National Banking Systems Research Articles

International Real Estate Review

During the recent housing recession and financial crisis, mortgage modification has been heavily promoted by the U.S. government as a way to stabilize the housing and the national banking systems. Numerous programs, such as the Home Owners Preserving Equity (HOPE), Home Affordability Modification Program (HAMP), and Home Affordability Refinance Program (HARP), were introduced or enhanced to allow more aggressive modifications than traditionally observed prior to the crisis. Loan modification is believed to be a way to avoid foreclosure and to help borrowers keep their homes. However, the effectiveness of loan modification in preventing eventual foreclosure has not been quantified. In this paper, we use Federal Housing Administration (FHA) modified loans to analyze their re-default risk. We use loan-level data to trace the performance of loans with heavy modifications. We have three major empirical findings. First, the empirical model shows that modified loans tend to have much higher re-default risk than otherwise identical never-defaulted loans. Second, the re-default model shows that re-default hazard is less sensitive to traditional risk drivers, compared with non-modified loans. Third, the re-default risk declines initially with the magnitude of the payment reduction associated with the modification received. However, as the payment reduction becomes substantial, the probability of re-default increases. Our empirical results suggest payment reduction is most effective around the 10% to 30% level, in order to reduce re-default risk. The effect is relatively flat between the 30% to 40% level. Payment reduction beyond the 40% level increases re-default risk, controlling for all observable variables. These findings have profound implications in how lenders should design optimal modification policies.

ИНТЕГРАЦИЯ В БАНКОВСКОМ СЕКТОРЕ СТРАН ЕВРАЗИЙСКОГО ЭКОНОМИЧЕСКОГО СОЮЗА: ПРОБЛЕМЫ И НАПРАВЛЕНИЯ РАЗВИТИЯ

Current state of the process of integration of banking systems of the member States of the Eurasian economic Union has considered. Based on the comparison of the main indicators of the banking sector development in the states of the Eurasian Economic Union countries, the main differences in the approaches of the States to the development of national banking systems have highlighted. Nowadays they are currently developing autonomously, despite the steps taken to integrate them has revealed. The SWOT-analysis of the factors influencing the integration in order to identify the positive and negative aspects of this process development has made.

Capital Flows in the Euro Area and TARGET2 Balances

We estimate a panel VAR model for the euro area to quantitatively assess how the uneven recourse of national banking systems in the euro area to the ECB's unconventional refinancing operations that led to the accumulation of large TARGET2 balances, has contributed to the propagation of different types of structural economic shocks as well as to the historical evolution of aggregate economic activity in euro area member countries in the period 2008-2014. Our results suggest that the built-up of TARGET2 balances was mainly driven by capital flow shocks while being barely responsive to other aggregate shocks. Furthermore, on basis of counterfactual experiments we find that the ability to build-up sizable TARGET2 liabilities has contributed substantially to avoid deeper recessions in the distressed euro area member countries like Spain, Italy, Ireland and Portugal, while to a smaller extent depressing aggregate economic activity in core member states, such as Germany, the Netherlands and Finland.

Measuring Contagion Risk in International Banking

We propose a distress measure for national banking systems that incorporates not only banks' CDS spreads, but also how they interact with the rest of the global financial system via multiple linkage types. The measure is based on a tensor decomposition method that extracts an adjacency matrix from a multi-layer network, measured using banks' foreign exposures obtained from the BIS international banking statistics. Based on this adjacency matrix, we develop a new network centrality measure that can be interpreted in terms of a banking system's credit risk or funding risk.

Analysis and regulation of the national banking systems a factor of increasing the level of ensuring economic safety in the conditions of instability

Analysis and regulation of the national banking systems a factor of increasing the level of ensuring economic safety in the conditions of instability

Ranking of EU national banking systems using multi-criteria analysis in the light of Brexit

In order to define and implement the most effective measures to overcome the difficulties of the post-crisis period, the policy-makers of ECB must identify not just main weaknesses of each banking system, but their strong points also. This requires the application of multi-criteria analysis, considering that policy-makers need to take into account a number of different aspects that, on the whole, indicate the quality of the banking system. Our aim is a comparative analysis of European banking systems right after the Brexit moment and within the framework of the tight new Basel III regulations. In this paper, we have ranked the banking systems of the 28 EU member states using multi-criteria analysis, specifically the PROMETHEE II method. The use of the PROMETHEE II method in combination with the entropy method offers a comprehensive insight into the banking system of each member state, given that the observed countries are ranked according to 9 conflicting criteria that are mostly used in banking system analysis. Our analysis shows that the banking systems in Central and Eastern Europe are the best performers, while the EMU’s developed banking systems such as the German, Italian, British, and French one are positioned among the last ranked. The Portuguese and Greek banking systems are, as expected, ranked in the last positions in our list. The obtained results also pointed out that the ECB should change its approach to the management and further development of a European Banking Union.

The difficult construction of a European Deposit Insurance Scheme: a step too far in Banking Union?

The German Government refused to accept the development of a European Deposit Insurance Scheme (EDIS) for Banking Union member states. Publicly, the German Government was preoccupied with the creation of a moral hazard that common funds would create for banks in those participating countries that had weak banking systems. This paper argues that to understand German moral hazard concerns it is necessary to look beyond the ideational – notably concerns stemming from German Ordo-liberalism – and focus on the existing national institutional arrangements that the German Government sought to protect. German moral hazard concerns stemmed from the fear that well-funded German deposit guarantee schemes (DGS) – especially those of small savings and cooperative banks – could be tapped to compensate for underfunded (and largely ex post funded) DGS in other member states. We thus demonstrate that the difficulties facing the construction of an EDIS owe to the weakness of the previously agreed harmonization of national DGS. This failure to harmonize schemes beyond a low minimal standard can be explained through an analysis focused on national systems. Different existing national DGS stem from the different configuration of national banking systems, the longstanding relationships among national banks and well-entrenched regulatory frameworks.

Group-Decisions, Economic Policy and the Resolution of Non-Performing Loans

Non-performing Loans (NPLs) have international ramifications because many banks operate in several countries and NPL-resolution related laws enacted in their home countries affect their foreign operations. While the management of Non-performing Loans (NPLs) remains a major problem around the world and requires long term preventive measures, Asset Management Corporations (AMCs) which are an afterthought (sometimes politically-motivated and usually introduced after non-performing loan - NPL - rates have exceeded permissible levels), have been created in various countries to help resolve NPLs and associated banking crisis. There have been mixed reviews of the effectiveness of AMCs and other methods of resolution of bank crisis in general; and AMCs can amplify financial instability and systemic risk problems in national banking systems. Within the context of the operations of Asset Management Corporation of Nigeria (AMCON), this article explains the following: i) accounting disclosure, “Bank Opacity” and behavioral problems may contribute to increases in earnings management and systemic risk; ii) there have may been a symbiotic relationship between the liquidity of Nigerian Banks’ shares/GDRs and institutionalized earnings management and corporate governance deficiencies on one hand, and AMCONs’ activities ii) AMCON has failed in its purpose and its business model has increased systemic risk and financial instability; iv) the AMCON business model caused other social and economic problems – such as Inefficient Cross-Subsidization (among banks and industries), Valuation-losses, Distortion of Borrowers’ Willingness-To-Resolve and Moral Hazard, and increased earnings management in various industries in Nigeria; v) the interaction of industry-level, firm-level and institutional-level corporate governance factors can affect banks’ reactions to AMCs’ activities. The article also proposes testable hypothesis, new theories of group-decisions and antitrust, and feasible solutions to problems caused by NPLs, AMCs in general (and AMCON in particular) and the Corporate Governance and antitrust deficiencies discussed herein.

Unsustainable Europe: How Will Explode the Banking System and Public Debt

The amendment of the Article 507 of the CRR, Capital Requirements Regulation, proposed by the European Commission, would expose member States of European Union to immediate failure for debt interest sudden rise, but would also expose to a higher risk of failure some national banking systems as a whole.

Early Warning and Systemic Risk in Core Global Banking: Balance Sheet Financial Network and Market Price-Based Methods

We analyse systemic risk in the global banking system using market price-based methods and the asset-liability network approach. For the latter we use the BIS consolidated data for exposures of 18 national banking systems to the banking sector debt of the same countries relative to their respective equity capital over the period 2005Q4- 2014Q4. The network based Systemic Risk Index (SRI) extends the spectral eigen-pair method of Markose (2012) and Markose et al. (2012), which treats network failure as a dynamical system stability problem. We also provide a comprehensive application in a cross-border setting of well known market price based SRIs, viz. MES (Marginal Expected Shortfall), ∆CoVaR, (Delta Conditional Value at Risk) and SRISK. In view of the large UK and European cross-border exposures to the US mortgage backed securities which led to widespread bank capital losses during the 2007 Global Financial Crisis (GFC), it is important to see if the SRIs can give early warning unlike paradoxical risk measures which were very low in the run up to the GFC when leverage was peaking. The network based eigen-pair method simultaneously gives early warning of instability of the global banking system in terms of tipping points identified by regulatory capital thresholds and also the centrality measures for both systemically important and vulnerable banking systems. Market price-based SRIs tend to be contemporaneous with the crisis and they are found to covary with standard risk management measures, such as VaR and betas.

A HEALTHY DOSE OF PESSIMISM? INFLUENCE OF THE UKRAINIAN ECONOMY ON ITS BANKING SECTOR CREDIT RATINGS

The purpose of the research is to identify the influence of Ukraine’s economic development on the international agencies' credit rating of its banking system. The instability and ambiguous geopolitical position of Ukraine are complicating any predictions for its economic developments. In the meanwhile, massive restructuring of all sectors of the economy became the necessary minimum for the reformation of the country and the achievement of the international standards. It is interesting to see how exactly these international standards, as represented by the evaluation of the rating agencies, appraise Ukraine, and particularly its banking sector. The methodology involves the analysis of the three major Ukrainian banks – PrivatBank, Oschadbank, and Ukreximbank using Fitch’s credit quality assessment systematic as an example. The comparative analysis was performed using Tier 1 capital ratio and loan-to-deposit ratio of these banks, year-to-year quarterly GDP growth, consumer price index (CPI) year-to-year change, UAH/USD exchange rate, 2-year and 5-year government bond yield, as well as 2-year and 5-year credit default swap (CDS). Results show that the most influential credit rating drivers for Ukrainian banks are: exchange rate; funding and liquidity; capital position and asset quality; sovereign risk. The research showed that the 2-year and 5-year government bond yield in USD and 2-year and 5-year CDS were influenced by similar trends. The yield on short-dated Ukrainian governmental bonds has shown a parallel increase with the corresponding CDS that indicated the market’s evaluation of the stressed condition of the country’s government and economy. Additionally, conventional yield structures displayed inversed nature with 2-year governmental bond yield in USD trading at significantly higher yields than 5-year government bond yield in USD during times of economic distress. Although longer maturity instruments should usually trade at a higher rate, such a development could have reflected the public markets’ scepticism to the Ukrainian government’s short-term solvency. The closer look at the Tier 1 capital ratio, which is considered to be a key indicator of the financial health of the banks, revealed analogy between it and three major Ukrainian banks rating development, indicating the Tier 1 capital ratio as a strong influencing factor. Loan-to-deposit ratio as an indicator of bank liquidity moved in parallel with decreasing credit ratings. The strong decrease in the UAH/USD exchange rate mirrored a strong increase in inflation and overall worsening state of the Ukrainian economy also being reflected in the major banks’ ratings. Practical implications. The correlation of these factors is relevant for bank managers and investors who can use financial market indicators to forecast and plan their own ability to conduct business. Likewise, academic researchers can further build on this study to add to the literature on country-specific reviews of sovereign debt crises and their impact on national banking systems. Value/originality. This research demonstrates that a worsening of financial indicators of the health of Ukraine’s financial system as measured by government bond yields and the trading of credit default swaps, as well as the country’s economic downturn, go along with a decline of local banks’ credit ratings.

National banking systems of Russia and Germany in conditions of macroeconomic instability: state analysis and development trends

In the modern world the credit institutions importance has gone beyond monetary and credit relations. They act as institutions on a par with the state and the market. It is impossible to imagine a rational organization of economic activity on a national scale without banks. Systemically important banks can be turned into a market element, an instrument of effective state policy, with effective and productive use. Weak credit institutions act as a factor of economic degradation. Therefore, the banking system, by accumulating and distributing cash, plays an important role in the economy of any country. Crisis phenomens and the unfavorable macroeconomic situation have a negative impact on the country's economy. Instruments, that support and stimulate the banking system, is played an important role. In this case, it is necessary to take into account the individual characteristics of a particular country, applying this or that mechanism of anti-crisis regulation. In the article, based on official statistical data published by the Russian Bank and the Bundesbank, the analysis of the banking systems state in Russia and Germany was made on the basis of an assessment of key indicators of banking activity in 2007–2016, including: the assets of credit institutions, the own funds of credit institutions, and the volume of loans issued. As a result of the analysis of the Russian and German national banking systems state in conditions of economic instability, it was revealed that the measures applied by the governments of countries are only half measures, which do not give sufficient effect. Besides that the state of the banking systems of the two countries is quite unstable. However the governments of Russia and Germany are struggling with the negative crisis phenomena (currency instability, decline in investment flow, etc.) and continue improving the current anti-crisis policy and developing new measures for support the banking system.

Banking union through Hungarian eyes–assessment of a possible close cooperation

Legislation laying down the first two pillars of the institutional system of the Banking Union was finalised in April 2014. In accordance with the regulations, non-euro area Member States, including Hungary, may notify the ECB at any time if they wish to participate in the common system even before the euro is adopted. The paper aims at summarising the possible pros and cons vis-à-vis the Banking Union from a Hungarian perspective. It highlights the reasons for not opting in at the inception of the new supervisory system and also gives indications about those major milestones that could give rise to the reconsideration of the present position. In its existing form, the single supervisory and crisis management mechanism has not achieved the initial target, i.e. the separation of the stability of national banking systems and the fiscal capacity of Member States and the elimination of interdependencies. In addition, close cooperation implies weaker powers than those provided by actual membership, and the separation of central bank and supervisory functions carries risks in non-euro area countries. By contrast, the attraction of Banking Union membership lies in the opportunity to join a uniform European system, a wider analyst base and ultimately, the “ammunition” of the EUR 98 billion available for crisis management in comparison to the Hungarian banking system. In October 2013, a uniform supervisory system integrated into the central bank was set up in Hungary, and the domestic resolution institutional system was complete by the end of 2014. Therefore, until the finalisation of the Banking Union through the creation of the common deposit insurance fund and a common fiscal backstop, it is reasonable to put the decision to join on hold; indeed, such a decision should be made in light of several factors presented in this study.

Development of investment banking activity in the context of cyclicality of the world economy

The article is dedicated to development of theoretical and methodological basis for research of investment banking activity and working out of scientific and practical recommendations as to development of international banking activity in the context of cyclicality of the world economy. Approaches for improvement of banking activity regulation in conditions of the crises are justified; mechanism for integration of national banking systems into the world financial system is developed; scientific and methodical approach to formation of pricing indicators of interbank credit market is proposed.

Los Mercados de Renta Fija y Bursátil

El presente documento trata de mostrar la excesiva dependencia de varias economías en sus respectivos sistemas bancarios nacionales como fuente de financiamiento. En muchos casos, el mercado interno de bonos, generalmente subdesarrollo, tanto en amplitud y profundidad, en comparación con el sistema bancario y el mercado de renta variable. A la luz de las experiencias de la crisis, muchos autores y los estudios han hecho relevante el desarrollo del mercado interno de bonos como una fuente alternativa de financiamiento. Para las economías emergentes, el contar con un sistema financiero sano, un mercado bursátil o de renta fija es beneficioso dado que proporciona servicios esenciales de calidad, sirviendo de palancas para impulsar el financiamiento

The Comparative Political Economy of Basel III in Europe

The Basel III Accord was the centrepiece of the international regulatory response to the global financial crisis, setting new capital requirements for internationally active banks. This paper explains the divergent preferences on Basel III of national regulators in three countries that approximate what are frequently presented as distinct varieties of capitalism in Europe — Germany, the United Kingdom and France. It is argued that national regulators setting post crisis capital requirements had to reconcile three inter-related and potentially conflicting objectives: banking sector stability, the competitiveness of national banks and short to medium term economic growth. The different national preferences on Basel III reflected how different national regulators defined and pursued these objectives, which in turn reflected the structure of national banking systems — specifically, systemic patterns of bank capital and bank-industry ties.

Öffentlich-rechtliche Sparkassen: Trägerschaft und Aufsicht im Umbruch?

In the past, public saving banks contributed significantly to stabilizing the German banking system. Nevertheless, those banks are facing both legal and economic challenges, which might potentially lead to a reform of their current organizational structure. As of today, public saving banks are set up as public law institutions (Anstalten des offentlichen Rechts) held by municipalities (Gemeinden). In legal terms, the participation of local and regional authorities has been challenged as a forbidden state aid. Similarly, the “Regional-prinzip” (i.e., the restriction of activities of the local saving banks to the area of the holding municipality) has been characterized as a forbidden regional cartel. None of those arguments, however, stands up to scrutiny. Neither does occasional malfunctioning of the saving banks supervision system (consisting of a supervision by the holding municipalities and an additional two-ply supervision by state authorities and European banking control) necessitate a general restructuring. In economic terms, the challenges the saving banks are facing can be met by facilitating mergers, albeit within the remits of Article 28 (2) of the Basic Law and the democratic principle. Access to external capital market is limited by the principle of democratic legitimacy, by the saving banks’ public mandate and the Regionalprinzip. In the future we will see tendencies of centralization: regional saving banks will be merged, they will be more than ever influenced by the saving bank association and they will increasingly act at local distance from their holding municipalities or districts. European regulation should take into account the diversity of national banking systems, especially the characteristics of small regionally restricted saving banks.

Swapové linky federálneho rezervného systému - medzinárodný veriteľ poslednej inštancie

After 2007, financial market turmoil began and shortage of dollar funding liquidity disrupted not only the US dollar funding market but also overseas. To address the shortage of dollar liquidity, the FED introduced swap lines with systematic important central banks, including emerging markets. The paper discusses the main feature of the FED’s swap lines in the context of the funding pressures on the FX swap market. The main objective of the paper is to reveal technical aspects and effectiveness of the swap lines. The paper explains connectivity between un/secured money markets and the FX swap market during the financial and debt crises. The FX swap market was hit significantly. During the liquidity crisis of 2007-2010, the main driver of the deviation from covered interest parity was a shortage of dollar liquidity jointly with counterparty risk. During the debt crisis, the main driver was counterparty risk of the euro zone banks and sovereigns. The FED swap lines were used as a liquidity backstop. The paper concludes that the swap lines were an effective tool of cooperation between central banks and significantly alleviated the pressure on the FX swap market. In addition, the swap lines were flexible, supported financial stability, no losses were recorded, the problem of adverse selection was avoided and exit was successful. Finally, the swap lines have become a permanent tool for solving temporary shortages of foreign currency liquidity in national banking systems.

The effectiveness of TARP-CPP on the US banking industry: A new copula-based approach

Following the 2008 financial crisis, regulatory authorities and governments provided distressed banks with equity infusions in order to strengthen national banking systems. However, the effectiveness of these interventions for financial stability has not been extensively researched in the literature. In order to understand the effectiveness of these bailouts for the solvency of banks this paper proposes a new model: the Longitudinal Binary Generalised Extreme Value (LOBGEV) model. Differing from the existing models, the LOBGEV model allows us to analyse the temporal structure of the probability of failure for banks, for both those that received a bailout and for those that did not. In particular, it encompasses both the flexibility of the D-vine copula and the accuracy of the generalised extreme value model in estimating the probability of bank failure and of banks receiving approval for capital injection. We apply this new model to the US banking system from 2008 to 2013 in order to investigate how and to what extent the Troubled Asset Relief Program (TARP)-Capital Purchase Program (CPP) reduced the probability of the failure of commercial banks. We specifically identify a set of macroeconomic and bank-specific factors that affect the probability of bank failure for TARP-CCP recipients and for those that did not receive capital under TARP-CCP. Our results suggest that TARP-CPP provided only short-term relief for US commercial banks.

Do the Troika's financial assistance programs reduce systemic risk? Evidence from Eurozone countries

The European sovereign debt crisis has forced many countries in the Eurozone to request financial assistance from the European Central Bank (ECB) and the International Monetary Fund (IMF) to prevent the contagion of the crisis to national banking systems. In the framework of providing large-scale financial rescue packages, the Troika, a unique institutional construction that consists of the ECB, the IMF and the European Commission (EU), has developed economic policies in combination with economic adjustment programs that aim to reinforce financial stability and reduce systemic risk. Our research focuses on the estimation of systemic risk in the countries that have implemented the Troika's bailout programs. The main objective is the evaluation of systemic risk in Greece, Ireland, Portugal, Cyprus and Spain 'pre' and 'post' the Troika's financial rescue programs to examine whether the Troika's bailout programs reduce systemic risk and financial fragility.