Reduce Bank Risk Research Articles

Impact Of Business Cycle And Revenue Diversification On Capital Buffer And Bank Risk: Empirical Studies From Asean Countries

The purpose of this research is to examine how business cycle and income diversification affect on capital buffer and banking risk in ASEAN from 2020 to 2022. The samples used in this research were 93 banks taken using purposive sampling techniques in the Philippines, Indonesia, Malaysia, Singapore, Thailand, and Vietnam. By using 2-SLS on panel data to analyze the data in the model being built. This research found that when the economy is in a contraction phase, banks will increase capital buffers. Then, if the bank’s revenue streams become more diversified, this could potentially weaken its capital buffer reserves and decrease risk levels in the banking sector. Meanwhile, expansionary business cycles and revenue diversification provide in reducing bank risk to encourage economic growth. In addition, the correlation between the level adjustment of capital buffer and bank risk confirms a positive impact.

Effect of Business Cycle, Income Diversification, and Financial Ratios on Bank Risk in the ASEAN Region

Research Aims: This research aims to analyze the influence of the business cycle, income diversification, and financial ratios as proxied by profitability and liquidity on the level of banking risk adjustment in ASEAN in the 2020-2022 period. Design/methodology/approach: The research used a sample of 93 banks in the ASEAN region. Sample selection applied purposive sampling techniques based on certain criteria in the Philippines, Indonesia, Malaysia, Singapore, Thailand and Vietnam. The estimation technique used is the Ordinary Least Square method on panel data to analyze the model being built. Research Findings: Research shows that the relationship between the business cycle and bank risk is negative. This means that when the economy is in a contraction phase, bank risk will decrease and vice versa. Then, banks that diversify their income can reduce bank risk. On the other hand, the influence of profitability and liquidity has a negative effect, meaning that a high level of income accompanied by liquid bank assets has the potential to reduce the level of bank risk. Apart from that, there are several other aspects that banks need to pay attention to in anticipating emerging risks, including previous year's credit risk, business size, loan loss reserves, asset growth and financial freedom. Theoretical Contribution/Originality: The originality of the research lies in its comprehensive approach to analyzing the impact of business cycles, income diversification, and financial ratios on bank risk in the ASEAN region. The study's methodology, variables, and empirical evidence all contribute to its originality and relevance to the existing literature Keywords: Revenue Diversification, Liquidity, Profitability, Bank Risk, Business Cycle

Women directors’ attributes and demographics: New insights into bank risk

This study examines the impact of women directors’ representation and characteristics on bank risk in a unique sample of 12 developing countries with dual banking systems. We examine different women’s leadership and monitoring attributes (leadership and independence) and demographic attributes (educational level and background, foreign directors, and financial expertise). Our results indicate that women directors significantly reduce bank risk, regardless of bank type. Foreign female directors and the financial expertise of women directors are both associated with high bank risk while the relation is inverted for independent women directors. We also find that women directors with high educational qualifications (i.e., postgraduate level) and those holding qualifications in accounting and finance are negatively associated with bank risk. Considering bank type, women on the board have an overall adverse impact on risk in Islamic banks, showing high bank risk across various risk indicators and directors’ attributes/demographics.

The impact of foreign participation on risk-taking in Chinese commercial banks: The co-governance role of equity checks and foreign supervision

This study examines how foreign equity participation affects the risk-taking of commercial banks using Chinese bank-level data from 2012 to 2020. The results indicate that foreign equity participation significantly reduces bank risk, and there is a U-shaped relationship between the foreign shareholding ratio and bank risk. Mechanism analysis reveals that augmenting foreign ownership strengthens shareholder equilibrium and boosts the presence of foreign directors. This structure enhances dual governance mechanisms, lowering the risk in banking activities. Considering that confounding factors affecting mediator and dependent variables can cause bias in coefficient estimation, we used machine learning methods to determine the best predictive factors affecting bank risk-taking. We indirectly verified the theoretically driven empirical model by evaluating more explanatory variables and selecting subsets of explanatory variables. In addition, we find that governance enhancements are particularly pronounced in Chinese banks, characterized by smaller scale and less income diversification. Additionally, foreign ownership significantly impacts banks' market risk more than credit and operational risks. Our results imply that China's financial regulatory authorities need to shift the focus of supervision to examining foreign shareholding ratio and corporate governance ability.

Banking Sector Development and Bank Risk-Taking Behaviour: Evidence from Commercial and Non-commercial Banks in Tanzania

This study investigates the effect of banking sector development measured by domestic credit provided by banks to private sector as percentage of GDP on risk-taking behaviour of the banks in Tanzania, measured in terms of bank capitalization ratio. The relationship was observed using annual country-level and bank-level data from commercial and non-commercial banks operating in Tanzania from 2012 to 2021. A system GMM estimation technique was employed in the investigation. Our results found that the effects of banking sector development on bank risk measured in terms of bank capitalization ratio is homogeneous across commercial and non-commercial banks. This means the development in banking sector measured as credit to the private sector by banks percentage of GDP in Tanzania has significant positive effect on bank capitalization ratio. Hence, reduce bank risk of default. Nonetheless, the findings reveal further that the profitability of bank and bank size factors are significant positive and negative respectively in relation to bank capitalization ratio. The results are further robust to bank ownership status dummy variable (DOSF) and for country of originality of the banks (DCOF) used to investigate whether there will be significant change in the result or not. The results of the robustness test indicate that banking sector development has insignificant effects on capitalization ratio when banks categorized as domestic and foreign banks as well as when banks categorized as private and state-owned banks.

Bank diversification and performance: Empirical evidence from Japan

AbstractThis article examines the relationship between bank diversification and performance in the Japanese banking sector. We use panel data from 141 banks over the period 2000–2022 to investigate whether banks can improve profitability and reduce risk through diversification strategies. Our evidence shows that diversification can improve bank profitability at the cost of a decline in net interest margins, suggesting banks are using the interest business as a loss leader to promote other business lines. We find that asset diversification has a risk‐reducing effect, which supports the portfolio hypothesis. Some evidence also implies that there is a more complex nonlinear relationship. This can be partly attributed to bank type, as the diversification effects vary across different types of banks. Furthermore, the decomposition of non‐interest income reveals that fees and commissions negatively influence return on assets while simultaneously reducing bank risk.

Do ‘Lehman Sisters’ work in China? Women on boards and bank risk

We investigate how women on boards impact bank risk in China. Using a merged dataset containing 83 Chinese banks for the period of 2006–2019, we find that more women on boards could reduce bank risk in China. We further provide the evidence that risk-averse nature of women directors motivates them to organize more board meetings in order to lower bank risk. Additionally, women executive directors play the main role in reducing bank risk and a critical mass (three or more) of women directors intensifies the negative impact on bank risk. Our results still hold when we use lagged variables, GMM regression technique, instrumental variable and DID estimation. Our study could provide valuable empirical advice for the policy makers in both China and other developing countries.

Trust matters: A global perspective on the influence of trust on bank market risk

This paper examines the role of societal and organizational trust in mitigating market risk within the banking sector. Using a global sample of 10,616 bank-year observations across 45 countries, we find that higher trust significantly reduces bank total and idiosyncratic risk. The risk-mitigating effect of societal trust becomes more pronounced for banks headquartered in countries with weaker investor protection, diminished legal rights, dissatisfaction with government economic policies, and higher political unrest. Our results suggest that trust serves as an alternative governance mechanism, substituting for ineffective formal institutions in reducing bank risk. These findings have important implications for financial regulation worldwide.

EFFECTS OF FINANCIAL MARKET DEVELOPMENT ON BANK CAPITALIZATION RATIO: EVIDENCE FROM COMMERCIAL AND NON-COMMERCIAL BANKS IN TANZANIA

Financial market development in many developing countries is a series of financial market reforms aimed at improving the market and the financial system in general. Theoretically, major reforms that improve the stock market are expected to increase bank performance by reducing bank risk of default by increasing the bank capitalization ratio. This results in stability in the financial market and banking sector. Nonetheless, empirical literature in addition shows that the quality of the financial market may be at high risk following the reforms process because of the integration effects of the markets across the countries or regions. A good example of this is the global financial crisis of 2007/2008. Based on this background, the present study investigates the extent to which the financial market development in Tanzania influences the bank's capitalization ratio (commercial and non-commercial banks). Employing a two-step system GMM technique in a dynamic panel dataset regression model for the investigation for a period of 2012 to 2021, while macroeconomic and bank-specific variables have been used as control variables. We proxy financial market development as stock market development. This study finds that stock market development in Tanzania measured in terms of stock market turnover ratio improves bank capitalization ratio with the goals of enhancing the financial market and maintaining stability in the banking sector.

When Does Linking Pay to Default Reduce Bank Risk?

When Does Linking Pay to Default Reduce Bank Risk?

When Does Linking Pay to Default Reduce Bank Risk?

When Does Linking Pay to Default Reduce Bank Risk?

CEO network centrality and bank risk: Evidence from US Bank holding companies

We investigate the impact of CEO network centrality, a central position in a social network, on bank risk. Using a sample of 471 bank holding companies (BHCs) in the US from 1999 to 2018, we find that CEO network centrality is negatively related to bank risk and this is due to CEOs with higher levels of network centrality implementing less risky policies. Additionally, we find that information flow and CEO power are two channels through which CEO network centrality reduces bank risk. Our empirical results still hold when we employ a battery of methods to mitigate endogeneity issues. Our research further extends a new strand of studies focusing on the specific position/hierarchy of executives/directors in a social network.

The impact of supervision on bank risk: empirical evidence from the Tunisian context

PurposeThe purpose of this paper is to examine the impact of supervision on banking risk to determine whether prudential measures taken especially after financial crises are effective in limiting banking risks.Design/methodology/approachThe empirical study focused on 210 annual reports of almost all Tunisian banks during the 2010–2019 period. Banking supervision effectiveness is measured by enforcement outputs (i.e. on-site audits and sanctions). The generalized least squares method of multivariate analysis was used to analyze this study.FindingsThe results show that supervision set up and on-site audits reduce bank risk, while the relationship between sanctions and risk appears to be non-significant. The results still hold after robustness tests by changing the bank's risk-taking indicators.Practical implicationsThis study has important implications for managers and investors in the Tunisian context. In particular, the findings provide microevidence for the impact of supervision in Tunisian banks to reduce their risk-taking. The empirical results have important implications for the decision-making of bank managers and regulators in Tunisia as well as for relevant actors in similar emerging economies.Originality/valueThis study extends the previous literature on supervision by examining the relationship between supervision and banking risk in an emerging country, which has been little explored, Tunisia in particular. Furthermore, this study examines whether supervision reduces risk borne by Tunisian banks, and to the best of the researchers' knowledge, it is one of the pioneering studies of supervision in the Tunisian market. This latter market has different economic, political and social attributes compared to developed countries. So, this paper helps to clarify the impact of supervision enforcement and macroprudential policies. In addition, this paper strongly contributes to the various stakeholders “understanding of the importance and implication of supervision practices. However, since banks tend not to reduce their participation in risky activities to seek higher profits, supervisory policymakers and practitioners should also take a closer look at the composition of banks” investment portfolios to reduce moral hazard and regulatory arbitrage behavior. Empirically, the authors measure supervision by on-site audits and sanctions and examine how they affect bank risk level, which was never approached in Tunisia.

Political promotion incentives and banking supervision: Evidence from a quasi-natural experiment in China

We document the importance of political promotion incentives for supervisors in banking supervision. Utilizing the merger of the China Banking Regulatory Commission (CBRC) and the China Insurance Regulatory Commission (CIRC) in 2018, we explore the actions of head of the CBRC's regional offices. We find that the increased political promotion incentives are associated with higher frequency, greater amount, and greater severity of penalties in regional banking supervision. The enhanced supervision is more remarkable when the head of the CBRC's regional offices has a higher political rank. After the merger of the two commissions, the regional banking supervision is significantly weakened with the disappearance of political promotion incentives. Furthermore, these enhanced regional supervision triggered by the merger event reduce bank risk. Our findings show that the increased political promotion incentives affect the supervisor's activities and improve the supervision effectiveness.

IFRS 9 implementation and bank risk

ABSTRACT In this paper, we investigate the impact of IFRS 9 – Financial instruments on bank risk. Using a sample of 666 banks across 61 countries for the period 2016–2019, we find a decrease in bank risk following the implementation of IFRS 9. This implies that the forward-looking loan loss provisioning, mandated under IFRS 9, facilitates a reduction in bank risk. We find this effect to be more pronounced for riskier banks, suggesting that the implementation of IFRS 9 is a sign of effective regulation for banks rather than a manifestation of regulatory overreach. We also find the effect to be greater for banks in countries with stronger accounting regulatory enforcement and high banking supervision intensity. Overall, our results, which are robust to different estimation techniques, including multi-level hierarchical regressions and entropy balancing estimations, show that increased transparency and timely recognition under IFRS 9 reduce bank risk.

Diversifikasi Portofolio Kredit, Risiko dan Return Bank

Banks as financial intermediaries, can diversify their credit portfolios into different sectors. This study aims to determine the effect of credit portfolio diversification on risks borne and returns earned by banks. The sample in this study was 61 conventional commercial banks in Indonesia for the 2012-2014 period with a total of 112 observations. The results show that credit portfolio diversification has a significant negative effect on bank risk and return. In other words, a more diversified credit portfolio can reduce bank risk and return. Keywords: diversification, loan portfolio, bank’s risk, bank’s return

Corporate social responsibility and risk-taking in banking

PurposeThe purpose of this study is to examine whether banks’ commitment to corporate social responsibility (CSR) is related to the diversification of their activities and whether CSR, as a result, affects banks’ risk profile.Design/methodology/approachUsing a sample of 215 publicly traded U.S. bank holding companies between 1996 and 2016, this study applies regression analysis to examine the links between CSR and activity diversification and risk-taking. It also conducts a mediation test to determine whether CSR affects risk through its influence on banks’ activity diversification.FindingsThe results of this study show that banks engaging in positive CSR activities significantly increase the diversification of their banking activities, consistent with the theory that CSR serves as an implicit risk hedging strategy. Mediation analysis provides evidence that this translates into more stable and less risky banks.Originality/valueThis study contributes to the literature by suggesting that activity diversification is a channel through which CSR reduces bank risk and improves asset quality.

The Effect of Income and Funding Diversification on Bank Performance and Risk in Indonesia

This research was conducted to determine the effect of income and funding diversification on bank performance and risks. The data used in this study is secondary data sourced from the financial reports of general and sharia banking for 2017–2021. The data sources are annual bank reports, published reports available at Bank Indonesia, the Indonesia Stock Exchange, and the Authority for Financial Services. The study results show that income diversification has no effect on bank performance and reduces bank risk. The results of bank income diversification in Indonesia have not been maximized because interest income remains the primary source of income. Meanwhile, funding diversification results in a decrease in bank performance and risk. Funding diversification can reduce bank risk. The expansion of funding diversification is intended to increase liquidity so that banks can meet their funding needs by increasing their liability portfolio. The diversity of costs that will be incurred by banks as returns from funding sources will reduce bank performance.

Bondholder representatives on bank boards: A device for market discipline

AbstractWe examine whether board representation of bondholders can be an effective market discipline mechanism to reduce bank risk, using a unique dataset combining information on bondholders and boards of directors of European listed banks. Our results show that the influence of bondholder representatives on the bank board significantly reduces bank risk without impacting profitability. The beneficial effect of this market discipline mechanism is stronger when bondholder representatives have regulatory experience, current or long relationships with their affiliated bondholders, and for more complex banks. In contrast, the reducing impact on bank risk is smaller for banks with lower capitalization levels.

Deposit Insurance System, Information Disclosure and Bank Risk-Taking: Empirical Evidence from Chinese Banking Industry

We incorporate the deposit insurance system into the analysis framework of the impact of bank information disclosure on their risk-taking, and empirically test the impact and synergistic effect of deposit insurance system and bank information disclosure on their risk-taking using the data of 266 Chinese commercial banks from 2007 to 2019. We find that the improvement of bank information disclosure will reduce bank risk taking, and the implementation of deposit insurance system will help reduce bank risk taking. The implementation of deposit insurance system and the improvement of bank information disclosure can not only inhibit the bank’s risk taking, but also play a synergistic role in reducing bank’s risk taking. Several extensions for future research are also offered.