Banking Supervision Research Articles

News Sentiment and Liquidity Risk Forecasting: Insights from Iranian Banks

This study addresses the critical challenge of predicting liquidity risk in the banking sector, as emphasized by the Basel Committee on Banking Supervision. Liquidity risk serves as a key metric for evaluating a bank’s short-term resilience to liquidity shocks. Despite limited prior research, particularly in anticipating upcoming positions of bank liquidity risk, especially in Iranian banks with high liquidity risk, this study aimed to develop an AI-based model to predict the liquidity coverage ratio (LCR) under Basel III reforms, focusing on its direction (up, down, stable) rather than on exact values, thus distinguishing itself from previous studies. The research objectively explores the influence of external signals, particularly news sentiment, on liquidity prediction, through novel data augmentation, supported by empirical research, as qualitative factors to build a model predicting LCR positions using AI techniques such as deep and convolutional neural networks. Focused on a semi-private Islamic bank in Iran incorporating 4,288,829 Persian economic news articles from 2004 to 2020, this study compared various AI algorithms. It revealed that real-time news content offers valuable insights into impending changes in LCR, particularly in Islamic banks with elevated liquidity risks, achieving a predictive accuracy of 88.6%. This discovery underscores the importance of complementing traditional qualitative metrics with contemporary news sentiments as a signal, particularly when traditional measures require time-consuming data preparation, offering a promising avenue for risk managers seeking more robust liquidity risk forecasts.

Risk-based regulation and supervision of second-tier banks: experience of EU countries

The aim of the study was to determine the impact of increased capital adequacy standards of second-tier banks on their performance. The study is based on second-tier banks of EU member states, as these countries are the first to implement the Basel Committee recommendations, so their experience should be studied and taken into account when building risk-based regulation of second-tier banks of Ukraine and Kazakhstan. The study covers the period of 2009–2022, as the Basel III regulations were adopted after 2008, and they began to operate for the second-tier banks of EU member states in 2013. The study was conducted using econometric modelling with an analysis of the dependence of banking indicators on the capital structure established by Basel III. Functional interrelationships of the dependence of Net Interest Income, Profit, Return on Assets, Return on Equity, Risk Costs to Operating Income were tested. The impact of capital adequacy requirements on the performance of second-tier banks was determined: capital adequacy requirements have a positive impact on net interest income and profit of second-tier banks. The obtained results can be used to substantiate increasing capital adequacy requirements to increase the reliability of the banking system as an element in the system of factors of economic growth of the national economy.

Japanese financial elites and banking supervision: the Ministry of Finance and the Bank of Japan

ABSTRACT Japan experienced a bubble economy in the late 1980s and a financial crisis in the 1990s, and the banking supervision system was criticized for failing to prevent excessive risk-taking behavior among commercial banks. In this study, I examine whether, and if so why, the banking supervision system deteriorated over the period in question, focusing on human capital, especially among the elites, in relation to banking supervision in Japan. I focus on two elements of banking supervision: the transition of supervisory policy and the characteristics (e.g. education, career path) of the heads of supervisory departments. The 49 Directors of the Financial Inspection Department in the MOF from 1927 to 1998 and the 26 Directors-General of the Bank Examination Department in the BOJ from 1928 to 1981 are analyzed. I also analyze the performance of several regional banks that appointed an ex-Director of the MOF as their president to check whether such an intimate bank – supervisor relationship worsened those banks’ management. The results showed no evidence of bad management as a result of that relationship. Rather, an increased burden on examiners and a reduced awareness of the importance of risk management led to the reduced effectiveness of banking supervision.

Fundamental procedural rights and ECB banking supervision: An ECB Hearing Officer?P. Chirulli

This article explores the possibility of establishing a position at the European Central Bank (ECB) along the lines of the Hearing Officer (HO) provided for in European competition law; a position whose task would be to safeguard the effective exercise of procedural rights throughout the supervisory proceedings carried out by the ECB. To this end, after identifying the reasons that might justify such a regulatory intervention, the article outlines the legislation on the HO laid down in European competition law. It then illustrates some functions that could be entrusted to the HO of the ECB and the regulatory instruments that could concretely be used to establish the HO position. In the conclusions, the article suggests that the introduction of this position within the framework of the ECB should be undertaken gradually.

Consistency conditions for bank efficiency analysis in Ghana: A comparison of parametric and non-parametric techniques

This paper extends the concept of methodological crosschecking by examining whether bank efficiencies computed by the two frontier techniques, stochastic frontier analysis (SFA) and data envelopment analysis (DEA), are consistent. The study used a panel of 220 unbalanced observations from 27 Ghanaian banks between 2007 and 2016 to estimate cost and technical efficiencies and check for consistency using five criteria: efficiency distribution, ranking, ability to identify best or worst banks, stability of efficiencies, and relationship with accounting ratios. The results suggest that there is no consistency in the way parametric and non-parametric techniques rank or identify the best or worst banks. Also, there exists a weak relationship between the efficiency scores generated by both SFA and DEA and the non-frontier accounting ratios of Ghanaian banks. This suggests that the latter may contain some exogenous variables that make them weak measures of efficiency and should be used with caution, especially for bank supervision. However, the SFA approach yielded efficiency scores that were comparatively more stable over time. Therefore, the study concludes that the SFA approach is more practical and thus more appealing for regulatory purposes in Ghana due to the relatively consistent efficiency scores under the SFA approach compared to those under the DEA.

Basel Implementation in Banking in Indonesia

This study’s goal is to determine the application of Basel in banking in Indonesia. Bank Indonesia in issuing banking regulations refers to the Bank for International Settlement (BIS) policies related to liquidity, especially as a reference to protect Indonesian banks from crises caused by insufficient liquidity needs in the Bank. policies from the BIS will be accommodated first by the Islamic Financial Service Board (IFSB). IFSB is used as a reference for regulators to make banking policies. One of the IFSB committees, namely the Basel committee in the field of banking supervision, has issued provisions that are a reference for international banking, namely Basel 1, Basel II and Basel III. This study collects data using a descriptive qualitative methodology and secondary data obtained from literature studies. The results of the research show that banks in Indonesia have implemented regulations according to the Basel III international standard OJK has adopted Basel recommendations and has implemented Basel 1, 2 and 3 although there are some shortcomings but the application of risk management is more effective and efficient. The application of the continuation of Basel III is adjusted to the conditions of national banking proportionally.

Analisis Peran Otoritas Jasa Keuagan (OJK) Sumatera Barat dalam Mengawasi Kepatuhan Bank Syariah

In order to ensure sharia bank operations comply with sharia law and related banking regulations, this research was inspired by the role of the Financial Services Authority (OJK) in West Sumatra in supervising sharia banks' compliance with sharia regulations and the principles of effective supervision. The purpose of this research is to determine the extent of the role of the West Sumatra OJK in carrying out supervision in ensuring that Islamic banks comply with regulations relevant to their operations. This research uses written research with a qualitative approach. Written research is research conducted indirectly or interviews conducted virtually. Research conducted by utilizing technology and online resources conducted directly or face-to-face such as interviews, data collection, or access to information sources conducted online or via online platforms. In this research, the researcher gave questions to the staff of the OJK Bank Supervision office which were sent via OJK email which would later be answered indirectly (online). The object of this research was carried out at the West Sumatra OJK Office which is located at Jl. Khatib Sulaiman No. 68 Ulak Karang Selatan, North Padang District, Padang City, West Sumatra 25137. The following are the results of inspections carried out at the West Sumatra Financial Services Authority (OJK): 1) The West Sumatra Province Financial Services Authority (OJK) has the ability to assess and guarantee Sharia Banks in carrying out their operations. Its operations are in accordance with sharia principles. This is achieved through off-site monitoring and analysis of reports. Either through field supervision or direct OJK audit findings, or through submission of audit results by the bank. The aim is to protect the stability of the financial system, prevent risks that are detrimental to the economy, and ensure the security of customers’ trust in banking. Through OJK supervision, it will have an impact on the effectiveness of implementing sharia principles in operations, which will ultimately have an impact on improving the performance of sharia banks. 2) In order to ensure Sharia Banks comply with regulations, the West Sumatra Financial Services Authority (OJK) follows the values contained in supervision, including ideas for improving supervision now and in the future. Integrity, accountability, fair treatment, availability of information and reporting, effectiveness, adaptation, and cooperation between institutions and society are qualities that are included in the context of supervisory value.

Impact of Strengthened Financial Regulation on Commercial Banks' Asset Risk: A Case Study of China CITIC Bank

As an integral part of China's economic system, the financial market plays a crucial role. In recent years, China has attached increasing importance to the financial market and intensified efforts to improve financial regulatory systems, with a particular emphasis on banking supervision. Banks, as vital components of the financial market, have a significant impact on the stability of the entire financial system due to their level of risk exposure. In order to better explore the changes in bank asset risk under the trend of strengthened regulation, this paper conducts a case study on China CITIC Bank. The case of China CITIC Bank being penalized serves to illustrate the inherent risks in the assets of China CITIC Bank. Furthermore, through this penalty, China has sent a signal to financial institutions to strengthen regulation, thereby compelling banking institutions to enhance their risk management capabilities. Under the trend of intensified regulation, it can be inferred that central oversight of banking institutions will gradually strengthen.

Mapping the future of banking crisis research: Key contributors and emerging areas

Banking crises, marked by catastrophic loan losses and systemic collapse, wield unparalleled influence over economic stability and societal well-being. Despite extensive research efforts on investigations related to banking crises, the current literature lacks a systemic analysis of scholarly published articles. The present study aims to bridge this gap by analyzing scholarly literature on banking crises using bibliometric data from Scopus from 1969 to June 2024. Using the bibliometric toolbox's performance and science mapping techniques, we map the research landscape, highlighting key contributors and trends in banking crisis research. The contributors are the United States, the International Monetary Fund, the National Natural Science Foundation of China, and the Journal of Banking and Finance from Elsevier publishers. Furthermore, we identify the focal areas of research in banking crises. Finally, we anticipate that future research in banking crises should focus on the applications of machine learning, banking regulations, bank supervision, random forest, risk perception, the impact of the COVID-19 pandemic, democracy, corruption, financialization, fiscal consolidation, and the role of institutions such as Silicon Valley Bank. The findings of the study support regulators, researchers, policymakers, and research funding institutions in fostering collaboration and prioritizing research areas.

The Economic Impact Of The 1997 And 2008 Financial Crisis On Asia

This study investigates the factors that made Asian economies more resilient during the 2008 Global Financial Crisis (GFC) compared to the 1997 Asian Financial Crisis (AFC). The research addresses the question: What made Asian economies more resilient during the Global Financial Crisis than the Asian Financial Crisis? Through a comparative analysis, the research highlights the proactive reforms implemented after the AFC, such as the adoption of adaptable exchange rate regimes, enhanced banking supervision, and the development of deeper capital markets, which collectively fortified the region's financial systems. In this respect, it is observed that such reforms provided an enabling environment that, together with strong current account balances and large foreign exchange reserves, helped the Asian economies weather the GFC. The research has also attempted to explain how strategic international cooperation and financial policies updated were helpful in sustaining financial stability. Despite these successes, the research underscores ongoing vulnerabilities, such as high levels of corporate and household debt, that require attention to safeguard against future crises. The findings offer valuable insights into the importance of readiness, flexibility, and regional cooperation in ensuring economic stability and growth.

The trialistic nature of charging bank balance sheet itemswith public levies – de lege ferenda postulates

This article concerns the issue of imposing three different public levies on banks, fulfilling different purposes,based on the balance sheet items of banks – a tax on certain financial institutions, a contribution to the compulsorybank restructuring fund and payments for banking supervision. It is pointed out that both the economicburden of banks and administrative obligations are multiplied in the situation of the identity of the subject of thelevy burden. The author characterizes the aforementioned public levies to the necessary extent and puts forwardde lege ferenda postulates aimed at changing the current legal status until Po land joins the banking union.

CORPORATE GOVERNANCE REFORMS IN THE BANKING SECTOR: ENHANCING STABILITY AND PROTECTING DEPOSITORS& INTERESTS

The global financial crisis of 2008 exposed significant weaknesses in the corporate governance practices of banks, leading to excessive risk-taking, lack of oversight, and eventual failures. In response, corporate governance reforms have been implemented in the banking sector to enhance stability, restore public confidence, and protect the interests of depositors. Effective corporate governance ensures that banks are managed responsibly, aligning the interests of various stakeholders. Key areas of focus for these reforms include board composition and effectiveness, risk governance and management, remuneration policies, internal controls and auditing, transparency and disclosure, and stakeholder engagement. Reforms emphasize the importance of having a diverse and independent board, robust risk management frameworks, aligning executive compensation with long-term performance, strengthening internal controls and auditing processes, enhancing transparency and disclosure requirements, and engaging with stakeholders, including depositors. Initiatives such as the Basel Committee on Banking Supervision's guidelines and the European Union's Capital Requirements Directive IV (CRD IV) have aimed to strengthen governance frameworks and promote best practices within the banking industry. These reforms mandate the establishment of dedicated risk committees, stress testing practices, clawback provisions in remuneration structures, and the implementation of effective compliance and auditing functions. Effective implementation of corporate governance reforms is crucial for enhancing financial stability, mitigating systemic risks, and protecting depositors' interests. By promoting responsible and ethical practices, strengthening oversight mechanisms, and aligning incentives with long-term sustainability, these reforms aim to restore public confidence in the banking industry and contribute to the overall resilience of the financial system. Keywords: Corporate Governance, Banking Regulations, Risk Management, Transparency, Financial Stability

Impact of Earnings and Cash Flow on Stock Return: A Case of Nepalese Commercial Banks

This study examines the impact of earnings and cash flow on stock return in the context of Nepalese commercial banks. Stock return and market price per share are selected as the dependent variables. The selected independent variables are net income, total equity, earnings per share, return on equity, cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. The study is based on secondary data of 10 commercial banks with 100 observations for the period from 2012/13 to 2021/22. The data were collected from Bank Supervision Report published by Nepal Rastra Bank (NRB) and annual reports of the selected commercial banks. The correlation coefficients and regression models are estimated to test the significance and importance of earnings and cash flow on stock return in the context of Nepalese commercial banks. The study showed that return on equity has a positive effect on stock return and market price per share. It indicates that higher the return on equity, higher would be the stock return and market price per share. Similarly, total equity has a positive effect on stock return. It implies that increase in total equity, leads to increase in stock return. Moreover, net income has a positive effect on market price per share. It means that increase in net income leads to increase in market price per share. Similarly, the result also showed that there is a negative impact of cash flow from investing activities on stock return and market price per share. It indicates that increase in cash flow from investing activities leads to decrease in stock return and market price per share. Furthermore, there is a negative impact of cash flow from financing activities on stock return and market price per share. It indicates that increase in cash flow from financing activities leads to decrease in stock return and market price per share.

A Comparative study of the Basel III liquidity framework’s “Liquidity Coverage Ratio”: Compliance and Performance between Islamic Banks and Conventional banks in the State of Kuwait

Aim of the Paper: To propose some recommendations based on the finding for the conventional and Islamic banks in the sample of the study and to submit the experience of the research sample, first, to all the relevant regulatory authorities who deal with the supervision and control of conventional and Islamic banks in their banking system and second, to the decision makers in the conventional and Islamic banks to gain their bank’s compliance and better performance of Liquidity Coverage Ratio.Study Design: Comparative study of Liquidity Coverage Ratio’s compliance and performance between 4 national Islamic banks and 4 national conventional banks.Sample and Data: The sample contains of 4 conventional and 4 Islamic banks in the Kuwaiti national banking system. The data were quantitative “LCR figures” of the sampled banks and were gathered from their official websites (secondary data).Results: Both the conventional and the Islamic banks showed that were compliant and had the same efficient and effective level of LCRs performanceConclusion: the paper presented recommendation on bank solo level, banking sector level, regulatory authority level and international organizations level.

THE EFFECT OF COMPETITION IN THE MARKET OF BANKING SERVICES ON THE STABILITY OF THE BANKING SYSTEM

The increase in the number of banks and the size of banks in the banking system creates problems related to interbank competition and requires constant research. Competition in the banking services market and the factors affecting it required the use of new regulatory tools after the global financial crisis of 2007-2009. In the post-crisis period, establishing strict prudential requirements for bank supervision and ensuring the stability of the banking system became important. Interbank competition and the stability of the banking system, i.e. in the conditions of competition, the risk appetite of banks is high, and the question of financial stability raises more questions. Many analyzes have been carried out on this issue and there are different approaches. In this article, an econometric analysis of the interrelationship between the stability of the banking system and competition in the market of banking services is carried out, and the causes and consequences are evaluated.

Green credit policy and bankruptcy risk of heavily polluting enterprises

We investigate the impact of a green credit policy (GCP) on the bankruptcy risk of heavily polluting enterprises (HPEs). We find that a GCP strengthens the bank supervision of HPEs’ production and management behavior (not limited to environmental behavior), thereby reducing their bankruptcy risk. However, since banks are unlikely to strictly supervise local state-owned enterprises and large firms, the negative correlation between the bankruptcy risk of HPEs and a GCP is weakened for such enterprises and firms. We suggest that a GCP can promote the coordinated development of the economy and the environment.

Problem Loans and Working Out the Pinnacle of Bank Failures in Nigeria

This study was designed to evaluate managing problem loans and work out the pinnacle of bank failures in Nigeria. One of the recommendations of the Basel Committee on Banking Supervision was credit risk management which is the optimization of the bank’s risk-adjusted rate of return by maintaining credit risk exposure within an acceptable level. Descriptive survey research was used and data were collected via annual reports of the sampled bank within the period of 2011–2016. The population of the research included the Deposit Money Banks. Pearson Coefficient of Correlation was the statistical tool used to analyse the hypotheses and this was done with the aid of Statistical Package for Social Sciences (SPSS). The researcher concluded that there is no significant relationship between credit risk management and bank failure in Nigeria. However, there were traces of weak negative relationships which keen interest should be given to because of the sensitive nature of the banking sector.

Analysis of Financial Regulatory Challenges for the Development of Islamic Banking in Indonesia

This article aims to present an analysis of the regulatory challenges in Islamic banking supervision on the sustainability of business and financial models, with a case study on Bank Syariah Indonesia (BSI). In the context of the growth of the Islamic banking industry in Indonesia, the main question raised is how regulation affects the sustainability of the business and financial models of Islamic banks, particularly BSI. This research uses a qualitative approach by analyzing relevant laws and regulations and a case study of BSI. The results show that complex and constantly changing regulations can be an obstacle to the sustainability of Islamic banks' business and financial models. Although BSI has adapted itself to the changes, challenges remain, especially in terms of meeting capital requirements, product diversification, and enforcement of sharia rules. In answering the research question, the author concludes that to achieve optimal sustainability, regulations need to be adjusted to better support the development of the Islamic banking industry, including providing incentives for innovation and consistent fulfillment of sharia principles.

Bank Supervision and bank’s Outcomes: The Case of Tunisia

ABSTRACT Supervision is important for the entire financial system since it plays the role of a stabilizer; it seeks to create a healthy environment for financial institutions, and in particular for banks. Bank supervision is considerably more challenging than that of other institutions because of the opacity and complexity of bank assets. We explore the impact of supervision on the risk, profitability, and growth of Tunisian banks. The empirical study focused on 210 annual reports of almost all Tunisian banks during the 2010–2019 period. Banking supervision effectiveness is measured by enforcement outputs (i.e. on-site audits and sanctions). The generalized least squares method of multivariate analysis was used to analyze our panel data.The results show that supervisory and regulatory measures applied during this period have a negative impact on bank risk and profitability. This means that stricter banking regulation and supervision reduce both the risk and profitability of banks. Our results also show that intense supervision reduces the growth of loans for Tunisian banks. Our results have important implications for the decision-making of bank managers and regulators in Tunisia as well as for relevant actors in similar emerging economies. Strengthening further banking supervision policy is still needed by the central bank of Tunisia, i.e. the bank regulator.

Ten Years of the Single Supervisory Mechanism: Looking into the Past, Navigating into the Future

ABSTRACT In November 2024 European banking supervision will have been operational for 10 years. The Single Supervisory Mechanism (SSM) has evolved from a start-up to a mature, well-established, and respected supervisor. Harmonized and transparent supervisory practices have been implemented, whilst the European banking sector has proved to be resilient. Nevertheless, whilst acknowledging the progress that has been made, Europe should not rest on its laurels. As the global financial landscape is continuously evolving, the European framework must also evolve. Growing geopolitical tensions, the rise of FinTech and BigTech companies, the ongoing digital transformation, and climate change not only impact banks but also add more complexity to the work of supervisors. This is due to unexpected and difficult-to-model events, the creation of new business models, products, and services, as well as the emergence of cultural, behavioural, and ethical considerations that should be taken into account. To address these challenges, supervisors should enhance their competencies, approaches, and tools to stay ahead of evolving market dynamics and to remain aligned with the rapid evolution of technology and the risks that climate change poses. Equally important, ensuring thorough and efficient supervision requires fostering and strengthening collaboration and information sharing between all relevant authorities.