Reduce Bank Risk Research Articles

Interest rate liberalisation to banks' risk resistance: moderator of strategic leadership and mediator of monetary policy transmission

This paper aims to investigate the influence of two missing aspects and to explore whether the liberalisation has had any influence on commercial banks' risk resistance capacity. This article considers 288 data. The analyses include the Sobel test, the ADF stationarity test, and the VAR model co-integration test. Our results show that China's interest rate marketisation reform has a positive effect on reducing bank risk. Commercial bank anti-risk capabilities can improve both China's monetary policy transmission and strategic leadership capabilities. This article showing that appropriate laws and regulations should be strengthened to reduce the risk of bankruptcy that commercial banks may face as a consequence of interest rate liberalisation. This paper contributes to the theory of interest rate liberalisation and anti-risk capability, by conceptualising from strategic leadership and monetary policy transmission theory. It finds that market-oriented rate reform has increased interest rate risk.

The Economics of Supranational Bank Supervision

AbstractThis article examines the effectiveness of cooperation among bank supervisors using novel data on supranational agreements signed by 93 countries. Exploiting that globally operating banks are differently covered by these agreements, we show that supervisory cooperation generally improves bank stability. The magnitude of the effect is higher for smaller global banks, and when supervisors are more stringent and have access to higher quality information. We also show that actual supervisory cooperation varies across countries consistent with differences in economic costs and benefits of cooperation. This suggests that cooperation is not always desirable, despite being effective in reducing bank risk.

The interrelationships between bank risk and market discipline in Southeast Asia

PurposeThe purpose of this study is to examine whether a bidirectional relationship between bank risk and market discipline may exist in Southeast Asia.Design/methodology/approachA simultaneous equations model with a three-stage least squares estimator is used to examine the interrelationships between bank risk and market discipline using a sample of 79 listed banks in five countries in Southeast Asia (ASEAN-5) from 2006 to 2019.FindingsThe findings show a two-way relationship between bank risk and market discipline. In particular, market discipline has a negative impact on bank risk, while there is a positive relationship between bank risk and market discipline. A bidirectional relationship between them still holds when using an alternative measure of bank risk in subsamples, controlling for the global financial crisis and governance indicators.Practical implicationsThe findings indicate that market discipline can reduce bank risk. Meanwhile, a positive impact of bank risk on market discipline reemphasizes that market discipline is a powerful tool to ensure banks do not have excessive risk-taking. Nonetheless, the findings suggest that further implementation of market discipline as the third pillar of the Basel framework is necessary for the banking systems in ASEAN-5.Originality/valueTo the best of the authors’ knowledge, this study is the first attempt to investigate the interrelationship between bank risk and market discipline in Southeast Asia.

Does loan growth impact on bank risk?

In the context of competition between domestic banks but also foreign banks become more and more fierce. The increasing penetration of foreign banks brings certain risks to domestic banks. This study was conducted to assess the effect of loan growth on banking risk in Vietnam. The study collects data on 29 banks listed on the Vietnam stock exchange from 2010 to 2020. The results of panel data analysis with Generalized least squares (GLS) have shown a relationship between loan growth and bank risk. In which loan growth has a negative impact on Non-performing loans (NPL), liquidity risk equity on asset (ETA); loan growth has a positive impact on return (ROA). In addition, the study also conducts a comparative assessment by bank size and loan growth rate. The results indicate a difference in loan growth's impact on banks' bank risk with lower and higher assets and lower and higher loan growth rates. From the results of this study, the authors also provide some implications to help banks reduce bank risk based on loan growth strategy.

Bank regulation and risk-taking in sub-Sahara Africa

PurposeIn a bid to enhance the stability of banks, supervisory authorities in sub-Sahara Africa (SSA) have also adopted international bank regulatory standards based on the Basel core principles. This paper aims to investigate the effectiveness of these regulations in mitigating Bank risk (instability) in SSA. The focus of empirical analysis is on examining the implications of four regulations (capital, activity restrictions, supervisory power and market discipline) on risk-taking behaviour of banks.Design/methodology/approachThis paper uses two dimensions of financial stability in relation to two different sources of bank risk: solvency risk and liquidity risk. This paper uses information from the World Bank Regulatory Survey database to construct regulation indices on activity restrictions and the three regulations pertaining to the three pillars of Basel II, i.e. capital, supervisory power and market discipline. The paper then uses a two-step system generalised method of moments estimator to estimate the impact of each regulation on solvency and liquidity risk.FindingsThe overall results show that: regulations pertaining to capital (Pillar 1) and market discipline (Pillar 3) are effective in reducing solvency risk; and regulations pertaining to supervisory power (Pillar 2) and activity restrictions increase liquidity risk (i.e. reduce bank stability).Research limitations/implicationsGiven some evidence from other studies which show that market power (competition) tends to condition the effect of regulations on bank stability, it would have been more informative to examine whether this is really the case in SSA, given the low levels of competition in some countries. This study is limited in this regard.Practical implicationsThe key policy implications from the study findings are three-fold: bank supervisory agencies in SSA should prioritise the adoption of Pillars 1 and 3 of the Basel II framework as an effective policy response to enhance the stability of the banking system; a universal banking model is more stability enhancing; and there is a trade-off between stronger supervisory power and liquidity stability that needs to be properly managed every time regulatory agencies increase their supervisory mandate.Originality/valueThis paper provides new evidence on which Pillars of the Basel II regulatory framework are more effective in reducing bank risk in SSA. This paper also shows that the way regulations affect solvency risk is different from that of liquidity risk – an approach that allows for case specific policy interventions based on the type of bank risk under consideration. Ignoring this dual dimension of bank stability can thus lead to erroneous policy inferences.

Openness, financial structure, and bank risk: International evidence

Using panel data from a large cross-country sample covering 97 countries over the period 1996–2017, we combine 2SLS procedure with system GMM estimation to study the relationship between openness, financial structure and bank risk. The main contribution of the paper is that we identified a new channel, i.e. the financial structure channel, through which financial openness reduces bank risk. In particular, we find that as financial openness increases, a country's financial system tends to be more market-based, and a more market-based financial system is associated with higher bank market power, better information sharing and more revenue diversification, all of which contribute to the reduction in bank risk. We also find that the effect of inflow restrictions on bank risk is more pronounced than that of outflow restrictions. These results highlight the importance of an appropriate design of a country's opening-up strategy to match the evolution of its financial structure to increase bank stability.

Impact of environmental cost information on reducing bank risk: an applied study

Impact of environmental cost information on reducing bank risk: an applied study

Impact of environmental cost information on reducing bank risk: an applied study

This paper aims to explaining how environmental cost information supports make the rational decisions related to granting bank credit, i.e., to know the relationship of cause and effect between the environmental cost information and the degree of credit risk through a statistical analysis of data in Iraqi banks. The researcher has used the descriptive approaches to formulate the theoretical side and used analytical approaches in empirical testing. The main findings of this work found increase in credit risks due to the inefficiency of credit analysts in diagnosing the weaknesses and threats of the entity requesting credit, especially related to environmental protection. Since the Iraqi banks did not adopt the environmental cost information in decisions of granting bank credits. The finding of this work will have significant implications to take environmental costs and laws into consideration when providing bank credits, especially those companies that have negative environmental impacts.

FINANCIAL CONSTRAINT MODERATE THE EFFECT OF CORPORATE SOCIAL RESPONSIBILITY AND INSTITUTIONAL QUALITY ON BANK RISK TAKING IN IDX

Banking sector holds a strategic position that demands excellent risk management. Improper risk management can lead to systemic failures which can affect the financial stability of a nation. Information asymmetry problems between managers and other parties can trigger moral hazard problems. This study examined how corporate social responsibility (CSR) and institutional quality affect bank risk taking and to determine the role of financial constraints in weakening the relationship between CSR and bank risk taking. This quantitative study involved banks listed on the Indonesia Stock Exchange from 2013-2020. Dynamic panel data regression analysis using system generalized method of moments (System GMM) approach was employed in data analysis. The results indicated that CSR and institutional quality had a significant negative influence on bank risk taking. Furthermore, as a moderating variable, financial constraint weakened the relationship between CSR and bank risk taking. The findings of this study added an empirical evidence in the field of financial management on the relationship between CSR, financial constraints, institutional quality and bank risk taking. Bank managers should employ CSR strategies to reduce bank risk taking. In addition, both the government and regulators can improve institutional quality to reduce bank risk taking.

Can foreign ownership reduce bank risk? Evidence from Vietnam

This study investigates the impact of foreign ownership on bank risk in Vietnam between 2006 and 2015. Our findings show that foreign ownership can lower bank risk, suggesting that the State Bank of Vietnam should further remove restrictions on foreign investments in the banking system. The findings also indicate that higher bank risk is associated with greater technical efficiency, suggesting that the skimping-cost hypothesis may exist. The same conclusion is true for large banks, for banks with higher liquid assets and those with greater loan growth. Also, the findings demonstrate that assets diversity may reduce bank risk, suggesting that Vietnamese banks should diversify their assets from loans towards derivatives and other earning assets to improve banks’ stability. Finally, our findings demonstrate that a less concentrated market can lower bank risk, suggesting that the future mergers and acquisitions in Vietnam that involve a state-owned commercial bank should be approached with caution.

The mediating role of competition on deposit insurance and the risk-taking of banks in ASEAN countries

We investigate the mediating function of competition on the association between deposit insurance and the risk-taking of banks during an economic meltdown. In our analysis, we address issues of deposit insurance, competition, bank risk-taking, and bank crisis with explicit deposit insurance and full coverage dummies. Deposit insurance reduces bank risk in the absence of competition by reducing both credit and insolvency risk; however, it exacerbates bank risk and weakens banking stability in a highly competitive market. It also shows that the banking instability in a competitive market is attenuated by deposit insurance during financial crisis. This study offers policy implications.

Bank capital regulation and risk after the Global Financial Crisis

We explore and summarize the evolution in bank capital regulations and bank risk after the global financial crisis. Using a new survey of bank regulation and supervision covering more than 120 economies, we show that regulatory capital increased, but some elements of capital regulations became laxer. Analyzing bank-level data, we also document the importance of defining bank regulatory capital narrowly as the quality of capital matters in reducing bank risk. This is particularly true for banks that have more discretion in the computation of regulatory capital ratios and are subject to weaker market monitoring.

Could 'Lehman Sisters' Reduce Bank Risk-Taking? Cross-Country Evidence

Since the global financial crisis triggered by the collapse of Lehman Brothers, board gender diversity has attracted growing attention among academia and policy makers. The “Lehman Sisters” hypothesis argues for more women representation on bank director board based on the stereotyped gender gap in risk preference that has been widely supported by empirical studies on nonfinancial firms. However, due to the constraint of data unavailability, empirical research on board gender diversity and bank risk-taking is scarce and mostly confined to individual developed markets with inconclusive findings. To our best knowledge, this research is the first cross-country empirical study to examine this issue using a large hand-collected dataset covering 492 commercial banks across 18 developed and 21 developing countries over the period 2007-2016. We find lower bank risk-taking is associated with greater board gender diversity, lending support to the “Lehman Sisters” hypothesis in the international context; however, this effect is significantly weakened in countries with more hostile perception toward working women. Our findings help to reconcile the existing contradictory empirical evidence by highlighting the importance of cultural effect. We also confirm the critical threshold of three female directors to play a significant role in reducing bank risk taking, providing novel international evidence in support of the critical mass theory from banking sector. Our findings have important implications for policy makers and bank risk management.

Can foreign ownership reduce bank risk? Evidence from Vietnam

This study investigates the impact of foreign ownership on bank risk in Vietnam between 2006 and 2015. Our findings show that foreign ownership can lower bank risk, suggesting that the State Bank of Vietnam should further remove restrictions on foreign investments in the banking system. The findings also indicate that higher bank risk is associated with greater technical efficiency, suggesting that the skimping-cost hypothesis may exist. The same conclusion is true for large banks, for banks with higher liquid assets, and those with greater loan growth. More interestingly, we do find evidence that state-owned banks with a greater level of foreign share are likely more stable. This is also true for the case of listed banks with a higher level of foreign ownership.

When do women on board of directors reduce bank risk?

Purpose This study aims to examine the relationship between female directors and bank risk. In particular, whether such a relationship varies across sound or unsound banks and with or without a critical mass of female directors is tested. Design/methodology/approach Using a sample of 215 listed banks from 40 countries over the period 2008–2016, this study carries out panel data analyses and tests all the model specifications on four different measures of risk (common equity ratio, leverage, NPLs ratio and price volatility). Findings The findings show that increasing the number of female directors does not reduce bank risk when banks are unsound. When banks are sound, female directors have a significant and positive role in reducing risk, only until reaching a critical mass of women. Practical implications This study provides useful corporate governance indications for policymakers and practitioners. Advantages of gender diversity on boards are recognized especially in sound banks, but increasing the number of women directors beyond the critical mass may not lead to lower risk. In fact, ethical or legal pressures aimed at increasing gender diversity on boards (i.e. soft or hard gender quotas) may cause undesired effects on bank risk, especially if female directors are not chosen on merit and skills. Moreover, gender-balanced boards, namely, with a “dual critical mass,” seem to assure more effective decision-making processes. Originality/value This study provides empirical evidence on female board members and risk minimization, differentiating between sound or unsound banks. Furthermore, this study contributes to the literature on the critical mass of women on the board of directors by testing this theory for these two categories of banks.

INTEREST RATE LIBERALIZATION TO BANK’S RISK RESISTANCE: MODERATOR OF STRATEGIC LEADERSHIP AND MEDIATOR OF MONETARY POLICY TRANSMISSION

Purpose: Most prior studies on interest rate liberalization focused on banking system reforms and technological reforms, as well as liberalization’s impact on the profitability of commercial banks. Rarely considered were the effects of monetary policy or management’s leadership ability. This paper aims to investigate the influence of these two missing aspects and to explore whether or not such liberalization has had any influence on commercial banks’ risk resistance capacity and, if so, to identify the nature of that influence.
 Methodology: This article considers 18 commercial banks in China, operating from 2003 to 2018. Analyses include descriptive statistics, the Sobel test, the ADF stationarity test, and the VAR model co-integration test.
 Main Findings: Our results show that China’s interest rate marketization reform has a net positive effect on reducing bank risk, despite the new risks created by reform. Commercial bank anti-risk capabilities were also found to be improved both by China's monetary policy transmission for interest rate liberalization and by the strategic leadership capabilities of individual bank managers.
 Results: Based on these research results, this article encourages the Chinese government to strengthen appropriate laws and regulations to reduce the bankruptcy risk of commercial banks during interest rate liberalization. Commercial banks should build competent risk management teams with the ability to anticipate risks to allow their banks to better resist the disadvantages of interest rate liberalization reforms.
 Application: Based on these research results, this article can provide insights for the Chinese government, showing that appropriate laws and regulations should be strengthened to reduce the risk of bankruptcy that commercial banks may face as a consequence of interest rate liberalization.
 Originality/Value: This paper contributes to the theory of interest rate liberalization and anti-risk capability of commercial banks, by conceptualizing new constructs from strategic leadership and monetary policy transmission theory. It finds that market-oriented rate reform has increased interest rate risk and complicated the term structure. Commercial banks should, therefore, improve their operational management capabilities and optimize their internal governance decision-making mechanisms.

Creditor rights protection and bank stability in developing countries: evidence from Tunisia

This paper analyzes the impact of creditor rights protection and the potential impact of interaction between legal rights and information sharing on the financial stability of banks in a developing country. We look at a sample of Tunisian listed banks over the period 2005-2018. We use an econometric method on a panel data framework that deals with heteroscedasticity and contemporaneous correlation problems. We show that poor legal protection of creditor rights increases Tunisian bank fragility. Indeed, the weakness of bankruptcy laws that favor debtors at the expense of creditors and the distorted collateral regime are significant in explaining the non-performing loans levels of Tunisian banks. In addition, our findings highlight the importance of credit information sharing in enhancing bank’s credit quality. This effect is not only statistically significant but also economically large. Results suggest that an increase in credit information depth index by one standard deviation reduces bank risk by 1.59 percentage points. Finally, we show that the development of credit information sharing cannot substitute to a poor legal protection of creditor rights. Therefore, a true improvement of bank credit quality requires reforms toward more efficient insolvency procedures and collateral enforcement.

Diversification, Efficiency and Risk of Banks: New Consolidating Evidence From Emerging Economies

This paper examines the impact of business diversification of banks on their risk, with efficiency taken into consideration as a conduit. Using bank-level data from more than 1400 commercial banks in 39 emerging economies during 2000-2016, we find that increased business diversification exerts two competing effects on bank risk, and overall reduces bank risk. The direct effect of increased diversification bolsters the stability of banks, but this is offset partially by the indirect effect of lowered efficiency, which increases the riskiness of banks. This provides a consolidating evidence on the competing arguments on the diversification-efficiency nexus in banking — the “diversification-premium” argument vs. the “diversification-discount” argument — with its extended implications on bank risk. In addition, we also present evidence that the diversification-bank risk nexus is heterogeneous on the bank size, market power and the ownership of banks, which provides useful policy implications for diversification strategies by bank managers as well as for the effective surveillance by bank regulators.

Revisiting the impact of institutional quality on post-GFC bank risk-taking: Evidence from emerging countries

This is the first attempt to address the impact of institutional quality on post-GFC bank risk-taking behavior. This study is conducted on 730 banks from 19 emerging countries covering the period 2011–2016. We used six indicators of good governance as a proxy for institutional quality. Both static panel and Dynamic GMM estimation are used to identify the impact of these variables on bank risk-taking; measured by Z-score. We evidenced that increasing government effectiveness, controlling corruption, and improving agents' confidence and adherence to the rule of law reduce banks' risk exposure and improve banks' stability. Besides supporting the Z-score model, the robustness test using σ(NIM) also provides evidence of the impact of regulatory quality on reducing bank risk. Surprisingly, both models tend to indicate that improving voice and accountability increase bank risk-taking in emerging countries. Furthermore, our study provides an interesting reconciliation to the major debate on the impact of size on bank risk.

Corporate Governance Factors, Capital Regulation and Bank Risk Taking in Zimbabwe

The study is motivated by the importance of corporate governance indicators in influencing bank risk taking and performance. It seeks to establish the relationship between shareholder power, board characteristics and executive director power as indicators of bank corporate governance and risk taking by banks in Zimbabwe. Using bank level data for the country over the period 2010 to 2017 and accounting for the effects of bank capital regulation, the study finds that more executive director power reduces bank risk taking; while strong boards raise risk taking. On the effect of shareholder power, the study finds that individual bank ownerships increase bank risk taking; with risk increasing as bank statutory capital requirements increase. The bank risk taking effect of government bank ownership is inconclusive; while an increase in statutory bank capital requirements reduces risk taking in banks that are owned by the private institutions. The study results suggest that the effects of changes in bank corporate governance and or banking sector regulations has different bank risk taking outcomes that depend on the interactions between the various governance indicators and the sector regulatory environment.