Bank Portfolio Research Articles

Sovereign debt exposure and the bank lending channel: Impact on credit supply and the real economy

In the context of the European crisis, we show that the security portfolio of banks plays an important role in the propagation of financial shocks across countries. Using Italian loan-level data, we show that the shock to the banks' sovereign portfolio caused by the 2010 Greek bailout was passed on to Italian firms through a credit contraction. This was particularly the case for banks with a lower capital and less stable funding. The contraction in credit was similar for both large and small firms, but it only negatively affected the investment and employment decisions of small firms.

Determinants and convergence of income diversification in Ghanaian banks

The study explores the determinants of income diversification, as well as, test for the existence of beta-convergence and sigma-convergence among Ghanaian banks. The study utilizes a dataset of 32 banks covering the periods 2000 to 2017. The panel corrected standard error ordinary least squares, fixed effects and system generalized methods of moments have been used. Both beta-convergence and sigma-convergence exist among Ghanaian banks; suggesting the presence of the catch-up effect and similarity of strategy over time. The risk profile and risk portfolio of banks affect their diversification strategy. Banks that are faced with high insolvency risk and liquidity risk tend to diversify while banks that are faced with low credit risk tend to diversify. Stable banks tend to adopt a diversification strategy even when they are exposed to credit risk. Network embeddedness drives diversification strategy. The implications of the study for practice, policy, and future research have been discussed.

On-Site Inspecting Zombie Lending

In spite of growing regulatory pressure in most developed economies, remains a widespread practice by banks. In this paper we exploit a series of large-scale on-site inspections made on the credit portfolios of several Portuguese banks to investigate how these inspections affect banks' future lending decisions. We find that an inspected bank becomes 20% less likely to refinance zombie firms, immediately spurring their default. However, banks change their lending decisions only in the inspected sectors. Overall, banks seemingly reduce zombie lending because the incentives to hold these loans disappear once they are forced to recognize losses.

Form the Optimal Investment Portfolio Applied Study in the Jordanian Banking Sector (2013-2017)

The study aimed to form the optimal investment portfolio in the Jordanian banking sector. The research covered a period (2013-2017) and the sample of the study was selected from its community of Jordanian banks listed on the Amman Stock Exchange, consisting of (15) working banks for which the necessary data are available to study.
 
 The importance of the research lies in the formation of a thought and methodology that can be applied and utilized by investors and securities analysts in the management of their investment portfolio.
 
 The study shows that the effective rate of return is higher than the required rate of return in the Jordanian commercial banks. This indicates that the commercial banks have succeeded in their estimates of the required or actual rate of return for the optimal investment portfolio banks. the correlation matrix between returns on each bank in the investment portfolio is mostly low, which confirms that the investment portfolio of Jordanian banks is efficient, as Markowitz stressed on his focus on the correlation coefficient between returns and its impact on the return and risk of the optimal investment portfolio that achieve the highest return at a certain level of risk.

Murabaha syndrome of Islamic banks: a paradox or product of the system?

PurposeThis paper aims to explain the “murabaha syndrome” of Islamic banks. It further attempts to offer alternatives for the expansion of profit and loss sharing (PLS)-based financing.Design/methodology/approachAudited financial statements of 18 Islamic banks in the GCC countries are analyzed to assess the financing structures of banks. Moreover, additional data about financing pattern of Islamic banks in other Muslim majority countries are collected from the Islamic finance literature. A comparative analysis is offered to examine the financing structures of Islamic banks.FindingsThe paper confirms murabaha (mark-up financing) concentration of Islamic banks. About 90 per cent of the total financing are concentrated on murabaha, which is the result of existing institutional underpinnings. Islamic banks would logically be involved with PLS-based financing only limitedly unless the current governing institutions are changed. Entrepreneurs’ financing needs based on PLS contracts should be catered by venture capital, whereas micro-finance enterprises can meet the demand for funds of marginal clients.Practical implicationsPLS investment in the portfolio of Islamic banks would result in higher risk and uncertainty. Ambiguity, or its equivalent uncertainty, is prohibited in Islam. This is a dilemma which the existing literature does not sufficiently explain.Originality/valueIdeally, Islamic banks should practice PLS-based financing; otherwise, their raison d’être would be difficult to justify. Islamic finance literature does not shed sufficient analytical lights in explaining Islamic banks’ preference of mark-up financing to PLS-based financing. Moreover, strategies to ameliorate this condition have largely remained unexplored.

Effect of Compliance Cost on the Supply of Bank Credit to Agriculture: A Differential Approach

The supply of credit to agriculture in the United States has been affected by a variety of financial regulations over time. One recent regulatory change is the Dodd‐Frank Act in 2010 that includes the Ability‐to‐Repay rule increasing the operating costs of banks. Although the rule increases the safety of the bank's portfolio, it requires more compliance costs to verify borrower's income status. Given that the verification of the ability to repay increases the costs of lending to all banks, this study examines the effects of bank regulations adding the compliance costs on small or community‐oriented banks. From the framework of multiproduct firm, we estimate the differential input demand and output supply systems to identify the banks' behavioral changes due to the compliance costs. The results indicate that changes in lending and input use have occurred due to the imposition of the compliance costs.

The Interdependence of Bank Capital and Liquidity

This paper analyzes the role of liquidity regulation and its interaction with capital requirements. We first introduce costly capital in a bank run model with endogenous bank portfolio choice and run probability, and show that capital regulation is the only way to restore the efficient allocation. We then enrich the model to include fire sales, and show that capital and liquidity regulation are complements. The key implications of our analysis are that the optimal regulatory mix should be designed considering both sides of banks' balance sheet, and that its effectiveness depend on the costs of both capital and liquidity.

The Impact of Regulatory Stress Tests on Bank Lending and its Macroeconomic Consequences

We use an expansive regulatory loan-level data set to analyze how the portfolios of the largest US banks have changed in response to the Dodd-Frank Act Stress Test (DFAST) requirements. We find that the portfolios of the largest banks, which are subject to stress-testing, have become more similar to each other since DFAST was implemented in 2011. We also find that banks with poor stress-test results tend to adjust their portfolios in a way that makes them more similar to the portfolios of banks that performed well in the stress-testing. In general, stress-testing has resulted in more diversified bank portfolios in terms of sectoral and regional composition. However, we also find that all the large banks diversified in a similar way, creating a more concentrated systemic portfolio in the aggregate. Finally, we analyze the effects of stress-testing and portfolio sensitivity to macroeconomic scenarios on credit supply. Our findings indicate that banks that experience worse results in the stress tests cut lending relative to their peers and specifically in loans that are most sensitive to the stress-test scenarios. At the borrower level, firms that rely more on credit from banks with poor stress-test results are not able to substitute lost funding and therefore face a larger reduction in credit and cut back investment. These results highlight a macroprudential effect of stress-testing: Credit growth is curtailed during a credit expansion in those banks holding a portfolio that is more sensitive to stressful scenarios. Hence, these banks are expected to be in a more resilient position at the onset of a downturn.

Evaluation of European Deposit Insurance Scheme Funding Based on Risk Analysis

In this paper, we carry out a quantitative analysis of the financing measures proposed for the European Deposit Insurance Scheme (EDIS) regarding the target level of the fund and the contribution scheme of member entities. We estimate the loss distribution of the EDIS considering different sources of systemic risk associated with the correlations between bank assets inside and outside the eurozone countries, and we analyse the sensitivity of the results to bank portfolio risk. We determine the variations in the cost of insurance due to the relative risk profile of banks in the Banking Union and the loss-absorbing capacity of the contribution made by countries with the methodologies proposed by the European Banking Authority (2015). Our findings show how the interconnection between banks of different countries has an important influence on accumulated losses in the tail of the distribution, although the correlation within a country exerts a stronger effect. Both aspects must be considered in the calibration of the target level of the fund to avoid underestimating financing needs. Likewise, deterioration in the quality of bank portfolios produces a significant reduction in the fund's loss-absorbing capacity, which calls into question its soundness in times of economic recession. Finally, we assess the impact of the new contribution scheme on moral hazard and the possibility of cross-border subsidies between the countries of the Banking Union.

Improved forecast assessment for the expected credit losses in credit risk monitoring in commercial banks in the context of international and Russian practices

Current banking sector’s performance raises the issues connected with the IFRS 9 Financial Instruments driven transformation of the forecast assessment for the expected credit losses during monitoring and credit risk assessment in commercial banks. In this regard, it becomes important to conduct a comprehensive systematization of the existing Russian and international practices for monitoring and evaluating credit risk in commercial banks. The purpose of the study is to develop a comprehensive approach to the use of an effective model for the impairment of expected losses in banking activities. The novelty of the study includes the enhancement of the tools for the forecast assessment of the expected credit losses among the commercial banks’ clients to improve the credit risk management efficiency. The results from the implementation of IFRS 9 Financial Instruments in the banking area show that modern conditions maintain the uncertainty of the long-term impact of the credit risk on the commercial banks’ performance. What is more, a huge amount of additional information gives significant difficulties, which contributes into the sophisticated calculations of the future credit losses of the banks. It has been justified that a forecast assessment model for the expected credit losses of the clients during the monitoring and bank’s credit risk assessment should be based on the collective or individual ground. The efficient application of the expected losses impairment in the banking performance has been described as a fundamental tool to simulate the expected credit losses to provision for impairment. This model has been shown to be determined by the features of the credit activities and bank portfolio, types of its financial tools, sources of the available information, as well as the applied IT systems. The proposed model validation algorithm for the expected impairment losses could reduce the expected credit losses, decrease the volume of the created assessed reserves, as well as improve the overall commercial bank performance efficiency. Theoretically, the study develops the credit losses risk management in the context of the transformations in the global and Russian banking practices. From the perspective of the practical value, the research gives an opportunity to create an efficient forecast assessment model for the expected credit losses of the commercial banks’ clients, this model contributing into the cost effectiveness of the bank’s credit activities. A promising further research is considered to be aimed at developing the tools for the assessment of the commercial banks’ credit activity results in the context of the adopted changes connected with the introduction of IFRS 9 Financial Instruments in the Russian banking sector.

Податкове регулювання інвестиційної діяльності банків України

The article is aimed at researching the tax regulation of investment activity of banks of Ukraine in the current conditions of development of the national economy; identifying the tax stimuli and deterrent factors of investment activity of banking institutions in the formation of investment portfolio. Tax regulation of the banking system directly influences the development of not only the monetary system, but also the national economy in general. Tax instruments for stimulating investment activity of banks are proposed to be grouped depending on the mechanism of influence, goals and types of investments. The dynamics of investments and their share in the assets of Ukrainian banks over the past five years are analyzed. The annual advance in the share of investments in the assets of Ukrainian banks shows an increase in the interest of banks in placing funds into investment objects. The assessment of the change in the composition and structure of the investment portfolio of Ukrainian banks for 2015–2019 was carried out, identifying that domestic banks focused on improving the liquidity of investments, i. e., financial instruments that can be sold at any time at favorable prices. The dynamics of the composition and structure of the portfolio of securities of domestic banks in recent years was researched, determining that the largest share for 2015–2016 made the securities for sale (more than 86%), while the securities before maturity amounted to more than 10%. When considering the structure of the portfolio of securities of banks during 2017-2019, it is specified that the most important is the proportion of investments in securities, which are accounted for at fair value through other comprehensive income, namely, more than 70%. Having examined the problems of domestic banking investment, we believe that stimulation in this direction should be carried out in terms of creating a favorable stable regulatory framework and an effective taxation regime.

Divorce and Credit

Does failure in a marriage foretell a failure to repay credit? Analyzing the retail loan portfolio of a representative bank, we find no significant difference in probability of default between divorcees and others, but do find evidence for taste-based discrimination. Divorcees pay 5.8 basis points more in interest than non-divorced peers. This discrimination is greater in regions where clan culture is more dominant, and among loan officers who are male, are older, and have been longer on the job. Such discrimination is reduced if the loan officers are better educated, and if competition in local banking market is fiercer.

Commercial Bank Finance for SMEs and Credit Portfolio of Commercial Banks in India

Despite the widespread belief that the commercial banks are the major source of external funding for SMEs, there are only limited studies that have analysed the SME lending pattern of commercial ba...

A proposed benchmark model using a modularised approach to calculate IFRS 9 expected credit loss

The objective of this paper is to develop a methodology to calculate expected credit loss (ECL) using a transparent-modularised approach utilising three components: probability of default (PD), loss given default (LGD) and exposure at default (EAD). The proposed methodology is described by first providing a methodology to calculate the marginal PD, then the methodology for calculating the marginal recovery rates and resulting LGD, and lastly a methodology to calculate the EAD. These three components are combined to calculate the ECL in an empirical style. In markets where sophisticated IFRS9 models are developed, our proposed methodology can be used as in two settings: either as a benchmark to compare newly developed IFRS9 models, or, in markets where limited resources or technological sophistication exists, our methodology can be used to calculate ECL for IFRS9 purposes. This paper includes two such comparative studies to illustrate how our proposed methodology can be used as a benchmark for a newly developed IFRS9 model based on an emerging country’s unsecured and secured retail banking portfolio. This paper is, in essence, a step-by-step implementation guide of the proposed IFRS 9 methodology to calculate ECL as well as the use of such a model as a benchmark.

Modelling Corporate Probability of Default – A Possible Supervisory Benchmark Model

In recent years, supervisory bodies around the world have lost some of their confidence in the estimations of credit risk parameters at banks applying the internal ratings-based methodology. Supervisory experience shows that differences in risk metrics and ultimately in regulatory capital requirement levels stem primarily from inconsistencies in the modelling techniques applied and the various methodological approaches, rather than from any actual differences between the inherent risks of bank portfolios. To avoid this unwanted effect, in its supervisory review of banks’ internal capital adequacy assessment process, the Central Bank of Hungary (Magyar Nemzeti Bank, MNB) aims at specifying the necessary capital requirements by developing and applying harmonised benchmark models. This study shows how it is possible to estimate a probability of default (PD) for corporate portfolios, which is based on large banks’ corporate default rate data series and available corporate financial data, uses a harmonised methodology that factors in differences between the credit quality ratings of various customers, and is suitable for the supervisor’s calculation of the capital requirement for any given bank. Nonetheless, there may also be other factors in addition to individual financial data (e.g. qualitative expert elements, sector information) that may affect credit quality; identifying these may be one of the objectives of benchmark model development.

基于行业维度的银行组合限额管理研究

基于行业维度的银行组合限额管理研究

DOMAINS AND MOTIVES OFMUSHARAKAHSPUR IN THE ISLAMIC BANKING INDUSTRY OF PAKISTAN

Participatory financing schemes, including Musharakah and Mudarabah, are theoretically claimed to be the ideal modes of Islamic financing, but their practice is restrained by several factors. That is why Islamic banks have a consistent tendency to avoid participatory financing on the assets side throughout the world. However, recently this trend has started changing in Pakistan and Indonesia where the share of participatory finance has raised significantly in the financing portfolio of Islamic banks. The present paper explores this recent spur of participatory finance in Pakistan in terms of its domains of applications and the responsible factors. The findings lead to a novel posteriori framework which shows that the shift toward participatory financing is primarily characterized by increase in working capital financing and commodity operations financing through Musharakah mode Islamic banks. Moreover, five factors contribute to the spur of participatory financing including: (i) introducing varieties in Musharakah, (ii) enhanced applicability, (iii) high volume projects, (iv) government interventions, and (v) regulator’s role. The framework can significantly advance understanding with respect to the implementation theory of participation financing within Islamic banking and related Shariah compliance and regulation.

Diversification and securitization of credit portfolios of Ukrainian banks

The article is devoted to the analysis of diversification of loan portfolios and securitization of financial assets by Ukrainian banks. The advantages and disadvantages of diversification and securitization use are discussed. The volumes of such operations and the separation of the actual lending market by types of economic activity, territory and in the sectional frame of individual persons and economic agents are determined. The rules of behavior and functions of participants of securitization, as well as its main varieties, are revealed. The forecasting of the ability of Ukrainian banks to securitize assets is carried out, but most Ukrainian banks can not securitize their assets, which is explained not only by small volumes of lending, but also by other reasons, including: underdeveloped legal base (legal status of a specialized legal company is not defined and the specifics of taxation of such operations have not been clarified); weak infrastructure of financial and stock markets, lack of financial instruments; inflexible tax system; low credit rating of Ukraine. In addition, the level of development of the financial and stock markets is not sufficient. According to the results of the study, it was concluded that there is an uneven distribution of loans both by type of economic activity and by geography: about 33 % of loans were provided to clients of wholesale and retail trade; the largest share of loans was concentrated in the Kyiv region – 60 %. The analysis reveals the territorial unevenness of banking lending services. The research shows the potential ability of Ukrainian TOP-Banks to securitize assets. The average amount of financial assets that were securitized was US $ 55 million. The analysis showed the inappropriateness of securitization for auto-lending and the high suitability for securitization of mortgage loans to individuals. Asset securitization for a typical Ukrainian bank encompasses a large number of clients who have been granted loans, which necessitates a clear definition of the rules of conduct and functions of the securitization participants.

Применение математического моделирования при формировании инвестиционного портфеля коммерческого банка

The article touches upon the most urgent problem of creating the stock portfolio 
 of a commercial bank, where studying the strategies and tools of the bank’s investment activity and using mathematical models for its assessment help to identify the relationship between profitability and the risk of investing in securities. As a result of applied analysis and modeling of the portfolio structure, the optimal portfolio option is selected, which corresponds to a given level of risk and profitability, as well as to the investment strategy chosen by the bank. There has been analyzed the portfolio structure with specified characteristics of risk and profitability, according to the statistics of previous years. The types of documents have been systematized according to the compliance with the strategy of managing the portfolio of profitability growth, liquidity and risk minimization. Using the models of Markowitz, Tobin and other researchers of probabilistic portfolio assessment through covariance indicators and a correlation coefficient, there have been found the values of return on assets that can change in one direction or have a multidirectional nature, and allow to calculate dependence between the values of return on securities in the portfolio. There have been considered the following models: a portfolio model based on calculating the level of stock returns of LUKOIL JSC, Novatek JSC, Yandex; a portfolio model that includes risk-free assets with the highest level of reliability (government short-term bonds, federal loan bonds); capital asset pricing model which describes dependency between the risk and the required profitability. Based on these calculations there has been inferred the possibility of developing specific areas of the banking business in the field of securities transactions, including: saving funds (providing protection against inflation); capital growth (focus on the securities that have the potential for growth in market value); profitability (purchasing securities in order to obtain dividends on shares and interest on debt securities); liquidity (investments into financial tools that can be sold at any time at favorable prices); risk minimization. The results of the conducted analysis of correlation and regression of the securities portfolio have revealed the most preferred types of securities for growing profitability that are in the bank's portfolio: shares of the Russian oil company LUKOIL, the Russian gas company Novatek, Yandex cIA, as well as the federal loan bonds (based on the terms of calculating history dynamics since May 1, 2018 up to May 1, 2019)

Developing an Impairment Loss Given Default Model Using Weighted Logistic Regression Illustrated on a Secured Retail Bank Portfolio

This paper proposes a new method to model loss given default (LGD) for IFRS 9 purposes. We develop two models for the purposes of this paper—LGD1 and LGD2. The LGD1 model is applied to the non-default (performing) accounts and its empirical value based on a specified reference period using a lookup table. We also segment this across the most important variables to obtain a more granular estimate. The LGD2 model is applied to defaulted accounts and we estimate the model by means of an exposure weighted logistic regression. This newly developed LGD model is tested on a secured retail portfolio from a bank. We compare this weighted logistic regression (WLR) (under the assumption of independence) with generalised estimating equations (GEEs) to test the effects of disregarding the dependence among the repeated observations per account. When disregarding this dependence in the application of WLR, the standard errors of the parameter estimates are underestimated. However, the practical effect of this implementation in terms of model accuracy is found to be negligible. The main advantage of the newly developed methodology is the simplicity of this well-known approach, namely logistic regression of binned variables, resulting in a scorecard format.