Bank Portfolio Research Articles

Credit Risk Migration and Economic Cycles

The misestimation of rating transition probabilities may lead banks to lend money incoherently with borrowers’ default trajectory, causing both a deterioration in asset quality and higher system distress. Applying a Mover-Stayer model to determine the migration risk of small and medium enterprises, we find that banks are over-estimating their credit risk resulting in excessive regulatory capital. This has important macroeconomic implications due to the fact that holding a large capital buffer is costly for banks and this in turn influences their ability to lend in the wider economy. This conclusion is particularly true during economic downturns with the consequence of exacerbating the cyclicality in risk capital that therefore acts to aggravate economic conditions further. We also explain part of the misevaluation of borrowers and the actual relevant weight of non-performing loans within banking portfolios: some of the prudential requirements, at least as regards EMS credit portfolios, cannot be considered effective as envisaged by the regulators who developed the “new” regulation in response to the most recent crisis. The Mover-Stayers approach helps to reduce calculation inaccuracy when analyzing the historical movements of borrowers’ ratings and consequently, improves the efficacy of the resource allocation process and banking industry stability.

Financial crises and the asymmetric relation between returns on banks, risk factors, and other industry portfolio returns

AbstractWe show that the relations between the returns on the banking industry, risk factors, and other industries often are asymmetric. Lagged banking industry returns seem to improve predictability but the positive impact of a 1‐month lag of the return on the banking portfolio is much higher in the lower part of the return distribution. However, after the Dodd‐Frank Act in 2010, the cross‐autocorrelation with banks is changed and becomes negative in the upper part of the distribution. Returns on banks also seem to lead returns on five risk factors. This relation, however, is not robust across the distribution.

Efficient portfolio composition of Indonesian Islamic bank financing

The purpose of this research is to determine the composition of an efficient portfolio in the financing of ten Islamic banks. The theory of efficient portfolio by Markowitz is a modern portfolio theory used for analyzing the combination of various investment instruments to form efficient portfolio points at efficient frontier lines. The efficient composition portfolio measurement of Islamic bank in this study uses return, standard deviation, variance-covariance, correlation coefficient, and variation coefficient of investment instruments between 2011 and 2015. This study uses quantitative research achieved using Microsoft Excel. The result of this research shows that the average composition of an efficient portfolio of each Islamic bank is as follows: 48.62% for Mudharabah-Musyarakah, 41.63% for Murabahah, 8.03% for Ijarah, and 8.31% for Istishna. It can be seen that Mudharabah-Musyarakah and Murabahah are more dominant than the other financing types.

THE ROLE OF BANKS IN NATIONAL INNOVATION SYSTEM: GENERAL STRATEGICAL ANALYTICS

In this paper the role of the banking system in the processes of innovation system as a new direction of banking strategy is considered. Innovation ways of increasing the role of banks and minimize the risks of innovation by integrating with an innovation infrastructure is offered. Analysis of the mechanisms to support innovation by banks in India, Great Britain, Norway was conducted.The purpose of this research is to consider the main points of banking strategy development within the innovation system. Methods of current research are institutional and evolutionary approach, methods of strategical development of innovation systems and the ways of innovation development ways selection, which used for the bank’s innovation strategy development.According to analysis of the main issues of innovation banks we propose to consider the strategy of innovation investment cycle. The main points of banks innovation strategy were considered. While forming the intellectuals’ property and innovation projects portfolio banks the authors have proposed to consider peculiarities of the innovations marketing. Implementation of agreements and cooperation between bank and innovation infrastructure element will create mechanisms for information exchange, constant interaction with the participants providing and accompanied by innovation projects implementation, and for ensuring of consistent communications to support the development of specialized institutions.Analysis of financing innovation models allows to conclude that for Ukraine the corporate-state system, in which various government agencies responsible for conducting scientific and technological policies play a crucial role, is the most appropriate. Identified features of the bank’s strategy can be used in the activities of innovation system and innovation structures development.

Why is contagion asymmetric during the European sovereign crisis?

We use shocks to CDS spreads of peripheral countries to identify the effects of changes in the creditworthiness of these countries on stock returns of EU banks. We predict that large positive spread shocks should have a weaker impact in absolute value than large negative shocks because bank equity is an option on the bank’s assets, policy reactions are asymmetric, and bank portfolios include bonds that benefit from a flight to safety. We find support for this prediction during the European crisis, so that contagion from pervasive creditworthiness shocks is asymmetric. This effect is important enough to make the portfolio contagion channel economically and statistically insignificant for adverse shocks.

A Model of Commercial Bank Projects Portfolio Building Based on the Game Theory

Purpose of research is to study building a commercial bank project portfolio based on the game theory. The existing algorithms and models for the formation of a commercial bank project portfolio impose certain restrictions on the initial conditions, and do not take into account the differentiation of selection criteria depending on specific types of bank projects, therefore it is necessary to develop a model that takes into account the specifics of the banking business and makes it possible to find the required solutions. Methods. A method for building a model based on the game theory allows us to determine the structure and system relationships between the components of the project portfolio and their characteristics. The article presents a formalized description of the commercial bank project portfolio model in the form of a cooperative game with a transferable utility. A detailed description of the search for the optimal distribution in the cooperative game is given. The Shapley axioms are laid down reflecting the fairness of the sharing based on the contribution of each player to the winning coalition regarding the project portfolio model. Results. The specific features of building a model of a projects portfolio, including multicriteriality and the relationship between individual bank projects and the synergetic effect of their joint implementation are revealed. In general, the task of building a project portfolio of a commercial bank is to maximize the expected total effect of the project portfolio implementation. The total of all portfolio projects should provide the greatest efficiency. The article describes the implementation of the proposed model of commercial bank project portfolio building through the example of real bank projects. As a result of calculations, the optimal solution of the cooperative game which is a sequence according to which bank projects will be included in a portfolio was obtained. Conclusion . Thus, the developed and implemented in the article model of formation of a commercial bank project portfolio using the game theory allows taking into account the relationship between bank projects, the synergetic effect of their joint implementation and finding the optimal solution in terms of risk and uncertainty.

ВПЛИВ ГЛОБАЛІЗАЦІЙНИХ ПРОЦЕСІВ НА ТРАНСНАЦІОНАЛІЗАЦІЮ БАНКІВСЬКОЇ ДІЯЛЬНОСТІ

Розкрито зміст глобалізаційних процесів у фінансовій сфері. Висвітлено як позитивні, так і негативні наслідки фінансової глобалізації для національних банківських систем. Зіставлено інтерналізаційну та еклектичну парадигми створення транснаціональних корпорацій. Виявлено тенденції розвитку банківського сектору в умовах глобалізаційних процесів. Показано діалектичну єдність і протиріччя інтересів глобальних господарських суб’єктів і держав. Дано оцінку впливу процесів транснаціоналізації банківського капіталу на національні банківські системи.

Analysis of implementation of the National Bank’s approaches to assessing the financial condition of the debtor – a legal entity and the condition of loan portfolio of domestic banks

The article analyzes the current state of the credit portfolio of domestic banks in the context of introduction of new approaches of the National Bank to assess the financial status of the debtor – a legal entity. Ukraine implements the recommendations of the Basel Committee on Banking Supervision on Credit Risk Assessment, which recommends banks to develop their own internal models in order to properly assess their clients. However, the National Bank of Ukraine has chosen another concept for the settlement of this recommendation, in particular, it developed and obliged all domestic banks to use their own methodology for assessing the level of credit risk based on a specific econometric model. Even before the full implementation of the methodology of the National Bank in practice of domestic banks, it was critically evaluated by domestic scientists with the details of deficiencies. The conducted study allowed to analyze the relationship between the introduction of the new NBU methodology for assessing the level of credit risk on corporate loans and changes in the share of non-performing loans in loan portfolios of Ukrainian banks. The obtained results confirmed the low effectiveness of the NBU methodology for identifying insolvent borrowers, as in the background of the growth of lending to legal entities in 2018, the share of non-performing loans was almost unchanged, or insignificantly, indicating that the newly issued loans subsequently went to the category of unemployed. The study summarizes the shortcomings of the current methodology and proposes to differentiate the approaches of banks to assessing the level of credit risk, namely, to allow banks with a long-term functioning in the market to develop and approve in the NBU their own methods for assessing the level of credit risk of the borrower, and for newly created banks – to use the methodology of the NBU until the moment of accumulation of the necessary experience to develop their own methodology.

New Portfolio-Rating-System based on LEVEL(S)

In Switzerland, there are currently no instruments for the holistic and easily applicable assessment of the sustainability of existing buildings, which can also be applied to larger real estate portfolios and which are structurally based on Swiss or European sustainability standards. The instrument, developed as part of a ZHAW R&D project for the City of Zurich, Public Real Estate Management, is based on the already existing LEVEL(S) criteria structure. As distinguished from LEVEL(S), it can be applied to all types of buildings, including mixed buildings, and also scalable to larger portfolios of cities, banks, insurances or real estate investment funds.LEVEL(S) is a voluntary reporting framework to improve the sustainability of buildings. Using existing standards, LEVEL(S) provides a common EU approach to the assessment of environmental performance in the built environment. In the current Version LEVEL(S) is suitable for new office and residential buildings and existing buildings at the time of a major refurbishment.The paper shows, how the rating structures of Agenda2030/SDG’s/GAPFRAME, ESCI City Rating System, DGNB and LEVEL(S) can be combined into a holistic evaluation system. If required, the developed portfolio analysis instrument can be coupled - with a more detailed building analysis as an intermediate step - directly with a DGNB renovation certification. It will show how sustaining property owners can be supported in this holistic way. Finally, the first findings from the practical application are explained. It will be shown how it is possible to support sustainably acting portfolio holders in this holistic way.

Financial (Il) Literacy And Stability Of The Financial System

The aim of the author of this paper is to show the relationship between the levels of financial
 Literacy of individuals and company’s managers and the stability of financial markets, asset
 Markets and the stability of the financial system as a whole. In post-conflict Bosnia and Herzegovina (BiH) economy was ''struck'' by foreign banks and financial capital that has swept the local public ''hungry'' for loans but also under-educated in the financial sense to borrow and use borrowed funds more effectively and accept tolerable burden of debt. Financial illiteracy and the willingness to accept the conditions imposed by banks have led to difficulties in servicing obligations and deteriorating loan portfolio of banks. In such circumstances, the onset of the financial crisis has brought something positive. The trend of rapid borrowing of citizens and companies in BiH was abruptly cut, but on the other hand problems with servicing the loan already taken simultaneously arose. The problems are still not dramatic but it should be noted that problems in the banking sector come to the surface only after one and a half to two years after the crisis. The author believes that a more serious approach to the financial literacy of citizens and managers and owners of small businesses is crucial, not only for the economy as a whole but also for the health of the banking system or financial system of the country.

Transformation of banking in the new paradigm strategy of Ukraine’s development

The article considers the issues of transformation of banking into the new strategy of Ukraine’s development in conformity with the accelerating comprehensive transformations of the modern world. It is found that the crisis of globalization is deepening, resulting in the end of the industrial matrix of globalization and the beginning of post-industrial paradigm. It is pointed out that due to the networking transformation of the world a strategic perspective is rather an apolar world than a multipolar one, or a world of equivalent entities. This signals the end of Euro-centrism. In the paper, it is shown that Ukraine’s course to European integration should correlate with current Euro-integration strategies.The systematic analysis of the modern state of the economic backwardness of Ukraine was carried out and the dynamic model of development with the new industrial policy in the reform of the economy was used. A system analysis of the current economic underdevelopment in Ukraine is carried out and a dynamic model of development with a new industrial policy is proposed.Taking into account the deterioration of investment climate, Ukraine’s position in the global investment flows is determined. The structure of capital investments is analyzed by funding sources. In order to mitigate investment risks, a scheme of interaction between tools and instruments used for attracting investments to Ukraine’s economy is proposed. It is stressed that a sustainable stabilization of Ukraine’s banking system is a key driver for the recovery of the real sector. Since the banking sector has been and continues to be a leader and a driving force for reforms in the country, the current state of Ukraine’s banking system after a “big banking cleansing” is assessed. It is concluded that restoration of lending is an essential result received from the transformation of banking. The roots of non-performing loans in bank portfolios are defined and ways for restructuring non-performing loans are outlined. It is noted that addressing the problem of insider lending plays an important role in improving loan portfolios.

Does focus strategy work? A study of bank loan portfolios in Indonesia

PurposeThe purpose of this paper is to determine the impact of loan concentration on the returns of Indonesian banks and examines whether bank ownership types affect the relationship between concentration and returns.Design/methodology/approachThis research uses heuristic measures of concentration: The Hirschman–Herfindahl index and Deviation from Aggregated Averages are applied to Indonesian banks across all sectors. The data covers the pre and post global financial crises periods from 2003-2011 for 109 commercial banks in Indonesia. Panel feasible generalised least squares analysis was applied.FindingsThe findings show that loan concentration increases bank returns. The positive effect of concentration on returns tends to be more significant for domestic-owned banks. In addition, the interaction effect shows that the positive effect of concentration on returns is less for foreign-owned banks.Research limitations/implicationsThe Indonesian central bank changes to the reporting format of sectoral loan allocation by banks since 2012 in terms of the Indonesian Banking Statistics Details of Enhancement matrix requires separate data analysis for 2012 onwards. The findings of this paper could be enhanced by more detailed data like interest rate expenses and bank level sectoral non-performing loans data.Practical implicationsThe findings suggest that a focus strategy provides better returns. Moreover, bank ownership types is an important factor to consider when setting a bank lending policy.Originality/valueThis paper is among the few studies where different measures of loan concentration in combination with measures of return are applied in Indonesia as an emerging Asian country. The research also provides evidence of the impact of concentration on the interest earnings of the loan portfolios of banks in addition to return on assets and return on equity that are generally applied as measures of return in previous research.

M‐PRESS‐CreditRisk: Microprudential and Macroprudential Capital Requirements for Credit Risk under Systemic Stress

AbstractM‐PRESS‐CreditRisk is a novel stress testing approach that can help authorities gauge banks' capital adequacy related to credit risk. For the first time, it combines the assessment of microprudential capital requirements under Pillars 1 and 2 and macroprudential buffers in a unified, coherent framework. Its core element is an advanced credit portfolio model—SystemicCreditRisk—built upon a rich, nonlinear dependence structure for correlated bank portfolios. The model is applied to a sample of 12 systemically important German banking groups and delivers measures for systemic credit risk and the banks' contributions to it in both baseline and stress scenarios.

Impact of Capital Structure on the Portfolio Behaviour of Commercial Banks in Tanzania

This study examined the impact of bank capital structure measured by leverage ratio as defined in Based III based on tier 1 capital to total assets, on the portfolio behaviour of commercial banks in Tanzania by using fixed balance panel of annual financial statements data of 20 banks from 2002 to 2017. The studied banks had more than 89 percent of the total commercial banks’ assets in 2017 and 79 percent of total loans. Consideration of portfolio behaviour was explained based on choice assets (loans, investment in government securities and interbank loans) and non-choice items (non-earning assets including cash, required reserved and investment in fixed assets). The study examined the impact of capital structure on the bank portfolio holding with respect to the size of the bank and ownership. Findings revealed that only 35% of the banks are undercapitalized as at the end of 2017. The variables tested were significant at p <0.01 and p <0.001 except for the bank size measure. This means size of the bank is not a measure for its leverage structure, but with positive relationship.

Corporate governance and non - performing loans: evidence from listed banks in Sri Lanka

Non-performing loans (NPLs) plays a significant role as they reflect the credit quality of the loan portfolio of banks, and in aggregate terms, reflect the credit quality of the loan portfolio of the banking sector in a country. The study aims to examine the influence of corporate governance on non-performing loans of listed banks in Sri Lanka for the period from 2013 to 2017. In this study, listed banks are selected as sample for the purpose of data analysis with help of Pearson’s correlation and multiple regressions. Secondary data from the annual reports of banks and journals was used for the analysis purpose. The findings show that board activities have a significant influence on non-performing loans of listed banks in Sri Lanka whereas other corporate governance variables such as board size, board independence and CEO duality have no significant influence on non-performing loans. This study would hopefully benefit to the academicians, researchers, policy-makers and practitioners of Sri Lanka and other similar countries.

Credit risk migration rates modelling as open systems II: A simulation model and IFRS9-baseline principles

In 2014 the International Accounting Standards Board (IASB) promulgated the current International Financial Reporting Standards 9 – Financial Instruments (IFRS9) that draw new lines for an ex-ante, reliable, unified and well-balanced credit risk assessment. Among others, two principles are of interest to this paper: that of segmented and prospective estimation of expected credit losses. Within the frame of a micro-simulation approach, this paper focuses on these issues while considering the evolution of a bank portfolio. The paper presents an algorithmic procedure developed on a realistic dynamic credit risk migration rates modelling of a portfolio as an open system with entries and exits that is consistent with the segmented and prospective IFRS9 principles. Although operating at the aggregate level of the migration matrix, combining accounting principles inspired to those of the IFRS9-baseline with the open systems modelling, the main conclusion is that it allows for a more reliable provision and ex-ante and forward-looking estimation of expected losses.

ОРГАНІЗАЦІЯ БЕЗПЕКИ БАНКІВСЬКОГО КРЕДИТУВАННЯ В УКРАЇНІ

У статті розглянуто різні точки зору сутності поняття «безпека кредитної діяльності». Коротко проаналізовано сучасний стан кредитного портфеля банків України. Також в роботі розглядаються теоретичні та методологічні засади фінансової безпеки банківських установ, а саме: відображена сутність кредитної безпеки банку, загрози кредитній безпеці та ризики їх виникнення. Встановлено, що банки не змогли швидко адаптуватися до фінансового-економічних шоків та незмінної нестабільності у політичній сфері. Перш за все, це стало причиною збільшення рівня кредитного ризику, що в свою чергу, призводить до збільшення обсягів резервування та зменшення інвестиційних можливостей. Тому було запропоновано шляхи покращення фінансової кредитної безпеки банків.

АНАЛІЗ ІНВЕСТИЦІЙНОГО ПОРТФЕЛЯ БАНКІВ УКРАЇНИ ТА СТРАТЕГІЯ УПРАВЛІННЯ НИМ

У статті розглянуто різні точки зору сутності поняття «інвестиційна діяльність та інвестиційний портфель банків». Проаналізовано сучасний стан формування та управління інвестиційним портфелем банків України. Також, визначено, що на протязі останніх років банківська інвестиційна діяльність є не досить успішною та прибутковою, яке в свою чергу призводить до ще більшого занепаду національної економіки та відсутності інноваційного розвитку. Адже, саме інвестиційна діяльність банків формує рух коштів на ринку, зосереджуючи їх на найбільш головних та важливих напрямах розвитку суспільства. В ході дослідження, також було виявлено основні проблеми, які виникають в процесі формування та управління інвестиційного портфелю банками, і, відповідно, обґрунтовано чинники, що гальмують даний процес. На основі цього, було розглянуто та обґрунтовано оптимальну інвестиційну стратегію для банків України.

Account of foreign economic activity factor in determining the entity creditworthiness

The article is devoted to the development of methodology for assessing the level of credit risk of borrowers-legal entities. The authors analysed the current methodology for determining the credit risk size under active banking operations used by Ukrainian banks. By analysing the statistical data on the share of problem loans in the loan portfolios of Ukrainian banks, it was established that the implementation of this methodology did not lead to a significant change in the share of problem loans in the banking system, and, consequently, needs further improvement. The article proposes the development of an approach to credit, which at the methodological level should be expressed through a set of interrelated quantitative and qualitative indicators, which in their unity determine the degree of creditworthiness of a potential borrower. The authors suggest taking into account the factor of foreign economic activity, as having a significant impact on the financial state of the enterprise, when calculating the integral indicator of the financial status of the debtor – a legal entity by including the indicator «the share of operating profit from foreign economic activities to depreciation in the total volume of sales». In addition, in the conditions of stable tendency of hryvnia devaluation, ranges of values of the debtor PD coefficient – the legal entity-exporter is proposed to be taken into account for the minimum values, and the legal entity-importer – for maximum values in determining the size of credit risk on an asset on an individual basis. The submitted offers will allow to adjust the level of credit risk of the borrower-legal entity that carries out foreign economic activity, depending on the importance of its impact on the financial result of the enterprise.

PECULIARITIES OF QUESTIONNAIRE ON DOCUMENTAL SUPPLY OF CREDIT SUPPLY RESERVES ON THE AGGREGATION, REQUIREMENT OF RIGHTS OF REQUIREMENTS

The underlying insolvency and liquidity loss of the vast majority of banks is the presence of problem debt in them, or ‘toxic assets.’ At the same time, the presence of a significant part of the problem debt in the loan portfolio of domestic banks leads to an increase in stress assets and reduces the possibility of lending to the national economy. In addition, the growth of problem debt has constantly led to an increase in reserves for such loans. And if you add another revaluation to the hryvnia equivalent of troubled currency loans, under which also needed to form reserves, then quite logical was the activity of some banks, aimed at getting rid of troubled loans by selling to a third party (mostly factoring companies). An analysis of expert and court practice in claims for debt collection under a loan agreement in the event of a deferral of the claim through the sale of a loan portfolio and by concluding a factoring agreement indicates that there are problematic issues due to the fact that the materials of the case submitted for research do not include the proper executed documents confirming the transition of the right of claim and its volume, and the petition of experts on cases of confirmation of arrears under loan agreements in the presence of documents in the case file overs factoring, cessions are usually partially satisfied. Input data for conducting an examination, in many cases, is reflected ambiguously in the materials provided for research. In this article, the authors considered the relationship between banks and financial or factoring companies. But it should be noted that there are asset management companies, in addition, Ukrainian legislation allows the creation of corporate and unit investment funds. Taking into account the foregoing, in order to find solutions and work out common methodological approaches we invite all experts to professional discussion and exchange of experience. After summarizing the information on this topic, the issues that will arise will be highlighted in the following articles. Key words: loan portfolio, cession, factoring, bad debts.