Stability Of Banking System Research Articles

THE INSTITUTIONAL STRUCTURE OF PRUDENTIAL BANKING SUPERVISION SYSTEM: ACROSS THE WORLD REVIEW

The article is devoted to the research of prudential banking supervision, as one of the key factors for ensuring financial stability. The fundamentals of prudential risk-oriented banking supervision system’s organization in current circumstances are defined. Particular attention of this article is paid to the question of optimal institutional organization of prudential banking supervision system with an aim to ensure stability of banking system of the country. The practice of foreign counties in organization of prudential banking supervision system is considered.

Measures of systemic risk and financial fragility in Korea

This paper provides a quantitative metric for financial stability of Korean commercial banking system based on the Tsomocos (J Math Econ 39(5–6):619–655, 2003) model, for which we use market data as proxies for probabilities of default and equity valuation of the banking sector. We estimate the effect of the probability of default and the equity valuation of the banking sector on real output using a vector error correction model (VECM). In addition, we estimate the contributions of individual banks to systemic risk using CoVaR and MES (Marginal Expected Shortfall). CoVaR is estimated based on the methodology of Adrian and Brunnermeier (2010), and MES is estimated based on Shapley value methodology which has been introduced by Tarashev et al. (2010).

Foreign Currency Lending and Banking System Stability - New Evidence from Turkey

Regulators in developing countries have started to strict banks' foreign currency (FC) lending. Following others, in June 2009, in what is considered surprise the Turkish Government removed a provision from its existing laws that had allowed Turkish residents to borrow in foreign currency from banks operating in Turkey. The development ended a long era of foreign currency lending for consumer loans. This paper studies the determinants and consequences of foreign currency lending for banks in Turkey in the run-up to this significant policy change. By using detailed balance sheet data on the Turkish lira and foreign currency composition of bank assets and liabilities between 2002 and mid-2009 when the policy change was initiated, we evaluate the drivers of FC lending by banks in Turkey along with consequences for the banking system in particular and for the economy in general. We highlight possible risks to the Turkish banking system as a result of the system's heavy exposure to exchange rate and default risks. In doing so, we show that the policy change was not necessarily a surprise but a cautionary step in the right direction to help keep Turkish banking system stable.

Australian Syndicated Loans: Domestic and Foreign Banks

Australian banks are different from foreign banks in terms of domestic reputation, sources of funding and regulatory environment. This study explores whether there is a home market advantage and reputation effect in the price of syndicated loans led by the big 4 domestic banks versus those arranged by foreign banks. The analysis takes into account important factors which may determine potential value of lead bank reputation, such as availability of borrower credit rating, past lending relationships, and loan type. Our results confirm the existence of a home market advantage and reputation effect in that loans arranged by the big 4 domestic banks carry lower interest rates than those led by foreign banks. The loan price savings offered by domestic lead banks are enjoyed by unrated borrowers, relationship borrowers, and those financed through a revolving loan. When a distinction is made regarding loans originated before and after GFC, we find that the average loan prices to be higher post GFC. The magnitude of such price increases is, however much lower for loans led by the domestic big 4 banks. This is a reflection on the stability of domestic banks and Australian banking system.

Copula-application to modelling Russian banking system capital adequacy according to Basel II IRB-approach

According to the strategy of the banking system development until 2015, the Central Bank of Russia is going to implement Basel II Internal-Ratings-Based (IRB) approaches in 2015, while Basel III is planned to be introduced in full starting from 2019. Taking into account the effects of the Basel II regulation during the crisis 2008-2009, in particular, the excessive procyclicality of the capital requirements, it is important to investigate the consequences of its adoption for the stability of the banking system in Russia. The aim of this paper is to model the Russian banking system capital adequacy under the Basel II IRB approach. The main hypothesis tested refers to the existence of the procyclicality effect of the capital adequacy for the whole banking system as if Basel II has been introduced. The research is based on publicly available quarterly financial statements of all the Russian banks for the period 2004Q1-2010Q1. Copulas are used to model joint banking risk distribution. The methodology consists of three steps. First of all, the copula structural shift for the joint risk distribution for the Russian banking system is assessed in order to examine the dynamics of the individual risks' dependence and analyze the change in the level of the banking system stability. Secondly, risk-weighted assets are modelled using copula. Finally, the Value-at-Risk approach is employed to arrive at the capital adequacy ratio for the Russian banking system. The analysis of the copula structural shift shows the downward change in the risks' interconnection starting from the third quarter of 2005 being associated with the increased stability of the banking system. The Basel II capital adequacy ratio fell to the minimum of 4% during the period 2009-2010, while the Basel I capital adequacy ratio was well above 15%. However, the hypothesis of the procyclical nature of Basel II is rejected. The research undertaken highlights the necessity for further investigation and calibration of the models proposed in Basel II and Basel III. Moreover, it is important to work out the appropriate policy options with respect to banks bearing high risks under Basel II.

Separation of Commercial and Investment Banks Activities and Its Impact on Economic Growth

Economic growth of a country is depends on its financial system; banks contribute positively towards economic health and stability. Therefore, it is important for a country to have stable banking system, which is closely monitored and regulated by its legislative system. This need becomes even more relevant, when the episodes of financial crises are common (event of 1930 and 2007). From historical point of view in the U.S., the episode of financial crises in 1933 enforced the implementation of Glass-Steagall Act. The crash in stock market affected the banks; as a result, one out of every five banks failed (Crawford, 2011). Regulator and legislator questioned underwriting activities of commercial bank. They suspected that these activities caused a conflict of interest by suggesting their customers to buy securities from the bank where they have been written. These dubious activities contributed stock market crash and bank failures. Banks were given a choice to choose between commercial and investment banking activities (as part of Glass Steagall act) and a separation was enforced. Many had strong reservations against the act and after almost 66 years, the act was abolished. A new life was given to the banking sector in the U.S. and commercial banks were allowed to perform investment-banking activities. Once again, the history repeated itself in 2008 and global economy faced bigger crises then 1930 (Wilmarth, 2009). The regulator and legislator again asking question on the abolishment of Glass-Steagall Act and its justification. This paper analyses two aspects. First, it analyzes the fact that both commercial and investment banks play a role in economic growth and failure in either of the banks could affect economic growth. Second, it discusses the hypothetical approach that the likelihood of having this impact on economic growth is bigger, when banks were allowed to mix their activities (As universal bank, due to changes in legislation and regulation in U.S.). As universal banks posses’ higher risk and were blamed to be the reason behind financial failure. It was concluded that both the commercial and investment banks play a vital role in the economic growth of a country, the failure in either of them could affect economic growth. In addition, universal banks in U.S. (which came across due to changes in legislation and regulation) contribute towards recent financial crises; therefore, exert higher impact on economic growth.

Credit Contagion in Financial Markets: A Network-Based Approach

We propose a network-based structural model of credit risk to demonstrate how idiosyncratic and systemic shocks propagate across the banking system and evaluate the costs. The banking system is built as a network of heterogeneous banks which are connected with one another. In such a system, single credit events propagate through the interbank market from debtors to creditors and across the system. The shock is imposed as an unexpected event. We demonstrate that while idiosyncratic shocks cannot substantially disturb the banking system, a systemic shock of even a moderate magnitude can be highly detrimental. Such shock includes a huge contagious potential. We demonstrate that the costs of the shock are largely determined by the extent of contagion and range from negligible to catastrophic. The results imply that a severe crisis has to be initiated by a systemic shock of at least moderate magnitude. Capital ratio and the bank size are two additional factors of the banking system stability. Finally, credit risk analysis is sensitive to the network topology and exhibits a profound nonlinear characteristic.

Shadow Banking Regulation

Shadow banks conduct credit intermediation without direct, explicit access to public sources of liquidity and credit guarantees. Shadow banks contributed to the credit boom in the early 2000s and collapsed during the financial crisis of 2007–2009. We review the quickly growing literature on shadow banking and provide a conceptual framework of shadow banking regulation. Since the collapse, regulatory reform efforts have aimed at strengthening the stability of the shadow banking system. We review these reform efforts for shadow funding sources including asset-backed commercial paper (ABCP), tri-party repurchase agreements (repos), money market mutual funds (MMMFs), and securitization. Despite significant effort by lawmakers, regulators, and accountants, there has been uneven progress in achieving a more stable shadow banking system.

Bank resilience to systemic shocks and the stability of banking systems: Small is beautiful

Utilising a novel empirical approach and an extensive sample of listed European banks, we identify which bank characteristics offer a shelter from systemic shocks and compare the relative effects of several hypothetical prudential rules on a bank’s risk exposure. While the results show that restrictions on a bank’s leverage ratio and the imposition of liquidity requirements, as in the Basel III Accord, may improve the resilience of a bank to systemic events, they also demonstrate that bank size, the share of non-interest income and asset growth (none of which are at the centre of the new regulatory landscape) are key determinants of a bank’s risk exposure. In particular, the introduction of a cap on bank absolute size appears the most effective tool, ceteris paribus, to reduce the default risk of a bank given systemic events. Furthermore, in spite of the integration process of the financial industry in Europe, the analysis presented here shows that such a cap should be country-specific with smaller economies requiring smaller banks. Finally, we show that the strengthening of individual bank stability obtained via size restrictions is accompanied by a reduction of the contribution to systemic risk for banks which are relatively large compared to the domestic economy.

Shadow Banking Regulation

Shadow banks conduct credit intermediation without direct, explicit access to public sources of liquidity and credit guarantees. Shadow banks contributed to the credit boom in the early 2000s and collapsed during the financial crisis of 2007-09. We review the rapidly growing literature on shadow banking and provide a conceptual framework for its regulation. Since the financial crisis, regulatory reform efforts have aimed at strengthening the stability of the shadow banking system. We review the implications of these reform efforts for shadow funding sources including asset-backed commercial paper, triparty repurchase agreements, money market mutual funds, and securitization. Despite significant efforts by lawmakers, regulators, and accountants, we find that progress in achieving a more stable shadow banking system has been uneven.

Financial Crisis, Regulation and Competition: The Romanian Banking Experience

By the early 1970s, competition in the banking system was limited. Reduced competition in the banking system was due to regulations adopted by many countries after the financial crisis of the 1930s. At that time, authorities believed that the high risks which banks have assumed, in a fierce competition context, led to destabilization of the financial system. After the 1980s, deregulation, financial liberalization and technological change were important factors that have led to increased competition in the banking sector. Therefore, an important issue for regulators and supervisors is the relationship between competition in the banking system and financial stability. The specialty literature, both theoretical and empirical, has not reached a consensus on the effects of competition on financial stability. This problem became more acute under the global financial crisis. Against this background, the paper analyses the role of competition in the Romanian banking system in the context of the global crisis. The paper is structured as follows: the first section reviews the arguments supporting that increased competition in banking system leads to improved financial stability; the counterarguments are mentioned later. The role of regulations in managing the competition in banking system is also emphasised. The last section analyzes developments on competition and stability in the Romanian banking system.

The Application of Load Runner in Message Broker Software of Financial Fusion in a Stated-Owned Bank

LoadRunner is a powerful tool for performance testing, facing the widely use of Financial Fusion's Message Oriented Middleware----Message Broker in a stated-owned bank, with the use the system hardware and software environment of the bank, build the performance testing program to test Message Broker. Using LoadRunner to achieve the Base Testing, Absolute Concurrent Testing and Stability Testing, From these testing, it has been achieved the testing results of performance testing of the messaging middleware software Message Broker, this can provide a theoretical basisfor the application of Message Broker in processing messaging in banks, it also provide theory with the stability of banking systems.

Financing Platforms of Local Governments and Their Role in Credit Boom in China in 2009-2010

The implementation of the anti-crisis program by the PRC State Council led to a credit boom in 2009-2010. The local governments specially established companies (financing platforms) were among the most vigorous borrowers. The article analyzes the influence of these companies on the banking system stability. The author concludes that the rapid accumulation of the financing platforms debt is mainly due to the revival of political lending and may result in a substantial increase of bad debt.

ANALISIS TERHADAP CETAK BIRU BANK INDONESIA PERIODE 2002-2011 UNTUK PENGEMBANGAN PERBANKAN SYARIAH INDONESIA

Research entitled “Analysis of the blue print of bank Indonesia for the development of Sharia banking in Indonesia period 2002-2011” aims to find out the blueprint of Islamic banking 2002-2011 issued by Central Bank of Indonesia, described the already realized targets of the blueprint of Islamic banking and those which not yet realized, also find out the factor which causes the targets the blueprint of Islamic banking were unrealized. This research is a descriptive research with in-depth analysis method. Data collection methods used was observations and interviews. The results showed that the targets of Indonesian Central Bank’s blue print covering the four things; first, adherence to the principles of Sharia; second, prudence; third, the improvement of operational efficiency and high competitiveness; fourth; stability and expediency of Islamic banking system for the economy.
 Blueprint objectives outlined in the strategic initiatives that are generally already implemented include: improving the understanding of Islamic finance, facilitating the formulation of norms of Islamic finance, conducting studies in surveillance and integrated arrangement system, refining the provisions of office network, developing “exit and entry” policy settings, enhancing the quality of human resources, creating strategic alliances with related agencies, devising the concept of the “takaful” deposit, pushing the involvement if rater institutions in banking activities, and encouraging an increasing in the role of financing with profit-loss sharing method.
 The objectives outlined in the strategic initiatives that have not been implemented were: the development of the concept of incentives for adherence to the principles of the Sharia, the development of real time supervision, the fulfillment of the needs of people who want Sharia banking services throughout Indonesia with 5% market share, the materializing of the Islamic banking “kaffah” functions, and the ability to serve all segments of the community.
 The factors those cause unimplemented strategic initiatives were the lack of knowledge and understanding of the people about Islamic banking; the lack of human resources with sufficient skill and capability in Islamic economy especially about the laws relating to Islamic banking, the scarcity of funds for socialization and information technology needs, also the assumption of 5% market share defined in accordance with the fact that the current Islamic banks consumers aren’t only muslims but also non-Muslim community

THE INFLUENCE OF DEPOSITS INSURANCE ON THE STABILITY OF THE BALTIC STATES BANKING SYSTEM / INDĖLIŲ DRAUDIMO ĮTAKA BALTIJOS ŠALIŲ BANKŲ SISTEMOS STABILUMUI

The processes in the financial markets in the last years revealed the new research directions in the risk for market actors valuation area. Globalization processes and their impact on a country's financial system stability affects banking system not only with the clear macroeconomic indicators, but also with the panic and uncertainty of resources providers – depositors. Deposit coverage insurance limit increase as risk management tool for Baltic States banking system stability in the period of 2005–2009 was implemented. These actions helped commercial banks, participating in deposit insurance system, to keep their credit ratings and financial stability. However, the main concern is about whether this tool is more theoretical or practical for maintaining stability of the banking system, and what influence to macroeconomic factors make deposits sum in country's banks. Santrauka Procesai, vykstantys finansų rinkose, pastaraisiais metais atskleidė naujas tyrimų kryptis, siejamas su rinkos dalyvių rizikos vertinimu. Globalizacijos procesai ir jų įtaka šalies finansų sistemos stabilumui daro įtaką bankų sektoriui ne tik per aiškiai susiejamus makroekonominius rodiklius, tačiau ir per finansinių išteklių teikėjų – indėlininkų – patiriamą riziką ar vertinamą neapibrėžtumą. Indėlių draudimo limitų padidinimas, kaip rizikos valdymo įrankis, Baltijos šalyse buvo įdiegtas 2005–2009 metų periodu siekiant užtikrinti bankų sistemos stabilumą. Šie veiksmai padėjo komerciniams bankams, dalyvaujantiems indėlių draudimo sistemoje, palaikyti savo kredito reitingus ir užsitikrinti finansinį stabilumą. Vis tik pagrindiniu susidomėjimo šaltiniu išliko siekis išsiaiškinti, ar pasiūlytos priemonės yra labiau teorinės nei praktinės stengiantis išlaikyti bankinės sistemos stabilumą, taip pat įvertinti, kaip makroekonominiai šalių rodikliai veikė indėlių kitimą analizuojamų šalių bankuose.

CONTAGION RISK IN AN EVOLVING NETWORK MODEL OF BANKING SYSTEMS

This paper develops an analytical model of contagion risk in banking systems with tiered structure. It explores the respective effects of banking network structure and bank activity on contagion risk in banking network evolution. The findings suggest that increasing interbank connections is conducive to handling banking crisis and reducing the effect of contagion risk, but its positive effect is limited; raising bank reserve ratio will enhance the stability of individual banks to a certain extent, but it may immediately lead to liquidity problems for banks that have less excess reserves, causing the occurrence of contagion risk; an excessive drive for risk assets with high return may bring high risk to banks and lead to instability of banking systems; the bank risk preference is crucial to the stability of banking systems, and the radicalness of it may lead to greater systemic instability.

Sources Of Non-Performing Loans In Turkish Banking System

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: Times New Roman; font-size: x-small;">The purpose of this paper is to examine the impact of the unlimited deposit insurance on non-performing loans and market discipline. Deposit insurance program play a crucial role in achieving financial stability. Governments in many advanced and developing economies established deposit insurance schemes for reducing the risk of systemic failure of banks. Deposit insurance has a beneficial effect of reducing the probability of a bank run.<span style="mso-spacerun: yes;">  </span>However deposit insurance systems have its own set of problems. Deposit insurance systems create moral hazard incentives that encourage banks to take excessive risk. Turkey established an explicit deposit insurance system in 1960. Until 1994, the coverage determined by a flat rate but in that date, Turkey experienced a major economic crisis. In April 1994, Turkish government started to apply an unlimited deposit insurance scheme to restore banking system stability. Unlimited deposit insurance caused a remarkable increase at non-performing loans. This paper empirically estimates the impact of unlimited deposit insurance system on non-performing bank loans (NPLs) and analyses the other potential sources of NPLs. </span></p>

Russia’s Financial System Strategy: Stimulating Modernization of Economy (Banking Sector, Monetary Policy, Taxes)

This paper provides Russia’s financial system strategy covering three blocks: banking sector, monetary policy and taxes. The post-crisis strategy in banking sector contains proposals on achieving soundness and stability of Russian banking system, problem banks restructuring, as well as increase in efficiency of banking institutions. The post-crisis monetary policy presumes multi-targeting of different goals, among which are economic growth and balanced, less volatile financial system. Proposals on tax regime improvement include tax burden decrease and stimulating innovations.

Burden Sharing: From Theory to Practice

The handling of cross-border banks in difficulties gives rise to coordination problems between home and host countries. Goodhart and Schoenmaker (2006, 2009) have suggested to implement an ex ante burden sharing mechanism to overcome the co-ordination failure of national authorities. While burden sharing is technically not very difficult, it requires political cooperation between sovereign nations. The financial crisis has provided some spectacular examples of coordination failure: the failures of Fortis, Lehman and the Icelandic banks illustrate how much damage the absence of an adequate cross-border framework can do to the stability of the global banking system. In the aftermath of the financial crisis, some burden sharing agreements are now being put in place.

Basel III and Responding to the Recent Financial Crisis: Progress Made by the Basel Committee in Relation to the Need for Increased Bank Capital and Increased Quality of Loss Absorbing Capital

Developments since the introduction of the 1988 Basel Capital Accord have resulted in growing realisation that new forms of risks have emerged and that previously existing and managed forms require further redress. The revised Capital Accord, Basel II, evolved to a form of meta regulation – a type of regulation which involves the risk management of internal risks within firms. The 1988 Basel Accord was adopted as a means of achieving two primary objectives: Firstly, “…to help strengthen the soundness and stability of the international banking system – this being facilitated where international banking organisations were encouraged to supplement their capital positions; and secondly, to mitigate competitive inequalities.” As well as briefly outlining various efforts and measures which have been undertaken and adopted by several bodies in response to the recent Financial Crisis, this paper considers why efforts aimed at developing a new framework, namely, Basel III, have been undertaken and global developments which have promulgated the need for such a framework. Further, it attempts to evaluate the strengths and flaws inherent in the present and future regulatory frameworks by drawing a comparison between Basel II and the enhanced framework which will eventually be referred to as Basel III.