Deposit Withdrawals Research Articles

Are Islamic Banks More Resilient During Financial Panics?

AbstractIslamic banking is one of the fastest growing segments of the financial sector in developing countries. Rapid growth of this segment is accompanied with claims about its relative resilience to financial crises as compared to conventional banking. However, little empirical evidence is available to support such claims. Using data from Pakistan, where Islamic and conventional banks co‐exist, we compare the behaviour of Islamic and conventional banks during a financial panic. Our results show that Islamic bank branches are less prone to deposit withdrawals during financial panics, both unconditionally and after controlling for bank characteristics. The Islamic branches of banks that have both Islamic and conventional operations tend to attract (rather than lose) deposits during panics, which suggests a role for religious branding. We also find that Islamic bank branches grant more loans during financial panics and that their lending decisions are less sensitive to changes in deposits. Our findings suggest that greater financial inclusion of faith‐based groups may enhance the stability of the banking system.

Are Islamic Banks More Resilient during Financial Panics?

Rapid growth of Islamic banking in developing countries is accompanied with claims about its relative resilience to financial crises as compared to conventional banking. However, little empirical evidence is available to support such claims. Using data from Pakistan, where Islamic and conventional banks co-exist, we compare these banks during a financial panic. Our results show that Islamic bank branches are less prone to deposit withdrawals during financial panics, both unconditionally and after controlling for bank characteristics. The Islamic branches of banks that have both Islamic and conventional operations tend to attract (rather than lose) deposits during panics, which suggests a role for religious branding. We also find that Islamic bank branches grant more loans during financial panics and that their lending decisions are less sensitive to changes in deposits. Our findings suggest that greater financial inclusion of faith-based groups may enhance the stability of the banking system.

Are Islamic Banks More Resilient During Financial Panics?

Rapid growth of Islamic banking in developing countries is accompanied with claims about its relative resilience to financial crises as compared to conventional banking. However, little empirical evidence is available to support such claims. Using data from Pakistan, where Islamic and conventional banks co-exist, we compare these banks during a financial panic. Our results show that Islamic bank branches are less prone to deposit withdrawals during financial panics, both unconditionally and after controlling for bank characteristics. The Islamic branches of banks that have both Islamic and conventional operations tend to attract (rather than lose) deposits during panics, which suggests a role for religious branding. We also find that Islamic bank branches grant more loans during financial panics and that their lending decisions are less sensitive to changes in deposits. Our findings suggest that greater financial inclusion of faith-based groups may enhance the stability of the banking system.

Bank funding stability, pricing strategies and the guidance of depositors

Banks face a ‘behavioralization’ of their balance sheets since deposit funding increasingly consists of non-maturing deposits with uncertain cash flows exposing them to asset liability (ALM) risk. Thus, this study examines the behavior of banks’ retail customers regarding non-maturing deposits. Our unique sample comprises the contract and cash flow data for 2.2 million individual contracts from 1991 to 2010. We find that contractual rewards, i.e., qualified interest payments, and government subsidies, effectively stabilize saving behavior and thus bank funding. The probability of an early deposit withdrawal decreases by approximately 40%, and cash flow volatility drops by about 25%. Our findings provide important insights for banks using pricing incentives to steer desired saving patterns for their non-maturing deposit portfolios. Finally, these results are informative regarding the bank liquidity regulations (Basel III) concerning the stability of deposits and the minimum requirements for risk management (European Commission DIRECTIVE 2006/48/EC).

Employee Inside Debt and Firm Risk-Taking: Evidence from Employee Deposit Programs in Japan

Using a sample of 2104 Japanese firms, we investigate the effect of employee deposits – a form of employee inside debt – on firms’ risk-taking behavior. Our identification strategy utilizes a new law in 2003 that changed the priority of employee deposits in bankruptcy and led to large scale withdrawals of employee deposits. Our results indicate that firms with higher levels of employee deposits have lower total risk, systematic risk, and idiosyncratic risk, engage in less risk-taking investment, and have higher leverage. Our findings suggest that the holding of the company’s debt by its employees can reduce the agency costs of debt.

A theoretical model of bank lending: Does ownership matter in times of crisis?

The present study investigates theoretically the lending responses of government-owned and private banks in the event of unexpected financial shocks. Our model predicts that public banks provide more loans to the real sector during times of crisis, compared to private banks which cut down on lending and increase liquidity holdings. We put forth three reasons for this heterogeneous behavior. First, the objective of public banks, in contrast to their private peers, is not only to maximize profits given risks, but also to stabilize and promote the recovery of the economy. Second, public banks may suffer less deposit withdrawals or avoid a bank run in a severe crisis, because the state has better access to additional funds making a recapitalization more likely. And finally, public banks may suffer less deposit withdrawals due to their higher credibility in promising a future recapitalization in the case of a severe crisis.

Liquidity Risk Sensitivity of Czech Commercial Banks

The recent financial crisis has shown that a liquidity risk plays an important role in the current developed financial system. One of the efficient tools of liquidity risk management is stress testing which can show banks their potential vulnerability to liquidity shocks. The aim of this paper is therefore to measure the liquidity risk sensitivity of Czech commercial banks and to find out the most severe scenario and the most vulnerable bank. Our sample included significant part of the Czech banking sector; we used unconsolidated balance sheet data over the period from 2000 to 2011 which were obtained from annual reports of Czech banks. We have evaluated liquidity risk of each bank in the sample via six different liquidity ratios. Then we stressed these baseline values in three stress scenarios: run on a bank (simulated by a 20% withdrawal of deposits), confidence crisis on the interbank market (simulated by a withdrawal of 20% of interbank deposits) and use of committed loans by counterparties (simulated by a 5% increase of loans provided to nonbank clients). We measured the impact of all scenarios by relative change of liquidity ratios. The impact of modelled liquidity shocks differs among scenarios. The most serious liquidity problems would be caused by the first scenario – run on a bank. The negative influence of third scenario (use of committed loans) is less severe. The confidence crisis on the interbank market would not affect bank liquidity at all. The results also show that the severity of the impact of all scenarios worsens in periods of financial distress. We have also found that large and medium sized banks are most vulnerable to liquidity shocks, mainly to massive deposit withdrawals.

Do Minority-owned Banks Pay Higher Interest Rates on CDs?

This paper analyzes whether minority-owned banks pass along an advantage in access to governmental deposits to the communities they serve in the form of higher interest rates paid on certificates of deposit (CDs). Although academic evidence has not confirmed increased profitability or efficiency of these banks since the creation of the Minority Bank Deposit Program, their unique positioning within communities may allow them to meet the needs of a clientele with lower and less stable income, and with higher than average expected future deposit withdrawals. Data from the regulatory reports provided by minority and non-minority owned banks are analyzed using five distinct time horizons for CDs. The results suggest that Black-owned banks consistently pay higher interest rates on CDs, with a lower premium for longer-term CDs, and used the premium to cushion the ill effects of the recent financial collapse on their customers. Asian-owned banks provide a smaller premium for short-term CDs, while the remaining category of minority-owned banks, including Native American, Hispanic, and Women-owned banks, also paid a premium on CDs, but shrank that premium substantially following the financial collapse. Note also that minority-owned banks may use this funding advantage in a variety of other ways to serve their respecitive communities.

Switching Costs, Deposit Insurance and Deposit Withdrawals from Distressed Banks

We study retail deposit withdrawals from large European commercial banks which incurred substantial investment losses in the wake of the U.S. subprime crisis. We first show that the propensity of households to withdraw deposits increases with the magnitude of bank distress. This withdrawal risk is, however, substantially mitigated by client-level switching costs that arise from tight client relationship with a distressed bank or limited access to branches of non-distressed banks. Our findings provide empirical support to the Basel III liquidity regulations which emphasize the role of well-established client relationships for the stability of bank funding.

Liquidity Ratios of Polish Commercial Banks

As liquidity problems of some banks during global financial crisis reemphasized, liquidity is very important for functioning of financial markets and the banking sector. The aim of this paper is therefore to evaluate comprehensively the liquidity positions of Polish commercial banks via five different liquidity ratios in the period of 2001- 2011 and to find out whether the strategy for liquidity management differs by the size of the bank. The results enable us to conclude that liquidity of Polish banks has decreased in recent years, partly as a result of higher lending activity but mainly due to the financial crisis. Almost all Polish banks are sensitive to potential massive deposit withdrawals. Only some banks finance their lending activity by deposits; most banks are dependent on other sources of finance. Large and medium sized banks rely on the interbank market or on a liquidity assistance of the Lender of Last Resort, small banks hold buffer of liquid assets.

Bank Regulations after the Global Financial Crisis: Good Intentions and Unintended Evil

AbstractIn this essay, we analyse the impact of the capital and liquidity regulations and call attention to the fact that the banks' responses might create unintended evil: a reduced supply of bank loans, incentives to securitise assets, and adverse incentives on bank risk monitoring. The conclusion is that privately‐based mechanisms that put most creditors at risk are the best way to increase the soundness of banking markets. It is argued that interbank debt should be put at risk because banks have a comparative advantage in risk monitoring. As putting short‐term interbank at risk increases the danger of sudden deposit withdrawals, a mechanism is needed to extend the maturity of short‐term debt at the time of a credit‐led panic.

Contagious Bank Runs: Experimental Evidence

We conduct a laboratory experiment to examine under which circumstances a depositor-run at one bank may lead to a depositor-run at another bank. We implement two-person coordination games which capture the essence of the Diamond-Dybvig (1983) bank-run model. Subjects in the roles of followers observe the deposit withdrawal decisions of leaders before they make their own deposit withdrawal decisions. In one treatment followers know that there are no economic linkages between the leaders' and the followers' banks. In a second treatment followers know that there are economic linkages between the leaders' and the followers' banks. Our results suggest that deposit withdrawals are strongly contagious across banks only when depositors know that there are economic linkages between banks'. The contagion of withdrawals is by a change in beliefs about bank asset quality and in beliefs about the behavior of other depositors, with the latter channel being more pronounced. Our results reconcile panic-based and information-based explanations of bank runs.

Currency Concerns under Uncertainty: The Case of China

The recent declines in China’s financial account balance ended the “twin surplus” era and led to a modest decline in the stock of official reserves, which reflects a reversal in expectations for the Chinese currency. Negative balances, which have been visible in China’s financial balances since the last quarter of 2011, have heightened fears/anxiety in markets. These deficits stand in sharp contrast to the typical financial account surplus that existed until 2010. The announcement in September 2011 by Chinese monetary authorities of a “two-way floating” RMB in the foreign exchange market has unsettled market expectations and has led to a sharp fall in the financial balance. The latter brought a change in the expectations regarding the RMB-USD exchange rate. This change was reflected in the drop in foreign exchange assets, which was caused by a jump in short-term trade credits to prepay (for imports) in dollars, a rise in dollar advances from banks, and a withdrawal of dollar deposits. These changes have, of late, been a cause of concern relating to the future of China’s economic relations vis-a-vis trading and financial partners, which include the United States.The experience of China, in a changing world beset with deregulation and with speculation affecting her external balance in recent years, provides further confirmation of John Maynard Keynes’s observation, in 1937, regarding uncertainty in markets: “About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.”

Ubiquitous Virtual Currency

The whole finance of the world revolves around currency. It may be physical or digital. Currency functions as a unit of account providing a common measure of goods and services being exchanged. The enormous use of paper currency has resulted in deforestation, which is leading to ecological imbalance. For conserving the space, time, and environment there is a need for an alternative currency. In this paper, ubiquitous virtual money is proposed, which is accessible throughout the environment. Ubiquitous currency is a form of electronic money that is spent like pocket change. The transactions can be made secure by the use of biometric identifiers. Keywords—ubiquitous, virtual money, banking, smart money, trackable money. I. INTRODUCTION Money is any physical or virtual object that is exchanged for goods and services. It has a store of value. It functions as a unit of account providing a common measure of goods and services being exchanged. In earlier ages, the exchange of commodity was practiced as barter system. Barter system was generally practiced between complete strangers or potential enemies. It is still used as a method of exchange in times of monetary crisis. Later physical tokens such as gold and silver were used as money. Fiat money was introduced during Yuan and Ming dynasty in China. Money that derives its value from government regulations is Fiat money. Banknotes and coins are used as currency which comprises the physical aspects of nation's money supply. With the advent of commercial banks, demand deposits were introduced as claims against financial institutions. Demand deposit withdrawal can be done in person through banks, checks, drafts, ATMS's or through online banking. Over the years due to increase in population and difference between currency value of various countries, the number of banknotes and coins has immensely increased. Currently over 165,000,000 banknotes and coins are in usage all over the world. For production and printing of banknotes, enormous numbers of trees are being cut down. To maintain the ecological balance we need to find an alternative currency. The world is growing very fast, and everything is moving towards digital from small mobile phone to a complex system such as atomic clocks. For conserving the space, time, and environment, we are proposing a new form of currency named as ubiquitous virtual currency that is not physical and is stored in the cloud. In the present scenario, currency is limited in terms of its reach in monitoring and tracking(1). This limitation could be eliminated with the advent of ubiquitous currency. Ubiquitous currency is a form of electronic money that is spendable like pocket change. Our proposed ubiquitous currency will evolve from existing technology. The term ubiquitous computing was coined by Mark Weiser in 1991. Weiser defined ubiquitous computing as the method of enhancing computer use by making many computers available throughout the environment making them effectively invisible. So, we propose a mechanism which makes efficient usage of money by making accessible throughout the environment and hence making it invisible. If we can store, forward and manipulate information similar thing can be done with the money. Now combine this power of money with the fast growing internet. So there is no hindrance in using the concept of ubiquitous money practically. II. ORGANIZATIONAL STRUCTURE Our whole proposed system is user centric, and it follows iHCI. On the whole top of the system, there will be centralized financial authority which manages all the states. This group consists of representative from each state. The financial system of every state will be controlled and managed by government authority of that country. The government will identify financial institutions like banks which handles all the transaction of public of that country.

How Can Banks Effectively Stabilize Their Retail Customers’ Saving Behavior? The Impact of Contractual Rewards on Saving Persistence and Cash Flow Volatility

Banks face a 'behavioralization' of their balance sheets since deposit funding increasingly consists of non-maturing deposits with uncertain cash flows exposing banks to asset liability (ALM) risk. Thus, this study examines the behavior of banks’ retail customers regarding non-maturing deposits. Our unique sample comprises the contract and cash flow data for 2.2 million individual contracts from 1991 to 2010. We find that contractual rewards, i.e., qualified interest payments, and government subsidies, effectively stabilize saving behavior and thus bank funding. The probability of an early deposit withdrawal decreases by approximately 40%, and cash flow volatility drops by about 25%. Our findings provide important insights for banks using pricing incentives to steer desired saving patterns for their non-maturing deposit portfolios. Finally, these results are informative regarding the bank liquidity regulations (Basel III) concerning the stability of deposits and the minimum requirements for risk management (European Commission DIRECTIVE 2006/48/EC).

The Role of the National Bank of Serbia In Reducing the Negative Effects of Financial Crisis in Serbia

Rapidly overflow crisis in Europe has in the short term to dramatically decrease the projection of economic growth; despite a significantly reduced liquidity is present and growing danger of inflation. Access to new sources of funds is almost out, which left negative consequences on the countries of Eastern and Southeast European countries, whose financial system is dominated by subsidiaries of large European banks. Effects of reduced inflow of capital, the depreciation pressure, increase the risk of deterioration of the quality of assets in countries in the region, whose products are mostly indexed in foreign currency. World financial crisis arrived in Serbia. It is now reflected in the reduced availability of funds from abroad and the psychological-induced fall in confidence in the banking system, that is, to some extent, resulted in withdrawal of foreign currency deposits. According to the two grounds there was a fall in foreign currency liquidity. This paper presents the role of central banks in the mitigation of systemic risk and the role of the National Bank of Serbia and measures undertaken to protect the national financial system and reduce the negative effects of financial crisis in Serbia.

Public Expenditures on Education and Health in Georgia Before and During the Global Crisis

After years of stagnation and political cataclysms, Georgia tried to recover by launching radical economic and political reforms starting in 2004. The results of the reforms appeared to be impressive. The country's GDP has more than doubled; the total volume of bank deposits is five times what it used to be. Key international indices (Doing Business Index, Economic Freedom Index, Corruption Perception Index) have also reflected the success of the reforms. The occupation of the Georgian territories by Russia in August 2008 and the global financial crisis have significantly changed the current macroeconomic environment in Georgia. The August conflict undermined investor and consumer confidence, put pressure on public finances, damaged physical and other infrastructure and undermined the banking system with a large volume of deposit withdrawals. The deepening of the international financial crisis put further pressure on currency and foreign investments. The purpose of this paper is to consider the nature and magnitude of the impact of the global financial crisis on Georgia's social services sector and on the country's economy as a whole. The global financial crisis had a sharp impact on the most disadvantaged members of the society. The main objectives of the paper are to describe to what extent the education and healthcare sectors were affected in Georgia and to investigate how government policies have addressed the problems which arose due to the financial crisis.

Depositors' withdrawal behavior in Islamic banking: case of Indonesia

PurposeIslamic banks need to manage depositors' deposit withdrawals in a well manner in order to be able to optimize depositors' funds in their portfolio financing. Taking into account the Indonesian Islamic banking industry as a study case, this paper attempts to analyze the depositors' withdrawal behavior. Moreover, it also analyzes the responses of Islamic banks to mitigate such deposit withdrawals.Design/methodology/approachFirst, the paper accommodates the flow of funds of the Indonesian Islamic banking operations. Second, it formulates a liability side model of the competitive Islamic banking industry referring to some ideas from the conventional models. Then, the paper uses linear probability model (LPM) to identify depositors' withdrawal behavior and to analyze the responses of Islamic banks to mitigate deposit withdrawals.FindingsIt is found that depositors withdraw their money if: Islamic banks do not generate incomes from their financing; interest rate goes up; and total deposits tend to decrease. As such, Islamic banks have to anticipate this withdrawal behavior by doing two actions: reserving some liquidity and adjusting return sharing ratio to depositors. The output of this paper should benefit the policy markers and Islamic banks to understand depositors' behavior in withdrawing money and determine appropriate policies to manage it.Originality/valueThe best of author's knowledge, this is the first paper trying to analyze the depositors' withdrawal behavior with LPM model taking into account the Indonesian Islamic banking industry.

The Empirical Study of Japanese Deposit Withdrawal Behaviors on Unstable Financial Environment

Problem statement: We need to analyze to withdrawal behavior rather than deposit behavior on the situation which financial institutions might fail. However, there are few studies on withdrawal behavior although there are various studies on individual deposit behavior. Approach: Our purpose of this study is to investigate relationships between individual’s deposit withdrawal behavior and economic and psychological factors using micro data from an Internet (Web-based) survey. Results: We confirm that individual’s withdrawal behavior is strongly affected by not only economic factors, but also psychological factors. In many cases, sign of estimated coefficient of economic factors are consistent with theory of economic behavior. In addition, effects of psychological factors such as degree of trust in information sources and degree of risk aversion are not uniformly against individual’s deposit-withdrawal behavior. Furthermore, we confirm that the probability that they carelessly withdraw their deposits tends to be lower if individuals correctly understand Japanese deposit insurance scheme. Conclusion: For reducing the ratio of individuals who do not correctly understand the Japanese deposit insurance scheme, we propose that the government should announce and educate the scheme to people strongly.

The Cost of Banking Panics in an Age before 'Too Big to Fail'

How costly were the banking panics of the National Banking Era (1861-1913)? I combine two hand-collected data sets - the weekly statements of the New York Clearing House banks and the monthly holding period return of every stock listed on the NYSE - to estimate the cost of banking panics in an era before “too big to fail.” The bank statements allow me to construct a hypothetical insurance contract which would have allowed investors to insure against sudden deposit withdrawals and the cross-section of stock returns allow us to draw inferences about the marginal utility during panic states. Panics were costly. The cross-section of gilded-age stock returns imply investors would have willing paid a 14% annual premium above actuarial fair value to insure $100 against unexpected deposit withdrawals The implied consumption of stock investors suggests that the consumption loss associated with National Banking Era bank runs was far more costly than the consumption loss from stock market crashes.