks with female CEOs and board Chairs were less likely to fail during the financial crisis. Overall, our findings are consistent with the view that gender-based behavioral differences may affect corporate decisions.

Bank funding structures and risk: Evidence from the global financial crisis

This paper analyzes the evolution of bank funding structures in the run up to the global financial crisis and studies the implications for financial stability, exploiting a bank-level dataset that covers about 11,000 banks in the U.S. and Europe during 2001–09. The results show that banks with weaker structural liquidity and higher leverage in the pre-crisis period were more likely to fail afterward. The likelihood of bank failure also increases with pre-crisis bank risk-taking. In the cross-section, the smaller domestically-oriented banks were relatively more vulnerable to liquidity risk, while the large cross-border (Global) banks were more vulnerable to solvency risk due to excessive leverage. In fact, a 3.5 percentage point increase in the pre-crisis capital buffers of Global banks would have caused a 48 percentage point in their probability of failure during the crisis. The results support the proposed Basel III regulations on structural liquidity and leverage, but suggest that emphasis should be placed on the latter, particularly for the systemically-important institutions. Macroeconomic and monetary conditions are also shown to be related with the likelihood of bank failure, providing a case for the introduction of a macro-prudential approach to banking regulation.

Bank Funding Structures and Risk: Evidence from the Global Financial Crisis

This paper analyzes the evolution of bank funding structures in the run up to the global financial crisis and studies the implications for financial stability, exploiting a bank-level dataset that covers about 11,000 banks in the U.S. and Europe during 2001?09. The results show that banks with weaker structural liquidity and higher leverage in the pre-crisis period were more likely to fail afterward. The likelihood of bank failure also increases with bank risk-taking. In the cross-section, the smaller domestically-oriented banks were relatively more vulnerable to liquidity risk, while the large cross-border banks were more susceptible to solvency risk due to excessive leverage. The results support the proposed Basel III regulations on structural liquidity and leverage, but suggest that emphasis should be placed on the latter, particularly for the systemically-important institutions. Macroeconomic and monetary conditions are also shown to be related with the likelihood of bank failure, providing a case for the introduction of a macro-prudential approach to banking regulation.

Bank Funding Structures and Risk: Evidence From the Global Financial Crisis

This paper analyzes the evolution of bank funding structures in the run up to the global financial crisis and studies the implications for financial stability, exploiting a bank-level dataset that covers about 11,000 banks in the U.S. and Europe during 2001?09. The results show that banks with weaker structural liquidity and higher leverage in the pre-crisis period were more likely to fail afterward. The likelihood of bank failure also increases with bank risk-taking. In the cross-section, the smaller domestically-oriented banks were relatively more vulnerable to liquidity risk, while the large cross-border banks were more susceptible to solvency risk due to excessive leverage. The results support the proposed Basel III regulations on structural liquidity and leverage, but suggest that emphasis should be placed on the latter, particularly for the systemically-important institutions. Macroeconomic and monetary conditions are also shown to be related with the likelihood of bank failure, providing a case for the introduction of a macro-prudential approach to banking regulation.

Bank Funding Structures and Risk: Evidence from the Global Financial Crisis

This paper analyzes the evolution of bank funding structures in the run up to the global financial crisis and studies the implications for financial stability, exploiting a bank-level dataset that covers about 11,000 banks in the U.S. and Europe during 2001–09. The results show that banks with weaker structural liquidity and higher leverage in the pre-crisis period were more likely to fail afterward. The likelihood of bank failure also increases with bank risk-taking. In the cross-section, the smaller domestically-oriented banks were relatively more vulnerable to liquidity risk, while the large cross-border banks were more susceptible to solvency risk due to excessive leverage. The results support the proposed Basel III regulations on structural liquidity and leverage, but suggest that emphasis should be placed on the latter, particularly for the systemically-important institutions. Macroeconomic and monetary conditions are also shown to be related with the likelihood of bank failure, providing a case for the introduction of a macro-prudential approach to banking regulation.

Understanding Contingent Capital

Contingent capital (CC) is a bond that automatically converts into common stock when equity capital is impaired. This paper analyzes the determinants of the interest rate at which CC is issued and discusses the impacts of CC issuance on other financial markets. The paper shows that Japanese banks are likely to offer high interest rates to CC investors, reflecting the economic and balance-sheet conditions of individual banks in Japan. The paper suggests that in order to draw much advantage from CC, regulators should avoid placing excess restrictions on the design of CC. By doing so, regulators can encourage banks to look for the ways to lower the interest rate of CC, some of which are illustrated in the paper. A minimum set of regulations, however, must be imposed on the design and issuing conditions of CC; otherwise, CC may disrupt the functioning of financial markets. In addition, the likelihood of bank failure is not necessarily reduced by replacing subordinated bonds with CC. Furthermore, the optimal combination of CC and subordinated bonds is extremely sensitive to economic conditions, such as the expected growth rate. All these issues are relevant when considering whether or not to allow banks to issue CC.