Traditional Banking Activities Research Articles

Threshold effect of non-interest income disaggregates on commercial banks’ financial performance in Zimbabwe

Financial performance has become a trending concept in corporate finance and strategic management in recent times especially in the aftermath of the Global Financial Crisis (GFC) of 2007–2009. As an antidote to charter value erosion caused by stiff competition from incumbents in traditional banking activities, banks venture into non-core banking activities as a diversification and survival strategy. The purpose of the study is to determine the optimal threshold levels of non-interest income that stimulate financial performance of ten Zimbabwean commercial banks using non-interest income disaggregates over 2009–2020. Unfortunately, studies that examine the non-interest-income-financial performance nexus of banks involved in intermediation are scant and inconclusive. Furthermore, the use of threshold models to crack this puzzle are conspicuous. The study employed Fully Modified Ordinary Least Squares and Threshold difference Generalized Methods of Moment nonlinear threshold approaches. The aggregated and disentangled non-interest income dynamic optimal thresholds found are 26 %, 17 % and 10 % whereas the average static ones are 35 %, 28 % and 17 %. Compared to aggregated non-interest income, the study reveals that the disaggregates pose a greater positive impact on financial performance of banks in the upper regime than their counterparts in the lower regime. In addition, more banks were found to be operating below the required minimum thresholds. To avert episodes of bank failures and hedging against banking sector fragility, commercial bank managers should come up with well-diversified portfolios of income-generating ventures. Also, central bank regulations must promote non-interest activities, competition, growth and reduce leverage of commercial banks.

Comparative analysis of Islamic banking regulation in Kyrgyzstan and Central Asian countries

The Islamic banking regulation plays a key role in ensuring the development of this type of financial activity, especially for countries with a predominantly Muslim population, such as the Kyrgyz Republic and other Central Asian countries, in particular the Republic of Kazakhstan and the Republic of Tajikistan. Therefore, the study aims to analyse and compare the peculiarities of the legal framework that regulates the activities of Islamic banks. Legal analysis, statistical analysis, grouping, generalisation, comparison, and abstract and logical thinking methods were used in the article. The information basis for this study included the current laws and regulations of Kyrgyzstan, Kazakhstan, and Tajikistan in the field of Islamic banking regulation. The study analyses the laws that establish the principles of operating and regulation of Islamic banks, as well as the regulatory documents of the Central banks of the Kyrgyz Republic, Kazakhstan, and Tajikistan. The study identifies and analyses the key requirements established for the establishment of Islamic banks, Shariah boards operating within such banks, as well as prudential standards for financial institutions operating on the principles of Islamic finance. A comparative analysis of regulatory and legal documents has made it possible to formulate both common and different approaches used to ensure and regulate the activities of Islamic banks. It is established that the key difference between the legal regulation of Islamic banks in Kazakhstan, as compared to Kyrgyzstan and Tajikistan, is the lack of possibility for banking structures to combine traditional banking activities with activities based on the principles of Islamic Finance. The study results can be used by the authorities that form the legislative framework and regulate the activities of Islamic banks, and entities operating in the banking system, as well as by the scientific community interested in ensuring the Islamic banking regulation in Kyrgyzstan and other Central Asian countries

Identification Of Revenue In Banking In The City Of Medan

This research aims to explore and identify the various sources and mechanisms contributing to revenue generation in the banking sector within the City of Medan. The study delves into the intricate details of revenue streams, assessing the diverse sources, instruments, and strategies employed by banks to generate income.
 Utilizing a mixed-methods approach, the research incorporates both quantitative data analysis and qualitative insights from key stakeholders within the banking industry. The quantitative aspect involves the analysis of financial statements, income reports, and performance indicators, providing a comprehensive overview of revenue trends. Key focal points of the research include the identification of interest income, fee-based income, and other ancillary sources contributing to the overall revenue of banks in Medan. The qualitative component involves interviews and discussions with banking executives and regulators to gather nuanced insights into the strategies employed for revenue diversification and sustainability. Preliminary findings indicate a diverse landscape of revenue sources, including traditional banking activities, innovative financial products, and digital services. The research contributes to the understanding of the dynamics of revenue identification in the banking sector, providing valuable insights for financial institutions, policymakers, and industry analysts.

Traditional commercial banking and systemic risk: Evidence from Hungary

Systemic risk reduction in banking is a key component in maintaining financial stability. Even after extensive explorations, the role of nontraditional activites in systemic risk still offers several questions to study. The paper aims to contribute to the literature on the topic by empirically examining whether traditional and nontraditional banking activities differ in terms of systemic risk. To answer this question, traditional commercial banking is assumed to be represented by the loan-deposit interest margin income component. Hungarian banking sector data between 2003 and 2020 are analyzed with principal component analysis and multidimensional scaling. The primary measure in systemic risk quantification is the return covariance-based absorption ratio. Empirical findings suggest that, when compared to a more diverse range of banking activities, traditional commercial banking may be characterized by lower systemic risk. Although in these two cases the most influential components of systemic risk may be considered as similar, the other components exhibit significant differences.

Cost efficiency of Chinese banks: Evidence from DEA and MLP-SSRP analysis

Our study contributes to the empirical literature in two ways: 1) We propose an innovative Data Envelopment Analysis (DEA) model to estimate the cost efficiency of Chinese banks; 2) We propose a Stochastic Structural Relationship Programming (SSRP) Model based on neural networks to evaluate the interrelationships between efficiency and other bank-specific variables. The findings show that Chinese commercial banks experienced a gradual increase in the level of efficiency from 2010 up to 2015, after which the efficiency level experienced slight volatility and, by the end of 2018, ended up with an efficiency score of 0.746 on a scale of 0 to 1. We find that for banks with lower levels of efficiency, improvement in the efficiency level has a favorable effect on profitability, and these banks will also focus their business on traditional banking activities. Banks with higher levels of efficiency need to find alternative, profitable banking businesses in order to sustain their higher level of efficiency.

Noninterest income mix and bank performance: Generalized propensity score fractional dose–response function evidence

This paper investigates the impact of different levels of noninterest income on the risk-adjusted profitability and financial stability of banks in the Middle Eastern and North African banking industry from 1988 to 2020. We apply a program impact evaluation analysis, using the generalized propensity score-fractional dose–response function method, and assess the effect of each level (or dose) of noninterest income mix on bank performance (the dose–response function). Splitting the sample into Gulf Cooperation Council- and non-Gulf Cooperation Council-based banks reveals that while higher levels of revenue diversification are beneficial for the former, a focus on traditional banking activities is preferable for the latter to achieve the best performance. The findings could serve as an early warning flag for bank managers, policy-makers, and regulators in dealing with these strategic shifts.

Імперативи розвитку банківської системи України в умовах цифровізації та ринкових трансформацій

Abstract. Introduction. The development of digitalization processes causes the appearance of new participants in the financial market, changes the structure of competition in the banking sector, reduces the profitability of traditional banking activities, and therefore forces banks to look for new sources of income. Transformations are also dictated by new challenges that stimulate the active growth of digital operations and create demand for digital products and services in the financial sphere. The article proves that digital and market transformation processes affect the future development of the banking system of Ukraine, requiring constant monitoring and adaptation to today's requirements. Purpose. The purpose of the research is to reveal the imperatives of the development of the banking system of Ukraine in view of the rapid processes of digitalization and systematic market transformations. Results. Based on the study of scientific sources and the current state of the banking system, the key imperatives of its development in the conditions of digitalization and market transformations are determined: improvement of the financial ecosystem; promotion of neobanks; open banking; artificial intelligence and machine learning; cryptocurrency. The classification of types of banking innovations (product innovations, process innovations, innovations in business models) is shown indicating the specifics of their implementation. The stages of the process of development and introduction of new banking products are considered, as well as the evolution of the financial ecosystem and the NBU ecosystem in the context of the global financial ecosystem are presented. Conclusions. . It is proven that there will be a transition to a new world of adaptive banking services, and technology will allow banks to satisfy the unique set of changing preferences of each client with the help of services or programs created according to the principle of modularity or the designer, according to which each user will choose only the modules he needs. Implementation of the above-mentioned trends in banking activity requires banks to develop clear strategy based on the types of innovations in partnership with external business structures, thanks to the development of new competencies and the transformation of corporate culture.

Improving customer relations in the banking sector of Ukraine through the development of priority digital banking products and services: Evidence from Poland

The emergence of new players – fintech companies, neobanks and non-banking companies – changes the structure of competition in the banking sector, reduces the profitability of traditional banking activities, and therefore forces banks to look for new sources of income. The paper deals with the issue of improving relations with clients in the banking sector of Ukraine, which is proposed to be implemented through the development of priority digital banking products and services. The study used a survey method using a statistical apparatus of a small unique sample, the degree of representativeness of which was assessed using the Student’s test. Slightly higher, closer to the level that characterizes the significant impact on the client’s perception of the whole complex of digital activities in the case of Polish banks (3.81, with a maximum possible score of 5.0) than Ukrainian banks (3.75), which indicates greater involvement and willingness to accept the digitalization of the people of Poland. Generally, banks in both countries are recommended to use a customer-oriented approach in forming product policy using digital products and services, which should be implemented and developed in practice in specific areas identified during customer surveys.

COMPETITION-STABILITY RELATIONSHIP IN DUAL BANKING SYSTEMS: EVIDENCE FROM EFFICIENCY-ADJUSTED MARKET POWER

This research attempts to explore the impact of banking competition on financial stability employing a more precise measure of market power. It was found that Islamic banks are less stable and are enjoying lower market power. The analysis shows that higher market competition makes the banking sector vulnerable to defaults, supporting the “competition-fragility view”. This research finds no difference in the relationship for Islamic banks indicates that Islamic banks might be involved in traditional banking activities as conventional banks. The results are consistent and robust to different estimation approaches and subsamples. This research carries regulatory and policy implications.

Платіжні системи в Україні та ризики їх функціонування

The article is aimed at defining the main aspects of the development of the current state of electronic payment systems in Ukraine and generalizing the main risks of violation of their functioning. The carried out research systematized information on the functioning of payment systems (both internal and international) and forms of payments in Ukraine (cash, non-cash – electronic). Among more than 80 domestic and international payment systems created by banks and non-bank institutions, the National Bank of Ukraine defines the following categories of importance of payment systems in Ukraine in order to ensure their continuous and stable functioning – systemically important, socially important and important. It is determined that in Ukraine at the legislative level, taking into account world trends, the payment infrastructure is being actively modernized, especially in the direction of protection of the rights of financial services consumers in the online space. Along with the advent of new technologies of electronic banking, opportunities to diversify the product range of remote services, atypical threats to traditional banking activities of both the internal and the external nature arise. The research systematizes the key risks inherent in functioning payment systems: legal, financial (total commercial risk, liquidity risk, commercial risk), settlement, operating, systemic. It is determined that the main risk in the banking and non-banking sectors is operational risk – the risk of loss of profit due to errors in the implementation of daily routine financial transactions. Prospects for further research in this direction are to find and implement effective mechanisms for minimizing or preventing risks of electronic payment systems.

The Role of Banking Crisis in the Effect of Income Structure on Risk in the Iranian Banking Industry

TToday, with the globalization of the economy and the increased competition between the banks, the profits of traditional banking activities have diminished, and their risk has been on rise. Thus, banks should adopt more efficient risk management methods. In the last three decades, Iranian economy has faced many fluctuations in macroeconomic areas, e.g. the banking industry. The main goal of the current study is to examine the role of banking crisis in the effect of Income diversity on risk of banking industry using panel econometric method) EGLS .(For this purpose, 8 accepted banks in the Tehran Stock Exchange were evaluated as a research statistical population during 2005-2018. The results show that an increase in the share of Non-interest income (income diversity) in the time of banking crisis does not have a significant effect on the banking stability. Another finding of the study suggests that there is a negative significant relationship between the index of concentration during the crisis and the stability of the banking industry. Also, there is a positive significant relationship between the size of the bank, the loan ratio, and the capital adequacy index during the crisis with banking risk.

Congruent Financial Regulation

:After the global financial crisis, bank regulation became more stringent, and as a result the traditional banking system was well capitalized leading into the COVID-19 pandemic. But these same regulatory changes also incentivized a continuing migration of traditional banking activities to nonbank financial institutions (NBFIs), where looser regulation allowed for dangerous buildups of systemic risk. These risks were then realized across many NBFIs and markets in 2020. While legislation to harmonize regulation across these different domains would be desirable, we do not believe it likely in the foreseeable future. In this paper we propose a congruence principle for financial regulation, whereby regulators use existing statutory authority to coordinate rules across economically similar instruments. We provide examples of how such congruence could work for the cases of nonprime mortgage finance and the markets for US Treasury securities.

Digital Infrastructure of Commercial Banks with Special Reference to Vellore District

Digital Infrastructure has taken place in each and every industry in today’s modern world. Banking has been a backbone to many businesses in the past as well as in the present times. Digitalization of all traditional banking activities and services paves the way for the new concept. This helps the banks to satisfy its customers to the core and delight them. Digitalization benefits the customers for making online deposits, online payments, and online money exchange, account opening, bill payment and tracking of account activity. Though digitization has many benefits, it has its own limitation that still exists. This study focuses on the merits and disadvantages of the digital infrastructure of banks to its customers. For the purpose of the study primary data has been collected with the help of questionnaire and secondary data has been collected from books and journals. This study uses percentage analysis and chi-square test for the purpose of data interpretation. The outcome of the study will help the banks to know their customers better and to maintain its performance in digital field.

Business Model as a Concept of Sustainability in the Banking Sector

The paper presents the concept of a sustainable bank by developing a framework based on performance of different business models. Traditional banking and investment activities, such as trading in securities or securitization, may reduce the risk of commercial banks and provide an attractive approach to sustainable finance. Using the method of assessing the performance of a bank, the study appraises the degree of sustainability of the bank from different stakeholders’ points of view. The aim of the article is to verify the research question: how does diversification of traditional activities of commercial banks affect their sustainability? The analysis has been extended by the importance of country-specific and macroeconomic factors. The survey was conducted on 368 commercial banks from European countries, using data from the period 1998−2015. The study contributes to the ongoing discussion on the recognized profitability and sustainability nexus as an important part of sustainable finance that may be a powerful solution to financial crises.

THE INFLUENCE OF FINANCIAL INNOVATIONS ON EU COUNTRIES BANKING SYSTEMS DEVELOPMENT

This article summarizes the arguments and counterarguments in the framework of the scientific discussion on determining priority directions of developing banking systems, modern problems and prospects of introduction of financial innovations in the process of development of banking services. Its pace and current trends require a completely scientific basis. Accordingly, the purpose of the study is to determine the impact of modern information technology in the banking systems of the European Union countries and the future prospects for their development. For this purpose, the hypothesis was, first of all, proposed that the level of business activity of the banking activity is related to the level of development of the country's economy and it will determine in the future the development of the banking systems of these countries. An appropriate empirical study was conducted to confirm this hypothesis. The systematization of literary sources and approaches to the solution of this problem has shown that in scientific sources the analysis of the impact of financial innovations on the banking systems of individual European Union countries is mainly carried out. Taking into account the different levels of development of these countries, these studies do not allow us to make conclusions and suggestions as to the future of European banks. Electronic banking, the creation of a large number of fi tech companies, crypto volume, blockade – radically change the classical banking business. These changes are gaining momentum and the future of the banking system is now very ambiguous. Will classical banks be able to function effectively, or will new financial companies come to their place? What should I do to manage the bank to lay the groundwork for its successful operation, in the context of the rapid development of information technology? Who and how will regulate global financial markets? There are no clear answers to these questions. The methodical toolkit of the study was a clustering method, methods of systematization, grouping, comparison, expert evaluations. The study period covers 2015-2018, which shows the most rapid dynamics of changes in the processes of customer service of banks from the offline to the online sphere. In addition, this period of time is characterized by the rapid development of financial innovation, which radically changes the approaches to traditional banking activities. The article presents the results of cluster analysis, the results of which allowed to group the countries of the European Union at different levels of digitalization. As a result, it was found that the most advanced economies and the most developed countries have the highest level of deductibility of banking activity (related to clusters 2 and 1). As a higher level of economic development provides more opportunities for investment, Internet access and better education of the population. In addition, it can be argued that it is the countries from the first group in the near future will or will become leaders in the European market of banking services, and it is on them that they will need to be guided by the orientation of the development of the banking system. The results of empirical analysis, have shown that banking institutions understand the lack of prospects of activities without financial innovation. On the other hand, as the study showed, such activity is characterized by high-risk banks. The issue of safety of up-to-date financial transactions is extremely important for supervisors who can not at the moment agree on what measures to apply and implement in order to minimize the risks of financial transactions. The study empirically confirms and theoretically proves that it is important to understand and justify the basic principles of the future development of banks, to identify and develop measures to minimize the levels of financial risks associated with the implementation of financial innovations, as well as to simply understand and evaluate changes expected by users of banking services during the next 5 to 10 years. The results of the research can be useful for scientists, management of banking and other financial institutions, as well as for users of banking services.

Share-option based compensation expense, shareholder returns and financial crisis

This paper contributes to the literature that analyses the relationship between Share-Option Based Compensation (SOBC) expense and shareholder returns. It utilises a sample of financial firms listed in the European Economic Area and Switzerland between 2005 and 2016 to make inferences about the impact of the financial crisis on the above-mentioned relationship. The paper also assesses the extent to which the relationship between SOBC expense and shareholder returns during the financial crisis varies with ownership concentration. We find evidence that the positive relationship between SOBC expense and shareholder returns is significantly more apparent during the financial crisis. This suggests that investors place more emphasis on the unrecognised intangible features of SOBC contracts during the crisis, even though their associated expenses are subject to managerial discretion and measurement errors. We also find that the positive relationship between SOBC expense and shareholder returns over the financial crisis is more pronounced when ownership is more concentrated. The results of our study are robust after controlling for firm size, potential investment growth opportunities, traditional banking activities and firm self-selection bias.

The impact of expanded bank powers on loan portfolio decisions

This paper investigates the impact of the integration of traditional and nontraditional banking activities on loan portfolio management at the consolidated level. The increased risk exposure to nontraditional banking assets, e.g., trading and merchant banking assets, has a nontrivial impact on traditional loan portfolios and, in particular, on the supply of short-term credits. The findings show that confronted with the market-wide shock of the financial crisis, commercial-focused banks which hold larger amounts of risky nontraditional banking assets gravitate their loan portfolios away from business and consumer loan sectors. The results from a quasi-natural experiment reveal that in response to an exogenous regulatory shock of FAS No. 166 and 167, which required banks to transfer off-balance sheet securitized loans onto bank balance sheets, securitizer banks tend to reduce business credits substantially more due to their pre-existing exposures to nontraditional assets.

Brexit: Options for Banks from the UK to Access the EU Market

UK banks who want to maintain an access to the EU market after BREXIT are currently assessing their options. The prospect of a free trade agreement with the EU remaining uncertain, they cannot rely on such an agreement before taken a decision. The present paper sketches the three main options – i.e. servicing EU client directly from the UK, creating a branch or establishing a subsidiary – comparing their benefits and restrictions under the GATS rules and the free movement of capital and freedom of establishment under the EU Treaties. The focus is on traditional banking activities leaving aside investment services. Whilst acting through a EU based subsidiary appears to be the most promising option for UK banks who ambition to serve clients on a EU scale, the choice of location is not trivial as Member States are competing to attract such subsidiaries to their jurisdiction. The ECB in its supervisory role of the banking sector has already signaled that it will not allow such competition to result in a supervisory arbitrage.

Stochastic cost frontier analysis – a sensitivity analysis on cost measures

Purpose This paper aims to examine alternative methods for recording and treating costs in studies of bank efficiency. Design/methodology/approach This study used stochastic frontier analysis (SFA) models with core costs and total costs to estimate the cost efficiency of banks in two different economies, Vietnam where the banking system is under-developed (and thus is dominated by traditional banking activities) and New Zealand where the banking system is well-developed (and thus non-traditional banking activities play an important role). Findings The authors found that models using total cost tend to underestimate the banks’ cost efficiency. This underestimation relates to the extent of modern activities in a banking system: it is larger in an advanced banking system (i.e. New Zealand) and smaller in a less-developed banking system (i.e. Vietnam). Research limitations/implications Research is limited to two countries, and it would be useful to apply the same technique to other data sets. Practical implications The paper suggests a new approach to cost SFA studies in banking. Originality/value The paper provides a much more searching analysis of costs in banking than has generally been seen in previous research.

Banking business models and the nature of financial crisis

In our paper, we analyze heterogeneity among the various business models that incorporate systemically important banks in 65 countries over the period of 2000–2012. For the first time, we identify true banking strategies in a portfolio context, that is, consisting of various combinations of bank assets and funding sources. Next, we estimate the way distinct strategies have affected bank profitability and risk before the crisis, as well as their impact on the mortgage crisis. We demonstrate that during the mortgage crisis, the investment model indicated the lowest individual risk and highest systemic risk simultaneously. Consequently, we document that the funding structure was responsible for the systemic effect of the mortgage crisis. Further, we demonstrate that countries with systemically important banks that rely on investment activities experience a greater, but more short-lived decline in GDP, when compared to countries that have predominantly traditional banking activities.