Non-crisis Years Research Articles

Bank Loan Loss Provision Determinants in Non-Crisis Years: Evidence from African, European, and Asian Countries

Loan loss provision is an important accounting accrual in the banking sector. There have been numerous debates about the determinants of loan loss provision in several contexts. This study extends the debate by investigating the determinants of bank loan loss provision in non-crisis years for 28 countries from 2011 to 2018. The non-crisis years cover the periods after the global financial crisis and the periods before the COVID-19 pandemic while the countries consist of African, European, and Asian countries. Using the generalized linear model regression and the quantile regression methodologies, the results show that institutional quality is a significant determinant of bank loan loss provision, indicating that the presence of strong institutions decreases the size of bank loan loss provision in non-crisis years. In the regional analyses, it was found that economic growth is a significant determinant of bank loan loss provisions in African and Asian countries. Loan loss provision is higher in times of economic prosperity in African and Asian countries. Bank overhead cost is a significant determinant of bank loan loss provisions in Asian countries. Meanwhile, bank loan loss provision determinants are insignificant in European countries.

Bank Loan Loss Provisions Determinants in Non-Crisis Years: Evidence From African, European, and Asian Countries

Bank Loan Loss Provisions Determinants in Non-Crisis Years: Evidence From African, European, and Asian Countries

Comparative Analysis of Industry and Country Diversification Benefits of the Equity Portfolio

This study focuses on the construction of investment portfolios using different optimization methods (1/N, risk parity, hierarchical risk parity, mean variance) based on two ways of asset diversification—cross-country and cross-industry—and assesses their effectiveness using a number of metrics. The main research question is which approach to asset diversification turns out to be the most profitable for the investor in terms of return and risk. Research results’ degree of susceptibility of fluctuations in time is assessed by an interperiod analysis with the division of the time interval under consideration into crisis and noncrisis years. According to the results, the industry asset allocation strategy outperforms the asset allocation strategy focused on country diversification. In crisis years, these differences are amplified, but the results are highly dependent on the portfolio optimization method.

Comparison of Black-Scholes and Garch Option Models on The Kompas100 Index With a Long Straddle Strategy During 2008-2021

Objective –This study aims to look at the use of contract options through Black Scholes and GARCH modeling on the Kompas100 Index with a long straddle strategy both in crisis and non-crisis. Methodology – The data used for the observation period are the closing price of the Kompas100 Index from 2008 to 2021. The testing lasts one month (from February 2008 to December 2021), and three months (from April 2008 to December 2021). To get the results, the average mean square errors (AMSE) of the two models were compared by implementing the long straddle strategy, meaning that the model is better if the percentage number is lower. Findings – Over a one-month period during the crisis, GARCH modeling performed better than Black Scholes modeling, with an error rate of 2.5539% for call options. Meanwhile, Black Scholes’s modeling was better on put options with an error rate of 1.9725%. In the 3-month period, GARCH modeling was better, with error rates for call and put options of 10.3882% and 7.4282%, respectively. In non-crisis years, GARCH modeling beat Black Scholes modeling during a one-month period with an error rate of 0.2689%, while Black Scholes modeling was better on put options with an error rate of 0.2943%. In addition, over a 3-month period, Black Scholes modeling performs better, with error rates on call and put options of 0.8821% and 1.0337%, respectively. Novelty – The longer the agreement term, the greater the error rate in both option models. The study results revealed that the error rate for the 3-month period was higher than the 1-month period. Type of Paper: Empirical/ Review JEL Classification: G11, G13. Keywords: Option; Black Scholes; GARCH; AMSE; Long Straddle Reference to this paper should be made as follows: Hendrawan, R; Hasibuan, M.D.A. (2023). Comparison of Black-Scholes and Garch Option Models on The Kompas100 Index With a Long Straddle Strategy During 2008-2021, J. Fin. Bank. Review, 7(4), 01 – 15. https://doi.org/10.35609/jfbr.2023.7.4(1)

Bilateral foreign direct investments: differential effects of tariffs in source and destination countries

We study the asymmetric effects of bilateral tariffs in FDI-receiving (destination) and FDI-sending (source) countries on bilateral FDI using Gravity analysis, with bilateral FDI and average tariff data for 47 countries during the period 2001–2012. Theory suggests that while the former would encourage tariff-jumping inward FDI, the latter would discourage offshoring and export-oriented outward FDI. Our empirical study uses two alternative methodologies to estimate a Gravity model, viz., PPML estimation method which uses pairwise, destination-time and origin-time fixed effects, and GMM with time fixed effects, which can deal with possible two-way causality. After correcting for possible two-way causality, our study confirms the theoretical expectations. We also find that the 2008 Financial Crisis has had a significant impact on the magnitude of the effects of bilateral tariffs. We find that one percentage-point increase in tariffs in the destination country increases inward FDI stock to GDP ratio in that country by 0.06% in the non-crisis years and by 0.01% in the crisis years. Similarly, one percentage-point increase in tariffs in the origin country decreases outward FDI stock to GDP ratio from that country by 0.06% in the non-crisis years and by 0.02% in the crisis years.

Capital structure speed of adjustment heterogeneity across zero leverage and leveraged European firms

This paper investigates whether leveraged and zero-leverage firms pursue or not a debt target level and, if so, how fast they adjust to that target. We also investigate how the influence of firms’ debt policy on capital structure speed of adjustment (SOA) changes with different financial systems, macroeconomic conditions, financial constraints and financial flexibility levels. Using the dynamic panel fractional estimator and a sample of European listed firms for the 1995–2016 period, we find that both zero-leverage and leveraged firms actively adjust to a target debt ratio. We also find that, in general, leveraged firms display a significantly higher SOA than zero-leverage firms (27.6 % vs. 22.1 %), with only two exceptions: there are no significant differences when the analysis is restricted to financially constrained firms; and during the 2008 financial crisis zero-leverage firms adjusted significantly faster (46.8 %) than leveraged firms (25.6 %) and relative to non-crisis years (21.6 %).

Тенденції розвитку депозитного ринку в Україні в сучасних умовах пандемії та пропозиції щодо його покращення

Abstract. Introduction. The trend of deposit policy of banks in Ukraine during the past five years is examined in the article. Deposit is the most important resource of banks. It is source for loans, investment and other activities. Purpose. The task was to investigate the extent to which the overall dynamics of bank deposits in Ukraine was affected by the Covid-19 in comparison with non-crisis years. Results. The situation in the deposit services market can be explained by two main reasons: the motive of caution, as well as the introduction of lockdowns, which helped to reduce the purchase of goods and services. The main goal of the banking and financial system is to strengthen the resource base of commercial banks. At the current stage of development in the provision of deposit services to individuals, there is an increase in absolute values, while the share of deposits in total bank liabilities remains at about the same level. The study of processes for the provision of deposit services in Ukraine shows its uneven development. This situation is explained as a psychological moment, the population is wary of spending all the money, prefers to keep them, because they are not sure about the future. Another reason is the introduction of quarantine restrictions that affect purchasing power. The result we got shows that the Covid-19 did not significantly affect to the amount of individual funds. However, it should be noted that the growth rate is not significant. It should be noted that over the past 5 years, interest rates in the national currency (both long-term and short-term) have more than halved, while in foreign currency — 7 times for long-term and 4 — for short-term. The interest rate policy largely determines the level of liquidity, profitability and risk of the bank.

Asset securitizations and bank stability: Evidence from different banking systems

The issuance of asset securitization has been subject to a substantial debate by financial regulators and practitioners post the financial crisis of 2008. This study examines the impact of asset securitizations on the performance and financial stability of banks in a dual banking system (Islamic and conventional). Using a unique sample of international banks located in 21 countries, our results provide strong evidence that banks involved in asset securitization are generally riskier and less financially stable. When we comparatively assess the different structures of securitization conditioned on the bank type (i.e. Islamic versus conventional securitization), these two models of asset securitizations show differential effects on bank stability. Unlike conventional securitization, which is marked by significantly low bank stability, an issuance of Islamic securitization leads to lower bank risk. This evidence is prevalent among the two bank types during the financial crisis of 2008–2009 and within non-crisis years. We attribute these findings to the distinctive monitoring and the constraints included in the Islamic model of securitization. The study provides new insights into alternative structures of bank securitization, offering policy implications for regulators governing countries with dual-banking systems.

Banks' profitability, institutions, and regulation in the context of the financial crisis

AbstractThis paper empirically examines how banks' dividend policy, the institutional environment, and banking regulation affects banks' profitability using panel data of a sample of 567 banks, mainly from Organisation for Economic Cooperation and Development countries, for 2004–2015. It further examines whether the effect of the institutional environment and banking regulation varies for crisis and noncrisis years. The estimation results reveal that banks' dividend policy influences positively banks' profitability, whereas higher levels of the institutional environment or stricter banking regulation reduces banks' profitability. The negative effect of the institutional environment and banking regulation was of lower magnitude during the global financial crisis, followed by the Eurozone crisis, and for less‐developed countries and larger banks.

Stock and bond returns correlation in Korea: Local versus global risk during crisis periods

This paper examines stock and bond returns correlation in Korea as an emerging market case study. The study covers the Asian financial crisis of 1997–1999 and the global financial crisis and European fiscal crisis of 2007–2012, plus non-crisis years that extend the sample period to 2005–2017. The sign of stock and bond returns correlation is shown to depend on the origin of risk triggering the crisis. In the local-risk driven crisis of 1997–1999, a flight to quality occurred across countries, causing stock and bond returns in Korea to decrease together. However, in the global-risk driven crises of 2007–2012, the flight to quality occurred across asset classes domestically, causing stock returns to decrease but bond returns to increase. Further, stock and bond returns correlation is found to relate systematically to changes in key macroeconomic variables, in particular, stock market volatility and a business leading indicator.

Sexually Transmitted Infections and Associated Factors in Homosexuals and Bisexuals in Granada (Spain) During the Period 2000-2015.

Sexually transmitted infections (STIs) are a major public health issue. Previous research shows the vulnerability of the homosexual and bisexual population, as well as the influence of economic, political, and cultural determinants. The aim of this study was to describe the socio-demographic healthcare profile and the main risk factors associated with STIs in homosexuals and bisexuals seen at the STI clinic in Granada (Spain) during the years 2000–2015. Infection prevalences were compared between the economic crisis period (2008–2014) and the rest of the years analysed. A cross-sectional observational and analytical study was conducted by reviewing 261 clinical records of individuals with suspected or present infection. Univariate, bivariate, and multivariate analyses were performed. 91.2% of the individuals were men, and 8.8% were women, with the mean age being 28.61 (SD = 9.35, Range = 17–74) years old. The prevailing sexual orientation identity was homosexual. 94.2% were single. The main reason for consultation was HIV. Differences in prevalence were found between crisis and non-crisis years (OR = 3.91; 95% CI = 1.73–9.19). In conclusion, their profile was that of a young, single man suspecting possible HIV infection. STI prevalence was significantly higher in the years of economic recession in comparison to the rest of the years.

Bank Switching and Interest Rates: Examining Annual Transfers Between Savings Accounts

We study the savings transfers between banks by retail depositors. Our sample comprises annual savings account data from the Netherlands for the period from 2004 to 2014. We control for demographic factors and find that the differences in interest rates across savings accounts help explain the extent to which depositors reallocate their savings to either a newly opened or an existing account. The depositors in our sample transfer between 3 and 6% of their savings for each percentage point difference in the interest rates. This effect is robust across various selected samples and model specifications. In addition, we show that depositors transfer a higher proportion of their deposits during the 2008–2009 financial crisis than during non-crisis years. During that crisis, the difference in interest rates remained a highly important determinant of transfer behavior.

International Bank Flows and the Global Financial Cycle

What is the role for supply and demand forces in determining movements in international banking flows? And what role might a common factor—the global financial cycle highlighted by Rey (Dilemma not trilemma: the global financial cycle and monetary policy independence, 2018) and others—play in movements in these flows? Answering these questions is crucial for understanding the international transmission of financial shocks and formulating policy. This paper addresses them by using the method developed in Amiti and Weinstein (J Polit Econ 126(2):525–587, 2018) to exactly decompose the growth in international bank credit into common shocks, idiosyncratic supply shocks and idiosyncratic demand shocks for the period 2000–2017. A striking feature of the global banking flows data can be characterized by what we term the “Anna Karenina Principle”: all healthy credit relationships are alike, and each unhealthy credit relationship is unhealthy in its own way. During non-crisis years, bank flows are well explained by a common global factor. But during times of crisis, flows are affected by idiosyncratic demand shocks to borrower countries and by supply shocks to their creditor banks. That is, the importance of the common component seems to vary over time. This has important implications for why standard econometric models break down during crises.

Effects of financial constraints on export performance of firms during the global financial crisis: microeconomic evidence from Korea

ABSTRACTThis study uses a manufacturing firm-level panel data set of South Korea for 2006–2013 to investigate the effect of financial constraints on the export performance of firms, with particular emphasis on the corporate ownership structure. The empirical results show that foreign multinational corporation (MNC) subsidiaries are not affected by financial constraint during both crisis and noncrisis periods, implying advantages of foreign ownership. However, domestic firms suffer more from financial constraints on exports during crisis years. In particular, domestic firms without parent firms are financially constrained during both crisis and noncrisis periods. However, those with parent firms do not experience financial constraints during noncrisis periods, although they too suffer from them during crisis periods. Thus, parent–subsidiary linkage among domestic firms plays an important role in alleviating financial constraints on export activity in noncrisis years but not as much during crisis years. Therefore, domestic parent firms exhibit less resilience to the global financial crisis, in comparison to foreign MNC parent firms.

Bank Switching and Interest Rates: Examining Annual Transfers Between Savings Accounts

We study the savings transfers between banks by retail depositors. Our sample comprises annual savings account data from the Netherlands for the period from 2004 to 2014. We control for demographic factors and find that the differences in interest rates across savings accounts help explain the extent to which depositors reallocate their savings to either a newly opened or an existing account. The depositors in our sample transfer between 3 and 6% of their savings for each percentage point difference in the interest rates. This effect is robust across various selected samples and model specifications. In addition, we show that depositors transfer a higher proportion of their deposits during the 2008-2009 financial crisis than during non-crisis years. During that crisis, the difference in interest rates remained a highly important determinant of transfer behavior.

RISK GOVERNANCEINTHE INSURANCE SECTOR—DETERMINANTSAND CONSEQUENCESINAN INTERNATIONAL SAMPLE

ABSTRACTWe analyze the relation between risk governance, risk, and performance measures for a global sample of 107 insurance companies from 2004 to 2012. Our risk governance index (RGI) covers several Solvency II provisions and includes the existence of chief risk officer on the executive committee, risk committee characteristics, and board industry experience. We find that in the crisis period 2008–2009, firms with a higher RGI generally have lower expected default frequency. We conclude that during noncrisis years, risk governance does not have a risk‐reducing effect but is positively associated with buy‐and‐hold returns, risk‐adjusted performance measures, and Tobin's Q. Our findings therefore support the role of risk governance as a business enabler rather than inhibitor. Insurance companies typically upgrade their risk governance following a negative shock, especially in countries that are well regulated and have weaker shareholder rights.

Bank Switching and Deposit Rates: Evidence for Crisis and Non-Crisis Years

Using a sample of annual deposit data in the Netherlands for the 2004 – 2014 period, we study the fraction of deposits transferred per year by 718 individuals. Controlling for demographic factors, we find that deposit rate differences across banks significantly explain the extent to which depositors reallocate their savings. This effect is predominantly present in non-crisis years, while depositors seemingly exhibited flight-to-safety behavior during the financial crisis. As this behavior holds for fully insured household deposits as well, we conclude that the effect of deposit insurance was muted during the past financial crisis.

Dividend Reductions, Reinstatements, and Substitution with Repurchases

Using a sample of dividend cuts and omissions between 1994 and 2013, we explore the cycle of dividend reductions due to a financial shock and the subsequent increase in payouts during the recovery. We indeed find that firms are more likely to cut and/or omit dividends during the recent crisis. While financial constraints are a first order consideration in these decisions, many of these firms reinitiate dividends and/or initiate share repurchase programs soon after, indicating that the effects of the crisis are less permanent than the causes of cuts and omissions in other years. Firms with a dividend-preferring blockholder reinstate faster than other firms following the crisis. Additionally, firms without a recent repurchase history that cut dividends during the crisis are more likely to subsequently repurchase than firms who cut in non-crisis years. Firms with dividend-preferring blockholders do not exhibit this propensity to shift payouts, indicating that some firms used the crisis as an opportunity to modify their payout policies. Market reactions to dividend reductions during the crisis are significantly worse than in non-crisis years, indicating that investors did not anticipate the quicker recovery in corporate payout in post-crisis years.

The Impact of Credit Line Drawdowns on Investment Evidence from the Financial Crisis

Using a unique dataset of credit line drawdowns and liquidity hedging, we study the relation between credit line usage and corporate investment. In line with theoretical predictions that credit lines aid firms to invest during times of limited credit availability, our findings reveal that the liquidity insurance function of lines of credit does facilitate the undertaking of value-enhancing investments during severe credit market conditions. Although the financial crisis did reduce firm investment, this effect was mitigated somewhat by credit line usage. We also find that in contrast to non-crisis times, during the crisis older, higher net worth firms were more likely to have access to credit lines. Similarly, firms with a higher firm value and bond rating were more likely to have extensive credit line drawdowns during the crisis than non-crisis years.

Accounting Discretion and the Market Disciplining of Bank Risk-taking Behavior: An Assessment of the Effectiveness of Egyptian Banking Reforms from an Accounting Perspective

The purpose of this study is to empirically delineate significant economic consequences associated with observable differences in discretion permitted to banks under the existing Egyptian Banking Act. More specifically, the study investigates whether accounting discretion is associated with earnings quality and risk-taking in the Egyptian banking sector. In light of this increased accounting discretion caused by the banking reforms, study questions the extent to which the Egyptian banking reforms facilitate market disciplining of banks. Based on a sample of 46 banks providing 634 bank-quarters over the period 2000-2015, the results indicate that, during non-crisis (crisis) years, bank managers smooth out earnings leading to higher quality earnings but also to higher (lower) earnings volatility and (lower) bank risk, consistent with managerial efficiency and not managerial opportunism explanation of accounting discretion. It is concluded that the economic reforms created conditions whereby bank earnings attributes are improved but where prudential market monitoring and oversight over bank risk-taking behavior may suffer.