non-US Banks Research Articles

International evidence for the substitution effect of FX derivatives usage on bank capital buffer

Banks are the most important users in the foreign exchange (FX) derivatives market, while the effect of FX derivatives usage on bank capital buffer is hitherto underexplored. We construct an international sample consisting of non-US banks from 59 economies, and examine the relationship between them. We find that banks with more FX derivatives have lower capital buffers, suggesting that FX derivatives usage is a substitute for capital buffer, and banks use FX derivatives largely for risk management purpose. The substitution effect is more significant for non-dealer banks, banks with high capital buffers, and banks in economies with floating currency system. It is also more significant when the FX rate and stock market are volatile. Our findings support policymakers, especially in developing economies, in promoting the development of FX derivatives market to facilitate the risk management of banks.

Global Banks’ Dollar Funding

Leading up to the global financial crisis, US dollar activity by global banks headquartered outside the United States played a crucial role in transmitting shocks originating in funding markets. Although post-crisis regulation has improved banking systems’ resilience, US dollar funding remains a global vulnerability, as evidenced by strains that reemerged in March 2020 in the midst of the COVID-19 crisis. We show that shocks to US dollar funding costs lead to financial stress in the home economies of these global non-US banks, and to spillovers to borrowers, especially emerging economies. US dollar funding vulnerability amplifies these negative effects, while some policy-related factors act as mitigators, such as swap line arrangements between central banks and international reserve holdings. Thus, these vulnerabilities should be monitored and, to the extent possible, controlled.

Global Banks’ Dollar Funding: A Source of Financial Vulnerability

Leading up to the global financial crisis, US dollar activity by global banks headquartered outside the United States played a crucial role in transmitting shocks originating in funding markets. Although post-crisis regulation has improved banking systems’ resilience, US dollar funding remains a global vulnerability, as evidenced by strains that reemerged in March 2020 in the midst of the COVID-19 crisis. We show that shocks to US dollar funding costs lead to financial stress in the home economies of these global non-US banks, and to spillovers to borrowers, especially emerging economies. US dollar funding vulnerability amplifies these negative effects, while some policy-related factors act as mitigators, such as swap line arrangements between central banks and international reserve holdings. Thus, these vulnerabilities should be monitored and, to the extent possible, controlled.

Global Banks' Dollar Funding: A Source of Financial Vulnerability

Leading up to the global financial crisis, US dollar activity by global banks headquartered outside the United States played a crucial role in transmitting shocks originating in funding markets. Although post-crisis regulation has improved banking systems' resilience, US dollar funding remains a global vulnerability, as evidenced by strains that reemerged in March 2020 in the midst of the COVID-19 crisis. We show that shocks to US dollar funding costs lead to financial stress in the home economies of these global non-US banks, and to spillovers to borrowers, especially emerging economies. US dollar funding vulnerability amplifies these negative effects, while some policy-related factors act as mitigators, such as swap line arrangements between central banks and international reserve holdings. Thus, these vulnerabilities should be monitored and, to the extent possible, controlled.

The Pricing of FX Forward Contracts: Micro Evidence from Bankss Dollar Hedging

Using contract-level supervisory data, we show that dollar forward sales by non-US banks that are initiated at the end of a quarter and mature shortly after it concludes trade at higher prices and higher volumes. These effects are driven by banks with large net on-balance-sheet dollar assets that they can hedge around quarter-ends by selling dollars forward (increasing off-balance-sheet short positions), which suggests regulatory arbitrage to reduce capital charges for open foreign exchange (FX) exposure. Our results indicate that demand effects related to banks’ management of FX exposure are an important driver of deviations from covered interest rate parity.

On the role of the chief risk officer and the risk committee in insuring financial institutions against litigation

PurposeIn most financial institutions, chief risk officers (CROs) and their risk management (RM) staff fulfill a role in managing risk exposures, yet their lack of involvement in the governance has been cited as an influential factor that contributed to the financial crisis of 2007-2008. Various legislative and regulatory bodies have pressured financial firms to improve their risk governance structures to better weather potential future crises. Assuming that CROs and risk committees are given sufficient power to influence the corporate governance of financial institutions, can CROs and risk committees protect financial institutions from violating litigable securities law? Can they improve bank performance? The paper aims to discuss these issues.Design/methodology/approachThe authors employ a principal component analysis to construct a single measure that captures various aspects of RM in a firm. The authors compare the risk governance characteristics of sued firms with their non-sued peers and consider one of the final outcomes of risky behavior: shareholder litigation. The authors compute ROA and buy-and-hold abnormal returns to capture operating and stock performance and examine whether risk governance improves bank performance by reducing litigation risk.FindingsProper risk governance reduces a firm’s litigation probability. The addition of the RM factor to models that have been previously proposed in the literature improves the accuracy of those models in identifying companies that are most susceptible to class action lawsuits. Better RM improves the financial and stock price performance of financial institutions.Research limitations/implicationsThe data collection is laborious as the information about CRO governance has to be hand-collected from the 10-K report. A broader sample employing, e.g., non-US banks may provide additional insights into the relationship between RM practices, shareholder litigation, and bank performance.Practical implicationsThe study shows that a bank’s RM functions play a critical role in improving bank and operating performance and in reducing shareholder litigation. Banks should emphasize the RM function.Originality/valueThis is the first study to examine the mechanism behind the positive association between RM and bank performance. The study shows that better RM improves overall bank performance by decreasing litigation risk.

Kto jest odpowiedzialny za kryzys finansowy z 2008 roku?

The aim of this paper is to investigate the causes of the U.S. subprime mortgage crisis and an attempt to analyse which factors should be blamed for the outbreak of the global recession in 2009. The first part consists of theoretical research. It begins with a definition of a crisis from various perspectives in the opinion of well-known economics and provides a general historical overview. Later on, papier highlights researchers who have been studying economic crises including their main findings and contribution. The second part of this work is devoted to an empirical analysis. Primarily, it investigates the reasons that had led to the crisis in the Unites States: excessive deregulation and growing inequality among financial market as well as too low interest rates. Secondly, paper provides a brief description on the transmission channels of the crisis to real economy, both in the US and in Europe. These were: involvement of non-US banks in “toxic” assets, declining demand in importing countries and panic among investors in stock exchanges. This resulted not only in the fall of consump-tion and investments but also increased public deficits and public debts in all economies. Finally, paper provides explanation of actions that were undertaken by public institutions including: “The Paulson Plan”, “TARP” – by government and “TALF”, “PPIP”, “QE” – by Federal Reserve System. At the end, paper attempts to evaluate what factors and to what extent where responsible for the outbreak of the recent global recession.

Bank ownership, financial segments and the measurement of systemic risk: An application of CoVaR

The recent financial crisis has shown that the regulatory framework that has been formulated and implemented over the last twenty years under the Basel I and II agreements has relied excessively on the monitoring of individual financial institutions. It failed to capture the contribution of systemic risk, which is considered to be the risk that is the outcome of collective behaviour of financial institutions that have significant effects on the real economy. This paper investigates whether the increased presence of foreign banks which are listed on a national stock market has contributed to the increase in the systemic risk, in particular, after the financial crisis of 2007–2009. We examine the extent to which the distress of foreign banks contributes to systemic risk for the US. In addition using relevant data for the UK we investigate the extent to which distress within different sub-segments of the financial system, namely, the banking, insurance and other financial services industries contribute to systemic risk. We conduct our analysis with the CoVaR measure of systemic risk recently developed by Adrian and Brunnermeier (2011) using daily data for the period 2 January 2000 to 31 December 2012. Furthermore, we complement our analysis with the application of two tests, the significance and dominance tests, to provide a formal comparison of the relative contribution of either the domestic or foreign banks and/or each individual financial sector. Our main results provide evidence that in the US, the non-US banks contribute to the systemic risk although most of the contribution comes from the US banks. In the case of the UK we show that the banking industry contributes relatively more to systemic risk in periods of distress than the insurance industry or the other financial services industry. Furthermore, when we examine the estimated ΔCoVaR measures, we observe that for all sectors the contribution to systemic risk has increased since 2008.

International Propagation of the Credit Crisis

We use a large sample of non-US banks to examine the propagation of the 2007-2009 crisis. Using both stock market and structural variables we test whether the relative incidence of the crisis was better explained by crisis models or by the VaR-type analysis of the Basel system. Consistent with crisis models, we find that comovement, interbank linkages, leverage, and fragility of funding structure are related to crisis impact. Contrary to the assumptions of the Basel system, we find that asset risk, measured by the risk weightings of the Basel, has a perverse relationship with crisis impact when considered alone and no relationship when other variables are included. We provide evidence of both a direct linkage between banks and an indirect linkage which could either represent linkages in the real economy or common demands by investors for liquidity. We also investigate whether the relative impact of the crisis on banks was related to a shift in correlations and find that it was not. We discuss the implications of our findings for regulation.

How does internal control regulation affect financial reporting?

Internal control regulation effectiveness remains controversial given the recent financial crisis. To address this issue we examine the financial reporting effects of the Federal Depository Insurance Corporation Improvement Act (FDICIA) internal control provisions. Exemptions from these provisions for banks with assets under $500 million and for non-US banks provides two unaffected control samples. Our difference-in-differences method suggests that FDICIA-mandated internal control requirements increased loan-loss provision validity, earnings persistence and cash-flow predictability and reduced benchmark-beating and accounting conservatism for affected versus unaffected banks. More pronounced effects in interim versus fourth quarters suggest that greater auditor presence substitutes for internal control regulation.

The Impact of the 1988 Basel Accord on Banks' Capital Ratios and Credit Risk-taking: An International Study

The purpose of this paper is to see whether and how G-10 banks have complied with the 1988 Basel Accord. The interest of this study lies in the fact that the standardized approach to credit risk in the New Basel Accord is conceptually similar to the 1988 agreement. However, very little is known about the reaction of non-US banks to the imposition of minimum capital requirements that make use of risk-weight categories. Building on previous studies, this paper uses a simultaneous equations model to analyze adjustments in capital and credit risk at banks from G-10 countries over the 1988-95 period. The results show that regulatory pressure was successful in raising the capital to assets ratios of undercapitalized banks in Canada, Japan, the UK and the US but not in France and Italy. In addition, there is no evidence that undercapitalized G-10 banks increased or decreased their credit risk over the period studied. Interestingly, these findings are robust to the inclusion of a variable measuring the role of market discipline in influencing bank capital and risk choices. All in all, the results suggest that the 1988 Basel standards were effective in that, subsequent to their adoption, undercapitalized G-10 banks generally increased their capital but not their credit risk.

Determinants of the Loan Loss Allowance: Some Cross-country Comparisons

This paper analyses the determinants of banks' loan loss allowances for samples of US banks and three non-US samples: a group of 21 countries, Canada and Japan. The model includes fundamental (or non-discretionary) determinants of the allowance such as non-performing loans, and discretionary determinants such as income before the loan loss provision. The results suggest that the loan loss allowance is sensitive to pre-provision income in almost all samples. However, the results also suggest that some variables thought to reflect fundamental factors in US analysis, such as net chargeoffs, are not significant factors for non-US banks.

Interest rate risk of Australian financial sector companies in a period of regulatory change

In a recent study, Madura and Zarruk (1995) provide evidence that interest rate risk is greater for non-US banks (British, Canadian, German and Japan) than for US banks. The primary contribution of the current paper is to extend the Madura and Zarruk analysis to the financial institutions of Australia over a period of extreme regulatory change, namely, 1978 to 1992. Our major findings are that there is evidence of (1) sensitivity to long-term interest rates; (2) instability of interest rate sensitivity across subperiods; and (3) interest rate sensitivity of large banks and finance companies.

Interest Rate Rish of Australian Financial Sector Companies in a Period of Regulatory Change.

In a recent study, Madura and Zarruk (1995) provide evidence that interest rate risk is greater for non-US banks (British, Canadian, German and Japan) than for US Banks. The primary contribution of this paper is to extend the Madura and Zarruk analysis to the financial institutions of Australia over a period of extreme regulatory change, namely, 1978 to 1992. The full sample period is partitioned into three subperiods of analysis, namely, January 1978 to November 1983 ("pre-deregulation" period): February l984 to September 1987 ("deregulation" period); and November 1987 to December 1992 ("post-deregulation" period) and the potential sensitivity to short, medium and long-term interest rate movements is examined in each sub-period. Our major findings are that (1) while there is some general evidence of interest rate sensitivity in the first two sub-periods, no such evidence is forthcoming in the final sub-period. (2) while the evidence of sensitivity at the long-term end is relatively strong, the short-term results are far less convincing; (3) there seems to be some degree of instability of interest rate sensitivity across sub-periods, particularly for long-term rates; (4) while significant interest rate sensitivity of a large banks portfolio and a finance companies portfolio is found, no such evidence is apparent in any subperiod for a small banks portfolio; and (5) there is a negligible role for a "shape of the term structure" effect. African Journal of Finance and Management Vol.7(2) 1999: 34-58

Book Reviews

Abstract Abstract Expert Systems in Auditing, by Jan van Dijk and Paul Williams. Stockton Press (15 E 26th St, New York NY 10010), 1990; 192 pp. With glossary and bibliography. Price: $143, including shipping; include payment with order, in US funds. Outside the US, order from Globe Book Services, Brunel Rd, Houndmilles, Basingstoke, Hants RG21 2XS, UK; inquire about price. Information Systems Management, Control, and Audit, by Ian Gilhooley. Institute of Internal Auditors (249 Maitland Ave, Altamonte Springs FL 32701–4201), 1991; 507 pp. Price: $68, including shipping; include payment with order, in US funds. Discount for IIA members. Add $40 for orders from outside North America. For checks drawn on non-US banks, add $30 more. Disaster Recovery Planning Manual for Financial Institutions, by Geoffrey Wold and Robert Shriver. (Order Item B141.) The Bank Administration Institute (Probus Publications, 1925 Clybourne St, Chicago IL 60614), 1990; 223 pp. Price: $185 in the US, include payment with order; elsewhere, inquire.