Small Banks Research Articles

The Impact of Market Power, Credit Risk, and Economic Environment on the Stability of the Arab Banking Sector

The paper presents an investigation of the dialectical relationship between banking concentration and the stability of the banking sector, using data from twelve Arab countries for the period 2014-2019 in the framework of a dynamic panel data model. The findings show that the banking sector in the Arab countries follows the "Concentration-Stability" hypothesis. That is, banking concentration has a significant positive impact on bank stability. The paper explains that this result is due to two main reasons. The first reason is that large banks tend to manage their assets and capital more efficiently compared to smaller banks, while the second reason is that systemically important banks (DSIBs) are subject to additional quantitative and qualitative regulatory requirements, especially after the global financial crisis in 2008. The paper also reveals that economic growth has a significant positive effect on bank stability, while credit risk has a significant negative impact on bank stability. The paper suggests encouraging the merger of small banks, as this leads to enhancing their operational efficiency, strengthening their financial positions, and supporting their ability to absorb potential shocks.

Networking effects of innovations: evidence from the Global South

PurposeThis paper aims to investigate the short- and long-run influence of core banking solutions (CBSs) on productive efficiency and identify the presence of potential network externalities arising from CBS adoption. This paper further examines the differential behaviour of long-term effects across the banking structure.Design/methodology/approachThis study uses a panel data set of Indian commercial banks from 2005 to 2021. Economic efficiency is quantified using VRS-based DEA programming algorithms. Productivity changes are measured through an input-oriented, DEA-based Malmquist productivity index. Short- and long-run effects are examined through a finite autoregressive distributed lag model, estimated through a pooled mean-group estimator.FindingsFindings suggest that CBS adoption negatively correlates with cost structure until the first year of adoption. Nevertheless, significant benefits are visible from the third year. Furthermore, such associations are highly susceptible to the industry structure. CBS results in higher incremental benefits for private banks vis-à-vis state-owned banks. Large banks receive significant and quicker productivity improvements from CBS vis-à-vis small banks. Bank age guides CBS–performance associations, highlighting that mature banks may face the issue of legacy infrastructure in CBS adoption. The resultant networking externalities are significant as they enhance the attractiveness of the network, which subsequently augments inter-branch and inter-bank communications.Originality/valueTo the best of the authors’ knowledge, this study is the first to recognise the stickiness of one of the most homogeneously adopted technological innovations in the Indian banking sector. The presence of a conjoint technological network has the potential to enhance the service delivery process and ensure superior returns for Indian banks.

Schumpeterian creative destruction and temporal changes in business models of US banks

Schumpeter theorizes that capitalism is characterized by a constant process of creative destruction. Newcomers introduce disruptive innovations and technologies that replace older, less efficient business practices. Thus, established firms must either continually adapt or perish. Christensen (1997) argues that large, established firms cannot innovate as fast as newcomers and thus are likely to perish over time. We test these predictions in the setting of the United States banking sector. We examine banks' credit and liquidity risks as proxies for their business models, as well as their reliance on brokered deposits, commercial real estate loans, off-balance sheet items, and noninterest income as proxies for operational strategies. We find that banks' credit and liquidity risks increased significantly over the last 40 years or so, indicating a steady change in banks' business models. This trend stems primarily from progressively aggressive business models introduced by incoming cohorts. Older cohorts respond to changing market conditions by increasing the aggressiveness of their own business models, but not as much as the newcomers. Surprisingly, surviving large banks among older cohorts change their business models faster than smaller banks from the same cohorts. Thus, while we find support for Schumpeterian creative destruction and Christensen's (1997) arguments, we also find that large and established banks are better able to adapt to new market conditions, perhaps because they have superior access to resources and talent necessary to implement transformation. Our findings at least partly explain why the dominant players in the US banking sector have remained the same decade after decade.

MERGERS AND ACQUISITIONS. A CREDIT RISK EVALUATION IN THE GREEK BANKING INDUSTRY SHORT- AND LONG-TERM TIME PERIOD AFTER THE EVENT

<p>The Greek banking system was greatly affected by the financial crisis that began to plague Greece in 2010. Therefore, in order to have competitive Greek banks, a rally of acquisitions and mergers of Greek banks began in 2010 and ended mainly in 2015. So, in essence, the Greek economy was left with only four large Greek systemic banks, which took over the other large and small distressed Greek banks under the specter of bankruptcy. This wave of acquisitions and mergers in the Greek banking system created strength in Greek banks mainly in terms of assets and at the same time protected the interests of Greek depositors. This paper deals with the assessment and calculation of the credit risk that led to the bankruptcy of the four Greek systemically important banks with Z-Score models. These banks are Piraeus Bank, National Bank, Eurobank, and Alpha Bank. The time period for conducting our study is limited from 2015 to 2020. The year 2015 is essentially the last year in which all the important and large mergers and acquisitions of Greek systemic banks that occurred immediately after the onset of the financial crisis in Greece in the year 2010, were completed. The last year of our study is the year 2020 when the pandemic started in Greece. In our paper, extensive reference is made to the credit risk models that we apply in our study, namely the Z-Score, the Z-Score for banks, and the Zeta model. The analysis of our findings is accompanied by tables, diagrams, and comments on them. The final comparative results obtained are forecasts for imminent possible or non-bankruptcy of the Greek systemic banks we examined. At the end of our paper, we present some conclusions about the Greek banking system and its future.</p><p><strong>JEL:</strong> G21, G33, G34</p><p> </p><p><strong> Article visualizations:</strong></p><p><img src="/-counters-/soc/0021/a.php" alt="Hit counter" /></p>

Digitalization and bank profitability: evidence from an emerging country

PurposeThis study aims to investigate the effect of digitalization on bank profitability among Vietnamese banks.Design/methodology/approachThe research employs fixed-effects regression on a panel data of 32 banks in Vietnam during the period 2010–2021.FindingsThe study reveals a positive impact of digitalization on bank profitability. The result is robust to different measures and empirical settings. Not surprisingly, small banks and banks with high percentage of state ownership experience lower profitability than their peers. However, digitalization helps improve the profitability of these banks. This study explains the effect by showing that digitalization significantly reduces bank cost in terms of cost to income ratio and increases bank non-interest income through diversification into non-traditional products and services. In addition, the current stage of bank digitalization in Vietnam does not reduce banks’ employment costs since it requires staffs to support and operate the new system.Practical implicationsThe research findings are motivations for bankers and policy-makers in designing appropriate strategies toward digitalization. Investors can also consider highly digitalized banks as valuable investment.Originality/valueThis research extends the current literature on the relationship between digitalization and bank profitability, with a focus on commercial banks in Vietnam. Given the high involvement of the government and the dominance of several large banks in the banking system, the study also explores whether the effect of digitalization on bank profitability varies with the bank’s size and state ownership. Last but not least, the channels in which digitalization affects bank profitability are also examined.

Islamic bank procyclicality in an emerging market economy: Do bank size and financing contracts matter?

Using a sample of Islamic banks in Indonesia, our empirical findings demonstrate a positive relationship between economic growth and financing growth in Islamic banks, indicating procyclical behavior. However, the degree of procyclicality varies depending on bank size, with small banks exhibiting a more pronounced procyclical behavior compared to large banks, which display a countercyclical pattern. Our deeper analysis reveals that consumption financing contracts through Murabahah and Istisna contribute to the countercyclical behavior observed in large Islamic banks. Moreover, Musharakah as a productive financing contract does not exhibit procyclical behavior regardless of bank size. In contrast, another productive financing contract, Mudharabah, can lead large Islamic banks to behave countercyclically. Additionally, Ijarah, a leasing contract used for either consumption or productive purposes, exhibits a procyclical pattern in large Islamic banks, indicating that it cannot serve as a hedge during economic downturns for these banks. Overall, these results underscore the importance of Islamic bank consolidation, as large Islamic banks tend to effectively overcome procyclicality throughout the business cycle by utilizing the majority of financing contracts.

Behavioural implications of risk–return associations based on the adjusted thermal optimal path method: Large versus small banks

AbstractThis article investigates the impact of bank size and business model on bank risk‐taking within the framework of the prospect theory. To fulfil this objective, we use the adjusted thermal optimal path model. The results suggest that conventional banks adopt the same risk‐taking behaviour for performance measures, regardless of their size. However, the size mainly influences the attitudes of managers towards Islamic banks. On the other hand, small Islamic banks, whether under‐ or over‐performing, take excessive risks. This behaviour is mainly explained by loss aversion. However, large Islamic banks that situated above the target are risk‐averse, since they adopt defensive behaviour. The results reveal that for risk measures and for both small and large banks, a bank's business model does not affect managers' attitude to risk. Therefore, small (large) banks adopt excessive risk‐taking (risk‐averse) behaviour and an offensive (defensive) strategy. The study has important implications for GCC banking regulators, supervisors, and market participants. Thus, our findings imply that understanding the impact of the bank size and business model on the risk‐taking behaviour of Islamic and conventional banks can help them reduce their risk and mitigate moral hazard and regulatory arbitrage behaviour.

The Cost of Dodd-Frank Act for Commercial Banks

The intent of this article is to explain how the Dodd-Frank Act impacts banks and puts a spotlight on the cost of this Act to financial institutions, especially small banks. As part of the discussion, federal agencies are described as the regulators in charge of supervising strict compliance and adherence to the applicable law. Through our research it is apparent that part of the reporting costs is transferred to the consumers in different fees and charges, which impacts the bank’s competitiveness. We depart from the premise that large banks could transfer these costs to consumers easier, because they have a critical mass of clients and products, enough to cover the additional expenses incurred when conforming with the regulation. Additionally, we analyze the cost of implementation from perspective of size which shows a substantial difference to institutions of various sizes. We conclude the paper recommending additional research and primary data collection that could contribute to a better understanding of the cost of the Dodd-Frank Act.

Impacts of the COVID-19 Pandemic on Chinese Banking System: Measuring Volatility Connectedness

In this paper, we study the impacts of the COVID-19 pandemic on the connectedness of the Chinese banking system, and explore the heterogeneity effect of this pandemic. We construct static and dynamic analysis on 14 Chinese banks by building the volatility spillover network proposed by Diebold and Yilmaz to assess the volatility spillover effects caused by COVID-19, and compare it with the previous financial crises in the past 12 years. The empirical findings show that the COVID-19 did impact the connectedness of Chinese banking system and its structure within the system, with the 14 Chinese banks highly interconnected especially during COVID-19 era. In addition, the highly connected and contagious status of Chinese banking system didn't stay long during COVID-19 era compared with previous crises. Moreover, we find a shock-passing path during the COVID-19 era: big banks deliver more shocks to the middle banks, and the middle banks send more shocks to small banks. At the same time, our work presents that state-owned banks, during COVID-19 era, were more contagious and the local banks were more vulnerable compared with their historical performance.

Optimizing systemic risk through credit network reconstruction

Capital buffers can improve the stability of the banking system, but they come at a cost. This study explores the efficient macro-prudential regulation of systemic risk from the perspective of capital network reconstruction. A model of option pricing is proposed to determine the market value of sector credits. Consequently, systemic risk is measured by both credit and interbank contagion risks. Credit network reconstruction is then optimized to minimize systemic risks. Our analysis was based on data from China's banking systems between 2008 and 2020. In different stress tests, the credit network reconstruction generally optimizes systemic risk to the lowest level. At the same time, it may save about 20% to 140% of the cost of capital. The optimization mechanism analysis shows that large banks with stability advantages share more shocks than small banks by reconstructing their sector credit network. As a result, the contagion process of systemic risk is prevented, and bankruptcy cascades are eliminated. These results imply that credit network reconstruction holds great potential for preventing systemic risks.

AirQuality Lab-on-a-Drone: A Low-Cost 3D-Printed Analytical IoT Platform for Vertical Monitoring of Gaseous H2S.

The measurement of gaseous compounds in the atmosphere is a multichallenging task due to their low concentration range, long and latitudinal concentration variations, and the presence of sample interferents. Herein, we present a quadcopter drone deployed with a fully integrated 3D-printed analytical laboratory for H2S monitoring. Also, the analytical system makes part of the Internet of Things approach. The analytical method applied was based on the reaction between fluorescein mercuric acetate and H2S that led to fluorescence quenching. A 5 V micropump at a constant airflow of 50 mL min-1 was employed to deliver constant air into a flask containing 800 μL of the reagent. The analytical signal was obtained using a light-emitting diode and a miniaturized digital light detector. The method enabled the detection of H2S in the range from 15 to 200 ppbv, with a reproducibility of 5% for a sampling time of 10 min and an limit of detection of 9 ppbv. All devices were controlled using an Arduino powered by a small power bank, and the results were transmitted to a smartphone via Bluetooth. The proposed device resulted in a weight of 300 g and an overall cost of ∼50 USD. The platform was used to monitor the concentration of H2S in different intervals next to a wastewater treatment plant at ground and vertical levels. The ability to perform all analytical steps in the same device, the low-energy requirements, the low weight, and the attachment of data transmission modules offer new possibilities for drone-based analytical systems for air pollution monitoring.

An in-depth analysis of the impact of cyberattacks on the profitability of commercial banks in the United States

This study examined the effects of cyberattacks on the profitability of U.S. public and private commercial banks using a sample of 120 data breaches across various institutions. The results showed that cyberattacks negatively influence bank profitability, with effects more robust in the 12 quarters following a breach, especially from non-hack breaches. Large and private banks suffer more than small and public banks, with breaches resulting in decreased deposits and loans and increased liquidity. These changes are confirmed as independent channels reducing bank profitability. The results were robust after controlling for factors like multicollinearity, non-stationarity, cross-sectional dependence, and heteroskedasticity.

Bond issuance and the funding choices of European banks: The consequences of public debt

European banks raise less funds in the bond market when there is a larger public debt in their national economies and this is reflected in lower leverage. We exploit numerous sources of heterogeneity in our data to demonstrate this result is driven by a crowding out effect from the public arena and not by a sovereign risk channel or political influence. The crowding out effect is stronger for less internationally active or smaller banks, and in banks characterized by more traditional business models. Our findings indicate that additional capital requirements on sovereign bond holdings can also influence bank funding composition via a decrease in the demand for sovereign bonds by the banking industry. The specific effect of these regulatory initiatives is critically dependent on bank characteristics.

Fintech, bank diversification and liquidity: Evidence from China

This research investigates the influence of Fintech development on bank diversification and liquidity in China. Analysing 101 banks between 2011 and 2021, we apply robust text mining processes and implement factor analyses to construct a Fintech development index, which is used to test for specific liquidity and diversification influence across the Chinese banking industry. Our results provide robust empirical evidence that the development of Fintech reduces bank liquidity creation and helps to increase bank diversification. We find further evidence that this relationship is heterogeneous. Both state-owned and smaller banks, as measured by market capitalisation, are found to have presented a weaker response to Fintech development. Moreover, the outbreak of the COVID-19 pandemic is found to have enhanced the inhibitory effect of Fintech on bank liquidity creation, and thereby weakening its contribution to bank diversification.

The revision of the banking crisis management and deposit insurance framework in Europe: Why is it important to enhance flexibility?

The Crisis Management and Deposit Insurance Framework - which came into force about ten years ago - is under review by the European Commission. The need for its revision stems from the identification of certain shortcomings and inconsistencies that have emerged in its application in Europe and especially in Italy. The central topics of the debate focus on how resolution should be applied and on possible innovations regarding the tools that can be used to manage the crises of small and medium-sized banks, which until now have been managed on the basis of procedures and tools decided at the national level. The aim of this paper is to investigate the areas subject to reform, using as an evaluation parameter the objective of increasing the flexibility of the framework, as this is considered a fundamental requirement to ensure the full effectiveness of the overall banking crisis management system

Identification and prioritization of the factors influencing blockchain adoption in the banking sector: integrating fuzzy AHP with TOE framework

PurposeThe objective of this research is to identify and prioritize the critical factors that influence the adoption of blockchain technology within the banking sector.Design/methodology/approachA well-known theoretical framework, the “Technology Organization Environment (TOE),” was chosen to analyze what criteria and sub-criteria affect blockchain adoption in the banking sector after a thorough assessment of the prior literature. Following that, 3 evaluation criteria and 14 sub-criteria were selected and verified using expert opinion. A survey design was created, and data for the study has been collected from various information technology (IT) managers/officers in the banking sector. A fuzzy analytic hierarchy process (Fuzzy-AHP) was then used to meet the purpose of the research.FindingsThe study identified that the organizational dimension is the most significant criteria for blockchain adoption in the banking sector, followed by the environmental dimension. In contrast, the technological dimension is the least influential criterion. Clientele pressure, IT resources, financial resources, pressure from competitors and relative advantage are the most influential sub-criteria for blockchain adoption.Research limitations/implicationsThis study provides valuable insights to bank managers, blockchain and IT developers, third-party service providers and policymakers. For instance, adopting the same blockchain platform is easier for both large and small banks for banking operations by using third-party service provider. At the same time, banks should have the banks' own core team to implement the blockchain-based systems or to have control over the third-party service providers during the adoption stage.Originality/valueTo the best of the authors' knowledge, no empirical studies have used a holistic organizational context to understand the factors influencing the adoption of blockchain technology from traditional to blockchain-based banking systems.

Monetary policy, funding liquidity, and undisbursed loans in Indonesia: The bank lending channel revisited

This paper extends the literature on the bank lending channel by assessing the interplay between monetary policy and funding liquidity in affecting undisbursed loans. Using a sample of Indonesian banks, our empirical findings highlight that a higher monetary policy interest rate increases undisbursed loan growth, suggesting that the bank lending channel affects borrower decisions. Furthermore, we find that banks with higher funding liquidity exhibit lower undisbursed loan growth in response to contractionary monetary policy. However, the role of funding liquidity in reducing undisbursed loans due to a higher monetary policy interest rate is more pronounced for weakly capitalized banks and small banks. On one hand, this paper emphasizes the role of funding liquidity, particularly for weakly capitalized banks and small banks, in maintaining financial intermediation during the implementation of contractionary monetary policy. On the other hand, we also emphasize that the effectiveness of the bank lending channel is mainly driven by highly capitalized banks and large banks.

An Approach to E – Banking Services by Small Finance Banks in Gujarat

The modern approaches of banking transactions are broadly evaluated. The small finance banks are taking baby steps towards their progress. It is necessary to evaluate their services and customers’ perceptions towards e – banking services. The research is conducted as pilot research for using of e – banking services by the customers of small finance banks in Gujarat. The focus is made for only two services which is primly used by the customers of any of the banks. An application of Chi-square test and descriptive statistics is used to conclude the results. It is observed that the small finance banks are competent to offering their services in network banking.

Digitalisation and commercial bank performance: A test of heterogeneity from Chinese commercial banks

Although digitalisation is a reality for companies and contributes to value creation, few studies have examined its impact on commercial bank performance. The objective of this paper is to analyse how banks' digitisation contributes to their performance. The study finds that digitisation has a non-linear dynamic relationship with commercial bank performance, being first inhibited and then facilitated. Moreover, the impact of digitisation on bank performance is heterogeneous, with small and medium-sized banks, those with a high share of non-interest income and those with a high customer concentration benefiting more from digitisation.

Fintech development, firm digitalization, and bank loan pricing

Using loan-level data of Chinese listed companies from 2011 to 2018, this paper finds a significant decrease in bank loan prices due to the regional development level of financial technology (fintech). For small and medium-size regional commercial bank lenders, a 1% increase in the regional fintech development level can reduce the spread of bank loans for local firms by 1.13 basis points. The reduction effect is greater for enterprises with more binding financial constraints and those headquartered in regions with a lower level of banking competition. In addition, this study discusses the policy effect of firm digitalization. The results show that firm digitalization can reduce bank loan prices directly while weakening the policy effect of fintech in reducing loan prices indirectly. To promote the coordination between fintech development and firm digitalization in reducing corporate financing cost, fintech enterprises should take the role of helpers of commercial banks rather than competitors.