Bank Solvency Research Articles

The impact of Basel III regulations on solvency and credit risk-taking behavior of Islamic banks

PurposeThis study aims to examine the simultaneous effect of variations in the Capital Adequacy Ratio and Credit Risk of Islamic banks of the Gulf Cooperation Council under the influence of the Basel III regulations using an innovative approach.Design/methodology/approachThis approach highlights the critical importance of the Basel III reform in preserving the stability of the regional and international financial sector in the Gulf Cooperation Council and globally by examining the complex dynamics between Capital Adequacy Ratio and Credit Risk and their interaction under regulatory constraints. The annual reports and financial performance of 26 Islamic banks were analyzed over the period 2013–2021.FindingsThe findings highlight the critical importance of the Basel III reform in preserving the stability of the regional and international financial sector in the Gulf Cooperation Council and globally by examining the complex dynamics between Capital Adequacy Ratio and Credit Risk and their interaction under regulatory constraints. The annual reports and financial performance of 26 Islamic banks were analyzed over the period 2013–2021.Originality/valueThe insights from findings help define effective strategies to manage and mitigate Credit Risk while strengthening solvency under Basel III prudential supervision. Policymakers, regulatory authorities and banking institutions can optimize the management of Credit Risk and create a robust and stable financial environment for Islamic banks.

Geopolitical risk and banking performance: evidence from emerging economies

PurposeThis study delves into the critical issue of banks' stability and profitability, which are crucial elements for fostering economic growth and preserving depositor confidence. Specifically, we scrutinize the impact of geopolitical risks on the profitability and solvency of banks operating in emerging economies across the Middle East and Africa.Design/methodology/approachEmploying a two-step Generalized Method of Moments (GMM) approach, we analyze a comprehensive dataset comprising 125 banks spanning 13 emerging economies in the Middle East and Africa, covering the period from 2003 to 2019.FindingsOur study reveals a significant sensitivity of Middle Eastern banks to geopolitical risks, wherein effective anticipation or adaptation to these risks positively influences bank performance. Conversely, the impact of geopolitical risk on African banking profitability appears inconclusive and statistically insignificant. These nuanced findings underscore the complex interplay between geopolitical dynamics and financial performance in diverse regional contexts, with implications for policymakers and industry stakeholders.Practical implicationsOur findings underscore the need for nuanced policy responses and risk management strategies tailored to the unique challenges posed by geopolitical dynamics in emerging markets. Furthermore, they highlight the importance of continued research efforts to deepen our understanding of these complex interactions and inform more effective decision-making in the financial sector.Originality/valueAmidst growing recognition of the importance of geopolitical risks in financial markets, empirical studies exploring their precise impact on bank performance remain scarce. This study fills this gap by offering a pioneering investigation into the influence of geopolitical risks on bank profitability and solvency, using advanced econometric techniques and a substantial, diverse sample of banks in emerging economies across the Middle East and Africa.

Post-amalgamation Performance Review of Six Public Sector Banks in India

Consolidation of public sector banks (PSBs) is a part of reorganisation efforts with an aim to improve their profitability, solvency and efficiency. Of late merger of five subsidiaries of State Bank of India and Bharatiya Mahila Bank Ltd with it in April 2017 has kindled interest in restructuring of unprofitable banks by merging them with a profitable one. In August 2019, the Government of India announced amalgamation of 10 PSBs constituting them into four entities under Punjab National Bank, Canara Bank, Union Bank of India and Indian Bank. Earlier in April 2019, another merger had taken place following the integration of Dena Bank and Vijaya Bank with Bank of Baroda. Studies reveal that while in European countries bank mergers led to improved efficiency, in Asian countries like Indonesia recapitalisation and diversification of banks improved their profitability. In a study of Nigerian banks in Africa it is revealed that post-merger, employee morale diminishes due to stress and anxiety arising out of possible job loss and possible challenges to be met in the new environment. In the present study, the authors have tried to ascertain how profitability, solvency and efficiency of banks improved post-amalgamation in six PSBs. The outcome of the result is a mixed one, while some banks improved their profitability and solvency parameters, for others it is not so perceptible. However, efficiency indicators do not have any significant result for all six of them after amalgamation.

FINANCING GROWTH AND BANK RISK: EMPIRICAL EVIDENCE FROM INDONESIA

This study examines the crucial issue of the impact of financing growth on various dimensions of Islamic Banks in Indonesia. The growth of financing affects bank risk, profitability, and solvency. The main objective explains the relationship between financing growth and key performance indicators. The study uses ROA for profitability, EQTA for capital adequacy, NPF for bank risk, and the natural logarithm of Total Assets as a proxy for bank size. LIQD and CIR are included as additional variables to provide a more comprehensive analysis. Data for the period Q1 2012 to Q4 2020, obtained from the publication report on the OJK website. Using multiple linear regression, the findings showed a negative relationship between bank risk and financing growth. In addition, the growth of financing has a positive effect on both profitability and solvency of banks. This confirms the importance of prudential principles to optimize risk management strategies, especially in the context of a growing role in financing growth in Islamic banks.

Strategies for effective management of loans: A case study of keystone Bank plc

In this study, strategies for effective loans management using keystone bank plc as a case study was investigated. Survey research methodology was adopted via structured questionnaire containing both open and closed ended questions administered to 120 respondents who were management staff of Keystone bank at both head and corporate offices. Likert scale was used in the questionnaire formulation and Hypothesis was tested using chi square at 0.05 level of significance. The result revealed that corporate loan portfolio diversifications is the most effective technique of loan portfolio management. Also, preference function allows banks compare risky portfolios and rank them according to the degree of satisfaction. Problems encountered with management of loan portfolio were identified to include insider abuse, increased perception of risk regarding the solvency of other banks within the banking system and anticipated decline in the value of the collateral used by the banks to secure the loans. The result obtained indicated that there is significant relationship between loan portfolio management and productivity. It is recommended that Keystone bank should focus on exposure assessment involving the credit review and a valuation of the collateral based on the data provided by the credit applicant. Also, effective risk management based on the risk regarding the solvency of other banks within the banking system should be implemented. Adequate provisions for bad loans that have very little chance of being recovered should be provided. In conclusion, there is significant relationship between loan portfolio management and productivity.

Basel III countercyclical bank capital buffer estimation and its relation to monetary policy

This paper proposes a new model to estimate the countercyclical bank solvency capital buffer established in Basel III. The model lies in a flexible semi-nonparametric approach to capture the probability distribution of the capital adequacy ratio, but also a stochastic Ornstein–Uhlenbeck process that incorporates components of the cyclical behavior. We measure the risk of breaching the minimum capital threshold that separates the countercyclical capital buffer from other capital components and analyze its relationship with macroeconomic variables such as interest rates, credit levels, and credit-to-GDP gaps. Furthermore, a vector autoregressive model is estimated to test the existence of the bank-capital channel and the risk-taking channel. The application to Germany and the Netherlands shows that countercyclical buffers are more accurate when skewness and kurtosis are considered and the probability of breaching the regulatory threshold is sensitive to macroeconomic signals. Overall, our model seems to be a useful tool for monitoring prudential policy and as a guide to establish countercyclical capital buffers.

Impact of specific liquidity shocks on the bank's solvency

PurposeThis study aims to demonstrate and measure the impact of liquidity shocks on a bank’s solvency, especially when the bank does not hold sufficient liquid assets.Design/methodology/approachThe proposed model is an extension of Merton’s (1974) model. It assesses the bank’s probability of default over one or two (short) periods relative to liquidity shocks. The shock scenarios are materialised by different net demands for the withdrawal of funds (NDWF) and may lead the bank to sell illiquid assets at a depreciated value. We consider the possibility of second-round effects at the beginning of the second period by introducing the probability of their occurrence. This probability depends on the proportion of illiquid assets put up for sale following the initial shock in different dependency scenarios.FindingsWe observe a positive relationship between the initial NDWF and the bank’s probability of default (particularly over the second period, which is conditional on the second-round effects). However, this relationship is not linear, and a significant proportion of liquid assets makes it possible to attenuate or even eliminate the effects of shock scenarios on bank solvency.Practical implicationsThe proposed model enables banks to determine the necessary level of liquid assets, allowing them to resist (i.e. remain solvent) different liquidity shock scenarios for both periods (including eventual second-round effects) under the assumptions considered. Therefore, it can contribute to complementing or improving current internal liquidity adequacy assessment processes (ILAAPs).Originality/valueThe proposed microprudential approach consists of measuring the impact of liquidity risk on a bank’s solvency, complementing the current prudential framework in which these two topics are treated separately. It also complements the existing literature, in which the impact of liquidity risk on solvency risk has not been sufficiently studied. Finally, our model allows banks to manage liquidity using a solvency approach.

Bank capital and liquidity creation in Sub-Saharan Africa: the role of quality institutions

PurposeThis study investigates the relationship between bank capital and liquidity creation and further examines the effect that institutional quality has on this relationship in Sub-Saharan Africa (SSA).Design/methodology/approachThe data comprise 41 universal banks in nine SSA countries from 2010 to 2022. The study employs the two-step system generalized methods of moments and further uses alternative estimators such as the fixed-effect and two-stage least squares methods.FindingsThe empirical results show that bank capital has a direct positive and significant effect on liquidity creation. In addition, the positive effect of bank capital on liquidity creation is enhanced, particularly in a strong institutional environment. The results imply that nonconstraining capital regulatory policies bolster bank solvency, improve risk-absorption capacity and increase liquidity creation.Practical implicationsThis study has several policy implications. First, it provides empirical evidence on the position of banks in SSA on the financial fragility and risk-absorption hypothesis of bank capital and liquidity creation debates. This study shows that the effect of bank capital on liquidity creation in SSA countries is positive and supports the risk-absorption hypothesis. Second, this study highlights that a country's quality institutions can complement bank capital to increase liquidity creation. In addition, this study highlights that nonconstraining capital regulatory policies will bolster bank solvency, improve risk-absorption capacity and increase liquidity creation.Originality/valueThe novelty of this study is that it introduces the country's quality institutional environment into bank capital and liquidity creation links for the first time in SSA.

Діагностика та оцінка впливу фінансово-економічних криз на розвиток банківської системи України

The aim of the article is to develop the theoretical foundations for diagnosing and assessing the impact of financial and economic crises on the stability of functioning of the banking system of Ukraine. The article identifies the main financial and economic crises from 1998 to 2022, as well as assesses the consequences of their impact on the banking system of Ukraine. The main causes of financial and economic crises have been systematized, it has been found that an effective instrument for counteracting the consequences of financial and economic crises on the banking system of Ukraine is the introduction by the National Bank of Ukraine of the inflation targeting regime to maintain the stability of the Hryvnia. The dynamics of changes in the NBU discount rate for 2014–2023 is studied and the NBU’s application of restrictive policy measures in 2015, 2018 and 2022, as well as expansionary policy measures in 2020 to financially stabilize the banking system is verified. It is proved that changes in the NBU discount rate directly affect the cost of loans and deposits. The structure is assessed and the balance of payments of the country for 2015–2022 is calculated, the excess of imports over exports is determined, also determined is the existing deficit of the balance of payments, which leads to a decrease in the country’s foreign exchange reserves, the outflow of currency from the country and the devaluation of the Hryvnia in general. It is proved that during the periods of financial and economic crises there is an increase in the profitability of the NBU. An assessment of the indicators of financial stability of the banking system has been provided and the main trends in their changes over the past five years have been diagnosed (currency exchange rate stability, structure of banking resources, financial results of banks and their compliance with prudential standards, settlements of the NBU with the State Budget of Ukraine, obligations to the IMF, business activity, financial stability, liquidity, solvency of banks, etc.). The article identifies and substantiates the key problems of functioning and development of the banking system of Ukraine, taking into account the destructive consequences of financial and economic crises, also further prospects for research on the chosen topic of scientific work are outlined.

The Impact of Financial Management Efficiency on the Financial Solvency of Banks on Iraq

The study aims to investigate the impact of financial management efficiency (financial planning, internal control, administrative control) on the financial solvency of Iraqi banks. The quantitative approach was used by developing a digital questionnaire that was distributed to a purposive sample of the study population, which includes senior management employees (General Director, Deputy Director, Financial Manager Administrative Manager) in the Iraqi banking sector, which number (13) banks. 99 valid questionnaires were retrieved for statistical analysis, and to answer the study’s questions and hypotheses, the data were analyzed using SPSS.

Інструменти грошово-кредитної політики воєнного часу

Wartime poses numerous challenges at the micro and macro levels. One of the key challenges in this context is macro-financial stability. The answer to this challenge can be provided by an effective transmission mechanism of the State’s monetary policy. The aim of the article is to analyze the features of a set of measures taken by the NBU in the period of 2022–2023 in response to the intensification of russian armed aggression in the plane of the transmission mechanism of monetary policy. The article analyzes the challenges of monetary policy in wartime, including financing military needs, ensuring the stability of the banking system, managing international reserves, and exchange rate flexibility. The key measures on the part of the NBU, such as the purchase of government bonds, ensuring the liquidity of the banking system and stimulating economic growth, are highlighted. A significant increase in international reserves, which has become an important factor in macro-economic stability in wartime, is indicated. The specifics of monetary policy in the conditions of wartime, its impact on investment, consumption, and inflationary pressure are considered; the need for close cooperation between the Central Bank and the Government in this area is underlined. Particular attention is paid to the financing of military expenditures and their impact on monetary policy. The measures taken by the NBU to prevent a liquidity crisis and maintain the solvency of banks are analyzed. The contradiction between the financing of the budget deficit and the stability of the national currency is considered. The need to maintain macro-financial stability through a high discount rate and exchange rate adjustment is indicated. The importance of maintaining the stability of the financial system in wartime conditions is emphasized. The proposed study can be useful for researchers and analysts of monetary policy, central banks, governments, and international financial organizations. Prospects for further research are proposed in the direction of integration of Ukraine’s monetary policy in the context of development of the national economy at the post-wartime stage of development.

Competition, liquidity creation and bank stability

AbstractWe examine the conditioning role of competition in affecting the relationship between liquidity creation and bank risk in a sample of US banks from 2001 to 2016. We find aggregate evidence that competition is related to bank fragility as proxied by the Z‐score both directly and indirectly through its interaction with liquidity creation. However, when the ex‐ante level of liquidity creation is low and/or competition is low to moderate, competition is associated with an improvement in bank risk at a given level of liquidity creation. In addition, the joint fragility effect of competition and liquidity creation manifests more strongly, in an economic sense, in poorly capitalised banks and large banks with assets of more than $3 billion. Our findings emphasise the crucial role of targeted competition regulations in ensuring bank solvency and systemic stability while maintaining a robust level of competition.

Interaction between credit risk, liquidity risk, and bank solvency performance: a panel study of Indian banks

Interaction between credit risk, liquidity risk, and bank solvency performance: a panel study of Indian banks

Research on the Evaluation of Core Competitiveness of Commercial Banks: Based on the Perspective of Digital Transformation

With the full arrival of the financial technology 3.0 era, commercial banks have realized the importance of using financial technology to accelerate their transformation and upgrading. Studying the influencing factors of commercial banks digital transformation has important practical implications for commercial banks to improve their core competitiveness. In the respect of digital transformation, this paper uses principal component analysis method to evaluate the core competitiveness of some typical commercial banks in depth. Finally, it draws some conclusions that with the development of digital transformation, the scale, profitability and solvency of commercial banks become stronger. In this case, core competitiveness of banks becomes better. Driven by digital transformation, the scale, profitability and solvency of commercial banks show a clear positive relationship with the core competitiveness of commercial banks. According to the research conclusions, this paper shows that the development strategies of using digital transformation to improve core competitiveness should be different for banks of different sizes and degrees of development, but all commercial banks should pay attention to the advantages of what digital transformation can bring in improving core competitiveness.

Interaction between liquidity risk and bank solvency, a crucial effect in a framework of simultaneous equations

The “2008-09” global financial crisis has underlined that the interaction between liquidity risk and bank solvency forms an important factor that makes banks particularly vulnerable to a global crisis. At the same time, stress-testing models do not consider the dynamics between solvency and liquidity risk the possibility of reducing the impact of stress on bank solvency and financial stability. In this context, the aim of this paper is to examine this highly relevant issue in the financial literature, and answer to the main question: Is the interaction between solvency and liquidity risk empirically significant in the context of the Algerian banks? Based on an econometric model using a simultaneous equation approach on panel data of 19 banks over 6 years running from (2016 to 2021). Our results validate our hypothesis about the interaction and show that these two risks are determined simultaneously. Building on this finding, we suggest that the authorities should emphasise developing integrated liquidity and solvency stress tests. Our results also show the need of the Algerian banks to set up a regulatory framework for liquidity in line with the international prudential regulations to enhance the performance of this sector.

The impact of bank competition on contagion risk: The case of Mexico

This paper examines the link between bank competition measures and risk indicators using quarterly interbank exposures data for all banks in Mexico during 2008Q1–2019Q1. The classical literature focuses on disentangling the link between competition and individual bank solvency risk. In this paper, we take one step forward in analyzing the relationship between competition and systemic risk. We use counterfactual bank-level contagion risk indicators as a proxy of systemic risk to assess their relationship with traditional competition measures. Our main finding indicates a negative relationship between the bank-level Lerner index and systemic risk. This means that an increase in competition is associated with an increase in systemic risk. Additionally, we find that the implementation of regulatory reform during the period studied does not affect this relationship.

Using the Z-score to analyze the Financial Stability of Conventional Commercial Banks in Bangladesh

This paper aims to measure and identify the determinants of financial stability of conventional commercial banks of Bangladesh listed on the Dhaka Stock Exchange. In the first step, the researcher calculates an accounting-based Z-score to measure the financial stability of the 23 sample banks over the period 2013-2022. In the second phase of the study, panel data regression analysis is conducted to identify the bank-specific determinants of financial stability. The exogenous variables include return on asset, income diversity, bank size, non-performing loan liquidity, capital adequacy, and management efficiency. The endogenous variable is the financial stability measured by z-score. The study provides empirical evidence of the bank-specific factors affecting the solvency of conventional commercial banks in Bangladesh.

Bank solvency stress tests with fire sales

We present a new framework combining current methods of bank solvency stress tests with a model of fire sales. We apply the framework to the stress tests conducted by the European Banking Authority. Fire sales are described by an equilibrium model balancing leverage improvements and drops in security prices. Additional bank losses caused by fire sales are significant and go beyond the trivial fact that with fire sales we will get bigger losses. Ignoring potential fire sales effects may lead to a false sense of resilience by assuming that institutions, which are in fact fragile, are resilient.

Prudential regulation and bank solvency based on flexible distributions: An example for evaluating the impact of monetary policy

AbstractThis paper proposes new risk measures by accurately estimating the components of solvency risk and focusing on prudential policy implementation. We use semi‐nonparametric statistics to model the stylised facts of the probability density functions, particularly the higher‐order moments of three variables: the solvency decline rate, the tier decline rate and the portfolio growth rate. The proposed measures allow the evaluation of the impact of expansionary monetary policy on the risk‐taking transmission channel and implementation of the minimum solvency ratios required by banking regulators based on the estimation of quantile risk metrics. Using a database of Colombian solvency indicators, we show that the liquidity injection measures employed in response to the COVID‐19 pandemic led to a significant increase in portfolio risk in the banking system. The proposed methodology is suitable for micro‐ and macroprudential regulation at different levels of portfolio risk aggregation.

Is Macroprudential Policy Instrument Blunt? Empirical Analysis Based on Japan's Experience from the 1970s to the 1990s

AbstractMacroprudential instruments, especially sectoral instruments, are considered to be precise tools that work only in areas of concern. However, it has not yet been fully tested in practice whether they affect only the targeted sectors and do not have undesirable spillover effects on nontargeted sectors. To fill this gap, we empirically study the impact of an instrument called Quantitative Restriction (QR), a policy tool used in Japan in the 1990s to curb excessive land price rises by requiring banks to contain real estate lending. We use narrative records to construct QR shocks and estimate their impact using a factor‐augmented vector autoregression (FAVAR). Our findings are summarized as follows. First, contractionary QR shocks reduced not only real estate lending and land prices, but also lending to other industries, putting downward pressure on the macroeconomy and lowering bank solvency. Second, industry groups and banks with balance sheets that were more exposed to changes in land prices and real estate transactions responded greater to these shocks, illustrating the role of balance sheet composition in spillovers and the importance of choosing the right timing for implementation following these shocks, suggesting that there may have been leakages through these institutions. Third, some nonbank financial institutions that were not required to report the loan results to the authorities did not reduce their lending following these shocks, which accords with the view that there were leakages through these institutions.