Stability Of Banking System Research Articles

Foreign bank presence in emerging markets: help or hindrance to banking system stability?

With financial liberalization during the 1990s, there was a marked increase in the involvement of foreign banks in emerging market economies. This study uses data from 32 emerging markets for the period 1999 to 2005 to investigate whether the presence of foreign banks promotes or hurts the stability of the banking systems in these economies. We find consistently that a greater presence of foreign banks does not harm banking system stability and, under some definitions, is associated with a statistically significant fall in the probability of a banking crisis. This result is robust across different ways of distinguishing foreign from domestic banks, thus providing useful information to policy makers and banking regulators.

Le « partage de la charge » : de la théorie à la pratique

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 Brothers 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. Classification JEL : F50, F53.

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.

El impacto de la entrada de la banca extranjera en los países en desarrollo

Realizamos una revisión de la literatura para explicar los factores que determinan la presencia de la banca extranjera en países en desarrollo. Asimismo, analizamos las evidencias empíricas de la entrada de esta banca en la eficiencia de la local y las repercusiones en la estabilidad de los sistemas bancarios locales. Consideramos que existen aspectos que no se han estudiado y pueden ser relevantes para la estabilidad del sector bancario de un país en desarrollo. Por ello proponemos realizar investigaciones sobre el impacto de la entrada de la banca externa en el crecimiento económico y las implicaciones de la evolución económica del país huésped y el país de origen en las actividades de esas instituciones extranjeras. El propósito es intentar despertar el interés de los investigadores por estudios que aporten un mayor conocimiento en este tema.

Banking Reforms for the 21st Century: A Perfectly Stable Banking System Based on Financial Innovations*

ABSTRACTAlthough bank loans themselves are somewhat illiquid because of private information, most of their cashflows are not. Recent financial innovations allow commercial loans to be liquefied via credit derivatives and actual and synthetic securitizations. The loan originating bank holds the remaining illiquid equity tranche containing the concentrated credit risk, private information rent and the ‘excess spread’ that incentivize the bank to continue to monitor and service the loans. Empirically, we find that the average size of the equity tranche is about 3% for the representative commercial loan portfolios in our sample. The liquefaction of bank loans makes possible a banking system that restricts the guaranteed accounts to be backed by 100% reserves and the non‐guaranteed deposits to be backed by liquid securitized loan tranches, while retaining the deposit‐lending synergy. Such a system is perfectly safe without deposit insurance and it renders banks bankruptcy‐remote without sacrificing a bank's traditional role as a financial intermediary.

Back to the basics in banking? A micro-analysis of banking system stability

This paper analyzes the relationship between banks’ divergent strategies toward specialization and diversification of financial activities and their ability to withstand a banking sector crash. We first generate market-based measures of banks’ systemic risk exposures using extreme value analysis. Systemic banking risk is measured as the tail beta, which equals the probability of a sharp decline in a bank’s stock price conditional on a crash in a banking index. Subsequently, the impact of (the correlation between) interest income and the components of non-interest income on this risk measure is assessed. The heterogeneity in extreme bank risk is attributed to differences in the scope of non-traditional banking activities: non-interest generating activities increase banks’ tail beta. In addition, smaller banks and better-capitalized banks are better able to withstand extremely adverse conditions. These relationships are stronger during turbulent times compared to normal economic conditions. Overall, diversifying financial activities under one umbrella institution does not improve banking system stability, which may explain why financial conglomerates trade at a discount.

THE RESEARCH OF CONCENTRATION EFFECT ON BANKING SYSTEM FINANCIAL STABILITY

The consolidation and concentration of banks around the globe is fueling an active public debate among scientists and politicians on the impact of concentration on banking system efficiency, competition, financial and hence macroeconomic stability. There has been greater tolerance of concentration in banking than in other industries, because of a presumed benefit of increased financial stability. As the results of many researches show the level of concentration in banking is higher than in other industries. The importance of concentration effect on banking system stability increased for several reasons in recent years. The main reason is substantial processes of banks consolidation and concentration both at a global and national level. Central banks and prudential regulators have responded to recent consequences of financial crises with an increased focus on financial stability. The third reason is growing interest of researchers on concentration effect on banking system efficiency, stability and economic growth. Growing focus on baking system stability is not surprising, given banks’ central role in financial systems and economies. During several decades the boundaries between banks and other parts of financial markets have been gone as banks have expanded into other activities including in securities markets, funds management and insurance. The dramatic growth in the assets size of the global banks over the past two decades had strengthened theirs role both at a global and national level. The aim of this article is to analyze global trends in banking concentration and concentration effect on banking system stability. The research methods were used in this paper: the analysis and synthesis of scientific literature, correlation and regression analysis, statistical methods as well as empirical research of the information on 162 banking systems concentration during period of 1987-2007. The research results had showed that concentration level of banking systems decreased to 71 percent in 2007 during analyzed period of 1987-2007. The analysis does not provide support for the view that bank concentration is closely associated with the stability of the banking system.

Measuring and explaining the impact of vertical product differentiation on banking efficiency

PurposeThe paper attempts to analyze vertical product differentiation as a strategy pursued by European banks seeking greater market power and higher reputation for quality, and to examine whether this entails losses in banking efficiency.Design/methodology/approachFirst, the empirical analysis seeks to demonstrate whether borrowers at banks in Europe are willing to pay a premium to operate with banks that attempt to increase their reputation for quality in the market, i.e. whether banks use quality to vertically differentiate and so soften competition. To test such hypothesis requires us to define an empirical model with variables that describe certain characteristics of banking quality as explanatory variables of the loan interest to the market interest rate margin. This model is estimated by two stage least squares. Second, the paper seeks to test whether the market power derived from vertical product differentiation (quality reputation) prevents banks from operating efficiently. To test this hypothesis first we estimated cost efficiency taking into account bank risk preferences and then we define an empirical model that relates the results on efficiency with the margin of interest loan rate over the market interest rate.FindingsThe results show that less competition, deriving from a bank's ability to differentiate its services from those of its rivals through quality, is positive because it helps to provide a more stable banking system. Moreover, the banking market power generated by investing in quality does not prevent banks from operating efficiently from a production point of view.Research limitations/implicationsThe findings are consistent with the view that European banks soften competition by being more stable, and this does not prevent cost efficiency. So it seems that the regulatory authorities should improve their solvency measures since borrowers’ preferences are to maintain relationships with non‐fragile banks, and on the other hand banks’ risk preferences seem to be to look for sound borrowers.Practical implicationsFrontier cost efficiency scores that account for bank's risk preference are able to be related with customer preferences based on the model of the industrial organization (10) based on vertical product differentiation in banking.Originality/valueThis is the first paper that relates vertical product differentiation with the results obtained from the literature on x‐efficiency. It is also the first paper that studies the impact of banking market power jointly with cost efficiency in social efficiency when market power comes as result of investing in reputation for banking quality.

Back to the Basics in Banking? A Micro-Analysis of Banking System Stability

This paper analyzes the relationship between banks' divergent strategies toward specialization and diversification of financial activities and their ability to withstand a banking sector crash. We first generate market-based measures of banks' systemic risk exposures using extreme value analysis. Systemic banking risk is measured as the tail beta, which equals the probability of a sharp decline in a bank's stock price conditional on a crash in a banking index. Subsequently, the impact of (the correlation between) interest income and the components of non-interest income on this risk measure is assessed. The heterogeneity in extreme bank risk is attributed to differences in the scope of non-traditional banking activities: non-interest generating activities increase banks' tail beta. In addition, smaller banks and better-capitalized banks are better able to withstand extremely adverse conditions. These relationships are stronger during turbulent times compared to normal economic conditions. Overall, diversifying financial activities under one umbrella institution does not improve banking system stability, which may explain why financial conglomerates trade at a discount.

Did the introduction of fixed-rate federal deposit insurance increase long-term bank risk-taking?

We investigate whether the introduction of fixed-price U.S. federal deposit insurance in 1933 increased the risk-taking of banks over the succeeding period. We examine 60 financial institutions and find that banks and trusts in general became more risky after the introduction of deposit insurance. However, a subset of well-performing banks appears to have reduced their risk. Deposit insurance also reduced the incentives of depositors to discriminate between ex ante weaker and stronger banks thus reducing depositor discipline in return for greater banking system stability.

The Empirics of Banking Regulation

This paper assesses empirically whether banking regulation is effective at preventing banking crises. We use a monthly index of banking system fragility, which captures almost every source of risk in the banking system, to estimate the effect of regulatory measures (entry restriction, reserve requirement, deposit insurance, and capital adequacy requirement) on banking stability in the context of a Markov-switching model. We apply this method to the Indonesian banking system, which has been subject to several regulatory changes over the last couple of decades, and at the same time, has experienced a severe systemic crisis. We draw from this research the following findings: (i) entry restriction reduces crisis duration and also the probability of their occurrence; (ii) larger reserve requirements reduce crisis duration, but increase banking instability; (iii) deposit insurance increases banking system stability and reduces crisis duration. (vi) capital adequacy requirement improves stability and reduces the expected duration of banking crises.

Regulation and Banking Stability: A Survey of Empirical Studies

This paper brings together and adds structure to the empirical literature on the link between banking regulation and banking system stability. In addition to clarifying the theoretical underpinnings for studying banking regulation, it points to several directions for future empirical research, necessary to fill the gaps in our understanding of the link between banking regulation and stability. The paper starts with a review of the literature on the design of banking regulation and its link with stability, followed by an assessment of the most common methodologies used in this literature.The paper then reviews the empirical literature of various banking regulations. This is followed by a proposal on the new directions for research of the link between banking regulation and banking system stability.

Risk Management - Objective of Basle II Accord - A Challenge for Romanian Banking System

Romania's adherence to the European Union implies a suitable adaptation of the Romanian banking system to the requirements of Basle II Accord, representing a challenge for the Romania's regulatory and prudential supervision, but also an additional chance to facilitate international co-operation among the authorities.At the present time, the main objective of all credit institutions is to enhance risk management, which alongside suitable corporate governance might strengthen the financial stability of the whole banking system.

Basel Accord and Lending Behavior: Evidence from Mena Region

In 1988, an agreement was reached in Basel to set the common requirements of bank capital towards promoting the soundness and stability of the international banking system. Banks are required to hold capital in proportion to their perceived risks, which may have caused a credit crunch, resulting in a significant reduction in the supply of credit. We investigate the direct link between the implementation of the Basel Accord and lending activities using a data set spanning annual observations covering 1989-2004 for banks in Egypt, Jordan, Lebanon, Morocco, and Tunisia. The results provide clear support for a significant increase in growth following the implementation of capital regulations, in general. Despite higher capital adequacy ratio, banks expanded and assets growth. Credit growth appears to be driven by demand fluctuations attributed to real growth, cost of borrowing and exchange rate risk. Overall, the effects of macroeconomic variables, in contrast to capital adequacy, appear to be more dominant in determining growth, regardless of the capital adequacy ratio, and variation across banks by nationality, ownership, and listing.

The Operation of the Moratorium on New Bank Licenses on the Hong Kong Banking System 1965-81

The Operation of the Moratorium on New Bank Licenses on the Hong Kong Banking System 1965-81

Branch Banking as a Device for Discipline: Competition and Bank Survivorship during the Great Depression

Because California was a pioneer in the development of large‐scale branching, we use its experience during the 1920s and 1930s to assess the effects of branching on competition and on the stability of banking systems. Using individual bank balance sheets, income statements, and branch establishment data, we show that smaller incumbent banks responded to the entry of a large branch bank by adjusting their operations in a manner consistent with increased efficiency. Competition from branching networks also produced an externality: unit banks exposed to this competition were more likely to survive the Great Depression than banks not exposed to it.

(The Effect of Megabanks and Universal Banking on the Stability of Banking System)

(The Effect of Megabanks and Universal Banking on the Stability of Banking System)

The Impact of Revenue Diversity on Banking System Stability

The dismantling of legal barriers to the integration of financial services is one of the recent, major developments in the banking industry. This led to an expansion of the variety of financial intermediaries and types of transactions. However, this trend may alter banks' risk-taking incentives and may affect overall banking sector stability. This paper analyzes how banks' divergent strategies toward specialization and diversification of financial activities affect their ability to shelter from adverse economic conditions. To this end, market-based measures of banks' extreme systematic risk are generated, using techniques developed for extreme value analysis. Extreme systematic risk captures the probability of a sharp decline in a bank's stock price conditional on a crash in a market index. Subsequently, the impact of (the correlation between) interest and non-interest income (and its components) on this risk measure is assessed. The estimation results reveal that the heterogeneity in extreme bank risk can partially be attributed to differences in banks' reliance on non-traditional banking activities. All non-interest generating activities increase banks' sensitivity to the market index during times of extreme equity market movements. In addition, smaller banks and well-capitalized banks are better able to withstand large adverse economic conditions. Furthermore, the effects are stronger during times of market turbulence compared to a situation of normal economic conditions. Overall, diversifying financial activities in one umbrella institution does not lead to a reduction of extreme banking risk, which may explain why financial conglomerates trade at a discount.

Sustaining Low Inflation in Ukraine

This publication presents the collection of papers written in 2004 within the project that aimed to broaden the knowledge about sources of inflation in Ukraine and indicate policies that can support low inflation in the future. While working on analyses of monetary policies and inflation, the authors used the experience of other transitional countries, Polish in particular. The project team1 hopes that the research gathered in this volume will contribute to the understanding of the sources of inflation in Ukraine and to the influence of monetary policy instruments on other variables.Over the last years, situation in Ukraine improved considerably. The country started to grow in 2000, and the rates of economic development have been impressive since then. It is enough to mention that the economy expanded by 12% in 2004 only. The end of the year 2004 was also marked by important political change, which became possible due to the mass protests, the so called Orange Revolution. The new president and the new government of Ukraine declared their pro-market orientation and the will to adhere to the needed economic reforms, while at the same time working on closer integration with the global economy. One of the macroeconomic challenges that Ukraine faces at the moment is to lower and stabilise the rates of price changes. After some years of relative stability - and even months of deflation in 2002 - consumer prices were rising by over 10% in annual terms in the second half of 2004 already, and recorded 15% y/y growth in the first half of 2005. Certainly, the reversal to the high and unstable inflation rates threatens sustainable economic development. With the perception of macroeconomic instability - which is often signalled by unstable and high inflation - the authorities are less able to conduct economic policies, as the trust of economic agents is limited and their behaviour hard to predict. The proposition that the monetary policy turns gradually away from the exchange rate-based stabilisation to inflation targeting was communicated by the National Bank of Ukraine in 2003 already, and released in fundamentals of the monetary policy for the following year. To date, however, the exchange rate peg to the US dollar have remained the nominal anchor of the monetary authority. Some new solutions in the functioning of the monetary policy are necessary if the current monetary regime in Ukraine is to be replaced by direct inflation targeting. Among them are: the necessity for the central bank to act independently and be credible, developed financial market with stable banking system, and the ability to conduct comprehensive and systematic analytical work in order to better understand the underlying reasons of price changes, as well as the speed at which the economy reacts to the changes in monetary policy. The authors of the research gathered in this volume carried out analytical work related to these subjects. Relevant transitional experience was used to illustrate possible effects and necessary conditions for moving to inflation target, and detailed calculations of inflation measures and estimates of monetary policy transmission in Ukraine were explored.

The economic value of regulated disclosure: Evidence from the banking sector

The study examines the economic consequences of regulated disclosure in the banking sector, focusing on its impacts on the stability of banking systems. In a cross-country study of banking systems across 49 countries in the 90s, I find that banking crises are less likely in countries with greater regulated disclosure and transparency. Specifically, banking systems are less vulnerable to crisis if supported by financial reporting regimes characterized by (i) more comprehensive disclosure, (ii) more timely financial reporting, (iii) more informative reporting, and (iv) more credible financial disclosure. To the extent that banking crises are costly, the paper documents the positive impact of accounting information to the real sector of the economy.