Bank Risk Research Articles

Are Risky Banks Disciplined by Large Corporate Depositors?

AbstractWe analyze depositor discipline using auctions of unsecured money market deposits of firms to banks. In each auction, only the firm observes the banks and their interest rate bids. We observe that deposit interest rate bids increase with bank risk. Conditional on the same interest rate bid and firm–bank relationship, depositors select less risky banks. Banks reduce their risk after their deposit offers are less often selected. Risky banks eventually exit the market, and reenter when they become safer. This has important implications for banks’ access to unsecured corporate funding, financial stability, and our understanding of market discipline more broadly.

Banking Financial Performance as Influenced by Credit Risk, Liquidity and Bank Size In Conventional Banks Listed On The Indonesian Stock Exchange For The Period 2014 - 2023

This study aims to empirically examine the impact of credit risk, liquidity, and bank size on the financial performance of conventional banks listed on the Indonesia Stock Exchange (IDX) during the period 2014-2023, with a particular focus on the COVID-19 pandemic period. The research variables used include the Non-Performing Loan (NPL) ratio, Loan to Deposit Ratio (LDR), and bank size, while Return on Assets (ROA) is used as a financial performance indicator. This study uses the purposive sampling method to select a sample from 138 banks listed on the IDX, resulting in 9 banks that meet the established criteria. Data analysis was conducted using panel data regression with the Fixed Effect Generalized Least Square (GLS) model to address the issues of autocorrelation and heteroskedasticity found in classical assumptions. The research results show that credit risk (NPL) has a significant negative impact on ROA, while bank size and liquidity (LDR) have a significant positive impact on ROA during the pandemic. These findings highlight the importance of managing credit and liquidity risks as well as optimizing bank size to improve financial performance amid the challenging economic conditions caused by the pandemic. This study also suggests that the financial performance of banks can be more stable if supported by appropriate risk management strategies and good operational efficiency. The limitations of this study include a sample restricted to conventional banks in Indonesia and the specific conditions during the COVID-19 pandemic, which may affect the generalization of the results.

FEATURES OF OPERATIONAL RISK MANAGEMENT IN THE REPUBLIC OF ARMENIA

Any type of business activity is not free from the formation of risks. Banking is also no exception. For banking business, it is important not to avoid risks in general, but to anticipate the consequences of risks and minimize their consequences. This article presents the main mechanisms for containing operational risks of banks, taking into account possible scenarios and changes. The goal is to find out how risks are managed and the possible limits of risk indicators. Forecasts of key operational risk indicators are based on banking experience and historical data, which makes it possible to monitor potential risk thresholds. According to the author, with precise management, the latter can help differentiate and limit potential risks.

Authentic feedback

Authentic assessment calls for authentic feedback (Dawson et al., 2021). Authentic feedback promotes the development of capabilities that transfer effectively from university to the workplace. I showcase an innovative process to improve the feedback on an assessment task that simulates a real-life scenario to undergraduate finance students at the University of Sydney. Authentic feedback inspires students to engage in higher-order thinking, decision-making and problem-solving to resolve the feedback comments (Molloy et al., 2020). I schedule a series of pre-submission classes that are dedicated to debating the assessment task and required standards with students. Feedback can motivate students to evaluate their own work and incorporate the insights for better quality performance. I focus on developing students’ understanding of the criteria that concern practitioners. The impact of the process to deliver authentic feedback is reflected in students’ perceptions of the extent to which they were guided by helpful feedback on their learning. The context is an undergraduate third-year elective unit, Bank Financial Management, which the University of Sydney Business School offers to students as part of its Bachelor of Commerce program. The objective of the unit is to expose students to the management of financial risks in banks. The unit’s assessment includes a group assignment on cybersecurity preparedness. The assignment is based on a case prepared by Korinek and Allayannis (2022). The case is framed from the perspective of the chief information officer of a mid-sized financial institution that has experienced a massive and unprecedented cyberattack in which $450 million of customer funds were stolen. The objectives of the assignment are for students to recognise the frequency and tremendous costs of cyberattacks, devise an incident response plan to cyberattacks and understand the cyber regulatory regime in which corporations operate. The unit attracts more than 500 enrolments per year. I deploy strategies for students to engage productively in the kinds of feedback practices that take place in the workplace. The grading rubric describes qualities sought by employers. The pre-submission classes provide opportunities for students to debate the issues with their instructors and peers and to develop practical solutions. The instructions require students to write a business-style report and to treat a bank’s managers as their target audience for the report. The process relies upon the Canvas learning management system. The feedback is delivered through a series of discussions between students and educators. The feedback process has contributed to improvements in students’ impressions of the assessment task and the quality of the feedback itself. This poster fits within the conference theme of technology enhanced learning (TEL) pedagogies. To deliver authentic feedback, the instructors augment face-to-face teaching with TEL including through video recordings, video conferencing and online discussion forums. I outline the opportunities and threats to educational quality posed by using TEL applications to generate authentic feedback. By presenting and analysing an example from university teaching in finance, I demonstrate implications and issues arising from Dawson et al.’s (2021) framework for authentic feedback. Dawson et al.’s framework contains the five elements of realism, cognitive challenge, affective challenge, evaluative judgement and enactment. I apply the framework to a feedback process as a way of identifying its authenticity and guiding its adjustment in a more authentic direction.

The Mediating Effect of Strategic Flexibility between Strategic Agility and Liquidity Risk in Iraqi Commercial Banks

The Mediating Effect of Strategic Flexibility between Strategic Agility and Liquidity Risk in Iraqi Commercial Banks

The Impact of Strategic Flexibility in Reducing Financial Risks in Iraqi Commercial Banks

The Impact of Strategic Flexibility in Reducing Financial Risks in Iraqi Commercial Banks

THE IMPACT OF INTERNAL AUDIT ON THE EFFECTIVENESS OF BANKING RISK MANAGEMENT (APPLIED STUDY ON A SAMPLE OF IRAQI BANKS)

In light of the scientific and technical progress in all aspects of life, banks need a control and auditing system to protect them from the risks they are exposed to as a result of their diverse financial dealings, to reduce or avoid losses and maintain and support banks to carry out their work in a way that enables them to achieve a competitive advantage. The problem is embodied in the extent of the contribution of internal auditing in how to manage banking risks and demonstrate their effectiveness in banks. It aims to stand on the reality of internal auditing and the extent of its application in Iraqi banks, with the importance of identifying the functions of internal auditing in auditing, evaluating and following up on the efficiency and effectiveness of risk management procedures based on the risk-based auditing approach. In addition to the commitment to applying the standards, principles and guidelines issued by the Institute of Internal Auditors or issued by the International Organization for Banking Supervision that govern the performance of the internal auditor and help him identify obstacles and find solutions to support and succeed in risk management in the two banks. The research sample used the questionnaire in the practical aspect to show the effectiveness of internal auditing in managing banking risks and to come up with a number of recommendations, the most important of which are: Continuing work to enhance and develop the skills and knowledge of internal auditors by holding training courses on how to deal with banking risk management to enable them to perform their work effectively, and for banking institutions to support the components of the independence of the internal auditor to perform his work efficiently.

Digital economy and entrusted loans: Evidence from shadow banking

Entrusted loans represent a vital component of shadow banking in China and have significant implications for financial system stability. Taking advantage of a sample covering all A-share traded Chinese firms from 2013 to 2022, this research explores the impact of the digital economy on entrusted loans. We display that the level of the digital economy reduces the scale of entrusted loans by strengthening bank risk management and increasing corporate financing options. Further analysis shows that banking competition can amplify the negative link we found. Overall, this study advances extant literature on the digital economy and shadow banking.

The Role of Generative Artificial Intelligence in Managing Speculative Financing Risks in Islamic Banks

Artificial intelligence has witnessed great importance and rapid growth in light of the rapid technical development, the increase and diversity of the volume of data, the power and speed of computers, and the accuracy of machine learning models, so that the role of machines has become not only limited to understanding our world, but contributing strongly to shaping it, and here the role of generative artificial intelligence has emerged to reflect... How machines interact with users and generate new and innovative content. Given the interest of the early theorists of Islamic banking in speculation as a basic formula for mobilizing and using resources in Islamic banks, as it is more capable of accumulating investable cash balances, and more capable of distributing available monetary resources to the best uses for the purposes of economic and social development, and contributing directly to the fair distribution of national income. In view of what we see in our contemporary reality of the limited dealing with speculative financing in Islamic banks, due to considerations related to the difficulty of managing their risks, whether these considerations relate to the Islamic bank itself, the financing clients, or the surrounding circumstances. This reality represents a problem for which practical solutions need to be sought. The importance of the research appears to be that, in light of the emergence of artificial intelligence in general and generative artificial intelligence in particular, generative artificial intelligence can be utilized in managing the risks of speculative financing in a way that enables the Islamic bank to protect its funds and opens the way towards development horizons instead of focusing financing on debts. The research aims to identify generative artificial intelligence in terms of its concept, origins, development, and relationship to finance, and the prospects for benefiting from it to contribute to managing the risks of speculative financing in Islamic banks. The research relies on the descriptive and analytical approach, as this approach is consistent with the nature of the research topic, as well as its objectives. The research addressed the definition of artificial intelligence and generative artificial intelligence, the definition of speculative financing and its risks in Islamic banks, and the role of generative artificial intelligence in managing the risks of speculative financing in Islamic banks. The research reached the role that generative artificial intelligence can play in managing speculative financing risks in Islamic banks, whether it comes to the stages of managing those risks or their mechanisms.

Systemic risk in banking, fire sales, and macroeconomic disasters

We develop a dynamic computational network model of the banking system where fire sales provide the amplification mechanism of financial shocks. Each period a finite number of banks offers a large, but finite, number of loans to households. Banks with excess liquidity also offer loans to other banks with insufficient liquidity. Thus, each period an interbank loan market is endogenously formed. Bank assets are hit by idiosyncratic shocks drawn from a thin tailed distribution. The uneven distribution of shocks across banks implies that each period there are banks that become insolvent. If insolvent banks happen also to be heavily indebted to other banks, their liquidation can trigger other bank failures. We find that the distribution across time of the growth rate of banking assets has a ‘fat left tail’ that corresponds to rare economic disasters. We also find that the distribution of initial shocks is not a perfect predictor of economic activity; that is some of the uncertainty is endogenous and related to the structure of the interbank network.

ESG risk management in banks – towards its measurement

The concept of sustainable development has been gaining importance and increasing society's awareness of the need to stop climate change, inequality, social exclusion, and inappropriate corporate practices. Banks increasingly integrate ESG objectives into their business activity. However, it is associated with their exposure to a new type of risk – the ESG risk. ESG risk management for banking institutions has now become not only a fashion and trend but an obligation that they have to fulfil. The main aim of the article is to identify ESG risk and methods of quantification, as well as to assess the exposure to ESG risk of commercial banks in Poland. That’s why the paper presents an in-depth literature review in the field of ESG concept and ESG risk in banks. Then, it describes the adopted methodology of the empirical research. The third section covers a presentation of the obtained results, which include the analysis of ESG risk exposure of the largest banks in the world and selected commercial banks in Poland, mainly based on the volume of the carbon footprint they generate and finally, ESG risk ratings for Polish banks. The following research methods were used in the article: literature studies, case study analysis, observation methods and synthesis methods. The empirical research that was conducted allowed the verification of the research hypothesis, stating that commercial banks in Poland are aware of the need to measure and monitor ESG risk increases. The research indicated that some of the banks in Poland are at an advanced stage of ESG risk management, while the rest of them are just starting their activities in this area. Currently, banks' involvement in ESG issues globally is one of the leading market trends. It becomes not only an option but an imperative for institutions wishing to maintain their market position. Therefore, commercial banks in Poland can and should participate in the implementation of sustainable development assumptions in the coming years.

Ambiguity of tone in annual reports and bank risk taking

AbstractIn this paper, we examine whether abnormal ambiguity of tone in banks' 10‐K filings is associated with banks' risk‐taking behaviour. We estimate abnormal ambiguous tone using residual of a tone model that disentangles the obfuscation component from the information component in the ambiguous tone. We find that banks that intentionally use more ambiguous tone in 10‐K filings exhibit higher risk taking subsequently, consistent with the argument that an intentional ambiguous tone adds to the opacity of financial statements, which potentially masks managerial risk‐taking activities and curbs market discipline from external stakeholders. Our results remain robust to alternative model specifications and sensitivity tests which address potential endogeneity concerns. Furthermore, banks with higher abnormal ambiguous tone are associated with more aggressive investment decisions. Together, our findings suggest that abnormal ambiguous tone in annual reports is informative of banks' risk‐taking activities.

Estimating systemic risk for non-listed Euro-area banks

SRISK is a measure of a firms' systemic risk contribution that is computed using its listed stock market price. SRISK measurement is extended and applied to firms that do not have listed equity. A mapping from balance sheet characteristics to SRISK for listed firms is applied to SRISK for unlisted European banks. The mapping is validated by comparing SRISK measures for unlisted banks with their losses in European bank stress-testing.

Interest Rates Risk and Financial Performance of Commercial Banks in Kenya

Interest Rates Risk and Financial Performance of Commercial Banks in Kenya

Influence of spin-off decision on financing risk: Empirical insight from Indonesian Islamic banks

Background Spin-offs play a significant role in organizational development strategies, particularly in Islamic banking, by fostering entrepreneurship, innovation, and Shariah-compliant management practices. Indonesia stands as a pioneer in implementing the dual banking system and has established a spin-off policy to foster the growth of Islamic banking. This study investigates whether the spin-off decision has a significant impact on financing risk in Indonesian Islamic banks. Methods Financing risk is measured by the non-performing financing ratio, while the spin-off decision is represented by a dummy variable equal to 1 for the post-spin-off period and 0 for the pre-spin-off period. This study utilizes data from semi-annual reports of 35 Indonesian Islamic banks and analyzes it using a dynamic panel model with the Generalized Method of Moments (GMM). Results The findings reveal that spin-offs significantly reduce financing risk, thereby enhancing the financial resilience and boosting investor appeal. Notably, this implies that Islamic banks operating as Islamic windows exhibit a higher level of financing risk compared to fully-fledged Islamic banks. Furthermore, a noteworthy pattern emerges that spin-off Islamic banks with substantial assets demonstrate greater risk in comparison to their counterparts with more modest assets. System GMM also confirmed the result. Conclusions Islamic banks can significantly reduce their financing risks by establishing independent Islamic banks, or spin-offs. Unlike Islamic windows, which are typically integrated within conventional banks and face higher risk levels, standalone Islamic banks offer greater flexibility and control over their operations.

Forecasting Bank Default Risk with Interpretable Machine Learning: The Study of Chinese Banks

ABSTRACT Bank occupies an important position in the financial system. The stable operation of the banking industry is not only one of the important factors in achieving sustainable economic growth but also related to the stability of the entire financial system. This research collects data from 507 banks in China from 2000 to 2021, uses the non-performing loan ratio as the measurement indicator of bank risk, and selects indicators from five levels (macroeconomic environment, industry economic environment, economic policy uncertainty, financial openness and bank financial status) On this basis, we use interpretable machine learning models to predict the bank’s default risk, analyze and compare the interpretable machine learning model and the post-hoc explainable methods. The results indicate that Provision Coverage (PC), Loan Provision Coverage (LPC), Liquidity Ratio (LR), and KOF Financial Globalization Index (KOFFiGI) have strong predictive capability for bank default risk. Our research can provide a reference for banks, government and financial regulatory authorities to construct the prediction model and indicator monitoring platform for bank default risk.

Liquidity and credit risks during the COVID-19 pandemic: evidence from a dual banking system

Purpose The purpose of this paper is to investigate the relationship between liquidity risk and credit risk of Islamic and conventional banks in a predominantly Muslim country (Indonesia) adopting a dual banking system. Design/methodology/approach To investigate liquidity-credit risk nexus, this study used a sample of 72 Islamic and conventional banks in Indonesia for a period between 2019 Q4 and 2022 Q1. This paper used a generalized method of moments (GMM) and generalized least square (GLS) estimators. Findings This study found that there is a nonlinear (inverted U-shaped) relationship between liquidity risk and credit risk in dual banking system. Liquidity risk was found to increase credit risk if it is below the optimal threshold, and above this optimal threshold, liquidity risk begins to decrease credit risk, both before and during the pandemic. In addition, the impact of liquidity risk on credit risk is higher in Islamic banks compared to conventional banks. Originality/value This paper reinvestigates the puzzle between credit risk and liquidity risk by taking a sample of a dual banking system country and by considering the period of the COVID-19 pandemic. To the authors’ knowledge, this approach has not been addressed in prior empirical studies.

Measuring the impact of enterprise risk management on performance, value, and risk indicators of Borsa Istanbul XBANK companies with data mining prediction models

Risk management (RM) is viewed by organizations from a holistic perspective instead of a silo-based point of view and a change in basic assumptions has occurred in recent years. The comprehensive approach to RM that is developed based on a holistic perspective and is adopted by companies is called enterprise risk management (ERM). From the general point of view, it is expected that companies will have sustainable operations, improved performance and value, and controlled risks by using the ERM concept. In this article, the relations of ERM adaptation with firm performance, firm value, and risks were researched through ordinal variables such as the implementation level of ERM and the sophistication level of the organizational structure of ERM in regression models based on panel data (PD). Empirical evidence depending on a sample of ten banking companies listed on the Borsa Istanbul (BIST) Banks index (XBANK) for the period from 2019 to 2022 confirms the above basic argument for firm performance, firm value, and the insolvency risk of banks in general terms. In addition, the prediction accuracy of PD models is calculated for the performance, value, and risk indicators of banks, and the partial least squares regression model is proposed as the alternative prediction model of data mining.

STRATEGI DIVERSIFIKASI PORTOFOLIO: ANALISIS DAMPAK RISIKO DAN KEUNTUNGAN PADA BANK KONVENSIONAL DAN SYARIAH MILIK NEGARA DI INDONESIA

This research examines the relationship between credit portfolio diversification and the risk and return of state-owned banks (Bank BUMN) from 2019 to 2023. Using multiple linear regression analysis, it evaluates the impact of the Herfindahl Hirschman Index (HHI) on credit or financing risk (NPL and NPF) and bank returns (ROA, ROE) among state-owned banks listed on the Indonesia Stock Exchange. Control variables include bank size, loan or financing to deposit ratio (LDR and FDR), and equity to total asset ratio (ETA). The results show that credit portfolio diversification reduces credit risk in BUMN banks, suggesting that spreading credit exposures across sectors can mitigate risk. However, diversification does not significantly affect bank returns (ROA, ROE). Control variables such as bank size, LDR and FDR, and ETA show no significant impact on credit risk, ROA, or ROE. This study provides empirical evidence on the effectiveness of financing portfolio diversification in managing credit risk within state-owned banks, considering Islamic banking principles. While diversification can mitigate credit risk, its impact on profitability requires careful consideration. BUMN banks should implement robust risk assessment frameworks and strategic oversight to maximize diversification benefits while maintaining financial stability and adhering to ethical and Sharia-compliant financial practices.

ESG and climate-related risks versus traditional risks in commercial banking: A bibliometric and thematic review

The aim of this study is to classify scientific research on the impact of ESG and climate-related risks on the conduct of the banking business. The systematic literature review was based on a bibliometric analysis of articles found in the Scopus and Web of Science databases. The search was confined to materials published between 2000 and August 2023. After applying criteria limiting the search, the final result was 869 unique literature items which were later analysed towards establishing the relationship of ESG and climate-related risks (‘new banking risks’) with other (so-called ‘traditional’) banking risks and identifying research gaps at the interface between traditional and new banking risks. This article introduces a variety of findings, including the most productive authors, organisations, countries and journals, the most cited articles and keyword distribution. In addition, a map of the evolution of the approach to ESG risk in banking was constructed on the basis of the literature review. The study identified 11 clusters of banking risk influenced by ESG risk and 10 clusters of banking risk affected by climate-related risk.