Banking regulation and supervision: can it enhance stability in Europe?

2014 ◽  
Vol 6 (3) ◽  
pp. 244-269 ◽  
Author(s):  
Faten Ben Bouheni
Keyword(s):  
Risk Taking ◽  
Generalized Method Of Moments ◽  
Banking Regulation ◽  
European Countries ◽  
Bank Risk ◽  
Dynamic Panel ◽  
Content Type ◽  
Regulation And Supervision ◽  
European Banks ◽  
The Relationship

Purpose – This paper aims to find the effects of regulatory and supervisory policies on bank risk-taking. The same regulation and supervision have different effects on bank risk-taking depending on influence factors. These factors were considered and a sample of the largest European banks from France, Germany, UK, Italy, Spain and Greece was used over the period 2005-2011. Design/methodology/approach – In this paper, the author analyses the effects of regulation and supervision on risk-taking. The author uses a sample of the biggest banks from six European countries (France, UK, Germany, Italy, Spain and Greece) over the period 2005-2011. Because the applicable entry of IFRS was in 2005, thus data of European banks are not available before this date. For each country in the sample, the 10 largest banks (defined by total assets) that lend money to firms were identified. The author does not include central banks or postal banks, which generally do not lend money to firms and are described as non-banking institutions (La Porta et al., 2002). Findings – It was found that restrictions on bank activities, supervisors’ power and capital adequacy decrease risk-taking. Thus, regulation and supervision enhance bank’s stability. While, deposit insurance increases the risk due to its association to moral hazard. Finally, it was found that strengthening regulatory and supervisory framework raises the risk-taking and weakens the stability of European banks. Originality/value – The author contributes to existing empirical analyses in three ways. First, the existing literature has drawn a lot of attention on US banks. However, the purpose of this paper is to examine the biggest banks of three European leaders (France, Germany and UK) and three more European countries influenced by the recent crisis (Spain, Italy and Greece) over the period 2005-2011. Second, most studies focus mainly on the relationship between regulation and profitability, yet seldom on the relationship between regulation, supervision and risk-taking. The author focuses on this relationship. Third, this study applies the two-step dynamic panel data approach suggested by Blundell and Bond (1998) and also uses dynamic panel generalized method of moments (GMM) method to address potential problems. The two-step GMM estimator that the author uses is generally the most efficient.

Merton-type default risk and financial performance: the dynamic panel moderation of firm size

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Muhammad Mushafiq ◽  
Syed Ahmad Sami ◽  
Muhammad Khalid Sohail ◽  
Muzammal Ilyas Sindhu
Keyword(s):  
Financial Performance ◽  
Firm Size ◽  
Default Risk ◽  
Banking Sector ◽  
Generalized Method Of Moments ◽  
Dynamic Panel Data ◽  
Dynamic Panel ◽  
Content Type ◽  
Nonfinancial Firms ◽  
The Relationship

PurposeThe main purpose of this study is to evaluate the probability of default and examine the relationship between default risk and financial performance, with dynamic panel moderation of firm size.Design/methodology/approachThis study utilizes a total of 1,500 firm-year observations from 2013 to 2018 using dynamic panel data approach of generalized method of moments to test the relationship between default risk and financial performance with the moderation effect of the firm size.FindingsThis study establishes the findings that default risk significantly impacts the financial performance. The relationship between distance-to-default (DD) and financial performance is positive, which means the relationship of the independent and dependent variable is inverse. Moreover, this study finds that the firm size is a significant positive moderator between DD and financial performance.Practical implicationsThis study provides new and useful insight into the literature on the relationship between default risk and financial performance. The results of this study provide investors and businesses related to nonfinancial firms in the Pakistan Stock Exchange (PSX) with significant default risk's impact on performance. This study finds, on average, the default probability in KSE ALL indexed companies is 6.12%.Originality/valueThe evidence of the default risk and financial performance on samples of nonfinancial firms has been minimal; mainly, it has been limited to the banking sector. Moreover, the existing studies have only catered the direct effect of only. This study fills that gap and evaluates this relationship in nonfinancial firms. This study also helps in the evaluation of Merton model's performance in the nonfinancial firms.

Can BRICS and ASEAN-5 emerging economies benefit from bank diversification?

2019 ◽  
Vol 27 (1) ◽  
pp. 43-69 ◽  
Author(s):  
Syed Moudud-Ul-Huq
Keyword(s):  
Risk Taking ◽  
Generalized Method Of Moments ◽  
The Other ◽  
Set Covering ◽  
Diversification Strategy ◽  
Data Set ◽  
Content Type ◽  
Diversification Benefit ◽  
The Impact ◽  
The Relationship

Purpose This paper aims to empirically investigate the impact of bank diversification on performance and risk-taking behavior. The analysis uses an unbalanced panel data set covering the period between 2007 and 2015 for a total of 1,397 banks from ASEAN-5 and BRICS economies. Design/methodology/approach Dynamic panel generalized method of moments (GMM) has been used primarily to examine the relationship between bank diversification on performance and risk-taking and later, validate the core results by incorporating two-stage least squares (2SLS). Findings Similar to the results of previous studies based on the developed economy, this study also confirms the hypothesis of the portfolio diversification. The key robust result is that the benefits from revenue and assets diversification are heterogeneous and the BRICS banks achieve higher benefit from using both diversification strategies. On the other hand, ASEAN-5 banks fail to show the significant advantage from assets diversification. Among the diverse sources of income, interest is not a major determinant of efficiency and bank’s stability, while ASEAN-5 banks should foster commission and others income as mechanisms for diversification benefit in the region. Originality/value A few studies are available in the current literature which examines the impact of revenue and assets diversification on either bank performance or risk-taking in the developed economy’s context. However, very few studies are found that examine the relationship between bank diversification, performance and risk-taking together. Moreover, to the best of the author’s knowledge, there is a dearth of literature on this topic that built on the comparative analysis between two regions, i.e. ASEAN-5 and BRICS. As a result, the empirical results of this research provide useful information to the stakeholders so that they can enhance bank diversification strategy and implement them successfully by considering the other factors.

The impact of multimarket contacts on bank stability in Vietnam

2019 ◽  
Vol 31 (3) ◽  
pp. 336-357 ◽  
Author(s):  
Tu DQ Le ◽  
Son H. Tran ◽  
Liem T. Nguyen
Keyword(s):  
Risk Taking ◽  
Emerging Market ◽  
Generalized Method Of Moments ◽  
Banking System ◽  
Asia Pacific ◽  
Asia Pacific Region ◽  
Bank Stability ◽  
Content Type ◽  
The Impact ◽  
The Relationship

Purpose The purpose of this study is to investigate the impact of multimarket contacts on bank stability in the Vietnamese banking system between 2006 and 2015. Design/methodology/approach The system generalized method of moments proposed by Arellano and Bover (1995) is used to examine the relationship between multimarket contacts and bank stability. Findings The findings show that multimarket contacts among Vietnamese commercial banks improve bank stability. In addition, more x-efficient banks appear to be more stable. The same is true for banks with less holding liquid assets, for those with less excessive lending, for smaller banks, for those with the greater level of intermediation and for those with a higher level of foreign ownership. Listed banks are found to be less-risk taking than unlisted banks. Originality/value This study is the first attempt to examine the relationship between multimarket contacts and bank stability in an emerging market in the Asia-Pacific region.

Funding liquidity risk and bank risk-taking in BRICS countries

2018 ◽  
Vol 13 (1) ◽  
pp. 231-248 ◽  
Author(s):  
Ahmed Mohamed Dahir ◽  
Fauziah Binti Mahat ◽  
Noor Azman Bin Ali
Keyword(s):  
Risk Factor ◽  
Risk Taking ◽  
Generalized Method Of Moments ◽  
Liquidity Risk ◽  
Bank Risk ◽  
Policy Makers ◽  
Substantial Impact ◽  
Content Type ◽  
Funding Liquidity ◽  
Brics Countries

Purpose The purpose of this paper is to examine the effects of funding liquidity risk and liquidity risk on the bank risk-taking. Design/methodology/approach This study employs a system generalized method of moments (GMM) estimation technique and a sample of 57 banks operating in BRICS countries over the period from 2006 to 2015. Findings The results reveal that liquidity risk has a significant and negative effect on the bank risk-taking, indicating that a decrease in liquidity risk contributes to higher bank risk-taking. The study also reveals that funding liquidity risk has the substantial impact on bank risk-taking, suggesting lower funding liquidity risk results in higher bank risk-taking. These results are consistent with prior assumptions. Research limitations/implications The implications of this study highlight the fact that liquidity risk is a risk factor which drives the potential bank default, of which banks tend to take more risks when higher funding liquidity exists. Practical implications This study offers a number of valuable implications for the policy makers as well as practitioners. The policy makers should take into account better liquidity risk management framework aimed at preventing banks from taking excessive risks. Bank executives must pay more attention on how banks could hold more liquid securities and cash. Less risk-taking reduces higher borrowing costs undermining earnings through imposing taxes on corporate. Originality/value This work uncovered that liquidity risk per se is an important and previously unidentified risk factor, specifically its effects on bank risk-taking and contributes to the view in support of holding more liquid securities than the past.

Does bank competition matter for performance and risk-taking? empirical evidence from BRICS countries

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Syed Moudud-Ul-Huq
Keyword(s):  
Financial Crisis ◽  
Risk Taking ◽  
Bank Performance ◽  
Bank Competition ◽  
Dynamic Panel ◽  
Content Type ◽  
Brics Countries ◽  
Risk Taking Behavior ◽  
Small Banks ◽  
The Relationship

PurposeThis study examines the relationship between banks' competition performance and risk-taking behavior concerning the impacts of bank size and the recent global financial crisis. The analysis empirically uses dynamic panel data from 1137 banks of the BRICS countries (i.e. Brazil Russia India China and South Africa) for the period 2000–2015.Design/methodology/approachDynamic panel generalized method of moments (GMM) has been used primarily to examine the effect of bank competition on performance and risk-taking. Later the paper validates the core results by using three-stage least squares (3SLS) and incorporating alternative measure of competition in baseline equations.FindingsThis study confirms the significant impact of competition that complies with the structure-conduct-performance hypothesis quiet life hypothesis and “competition fragility” view. However, the key robust results are as follows: (1) in competitive markets large banks are more efficient than small banks; (2) there is a nonlinear relationship between competition performance and risk; (3) across bank size competition heterogeneously affects profitability efficiency risk and stability; (4) notably small banks are as efficient as large banks during crisis but shared with risk; and (5) small banks also stable during crisis in highly concentrated markets but less stable in competitive environments.Practical implicationsThis study promotes higher market power for the bank's profitability and financial stability. More intently policymakers should nurture both cost and revenue efficiency for large banks as these are less efficient than small banks in concentrated markets though these banks produce risk. Hence those banks should be cautious to minimize non-performing loans and maximize stability regarding financial and efficiency. Based on the nonlinear pattern of competition the regulators should adopt different policies for short and long run. It also recommends encouraging commercial and cooperative banks in the BRICS region as these are more efficient risk-averse and better stabilized than other types of banks.Originality/valueA good number of studies are available in the current literature which examines the impact of bank competition on either bank performance or risk-taking in a single country or cross country analysis. However, very few studies examine the relationship between bank performance and risk-taking behavior concerning the impacts of competition (non-linear and quadratic) size financial crisis and ownership structure together. Moreover, there is a dearth of literature on this topic that built on BRICS economies.

Diversification, corporate governance, regulation and bank risk-taking

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ahmed Imran Hunjra ◽  
Mahnoor Hanif ◽  
Rashid Mehmood ◽  
Loi Viet Nguyen
Keyword(s):  
Corporate Governance ◽  
Emerging Economies ◽  
Risk Taking ◽  
Deposit Insurance ◽  
Generalized Method Of Moments ◽  
Bank Risk ◽  
Content Type ◽  
Diversification Strategies ◽  
Capital Regulations ◽  
The Impact

Purpose The purpose of this paper is to investigate the impact of diversification, corporate governance and capital regulations on bank risk-taking in Asian emerging economies. Design/methodology/approach The authors applied the generalized method of moments to analyze a sample of 116 listed banks of ten Asian emerging economies for the years 2010–2018. Findings The authors found that diversification, board size, CEO duality and board independence, block holders and capital regulations significantly affect bank risk-taking. In particular, nontraditional income sources such as noninterest income and adoption of diversification strategies minimize bank risk-taking. Practical implications It is expected that the outcomes of this study can be used by banks in Asian emerging economies that seek to reduce risk-taking by managing the diversification of their income streams and managing the impacts of capital regulation and implementing sound corporate governance features in monitoring their operations. This study suggests practical risk minimizing strategies for banks. First is the sourcing of nontraditional income and adoption of diversification strategies. Second, maintaining nonexecutive directors on the board would enhance monitoring of business activities. Third, maintaining deposit insurance would reduce bank’s risk. Government provides insurance to depositors to motivate them to deposit their funds into the banks. This, in return, facilitates banks to overcome risk. However, banks need to be cautious of any increase in capital ratio, as channeling funds into risky investments would increase risk. Originality/value This study is the first to investigate the impacts of corporate governance, diversification and regulation on bank’s risk-taking in a cross-country setting of ten Asian emerging economies.

The impact of corporate social responsibility on the risk of commercial banks with different levels of financial constraint

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Liem Thanh Nguyen ◽  
Khuong Vinh Nguyen
Keyword(s):  
Corporate Social Responsibility ◽  
Social Responsibility ◽  
Risk Taking ◽  
Bank Risk ◽  
Bank Performance ◽  
Content Type ◽  
Corporate Social ◽  
The Impact ◽  
The Relationship ◽  
Different Levels

PurposeThis research investigates the link between corporate social responsibility (CSR) activities and bank risk-taking in Vietnam and introduces the constraint factor to see whether this link alters with different levels of constraint.Design/methodology/approachUsing a sample of commercial banks in Vietnam from 2008 to 2017, this study employs two-step system generalized method of moments (Sys GMM) with a finite sample correction mechanism to estimate the models.FindingsThe results suggest that CSR activities reduce bank risk-taking, and this relationship is only present in the case of financially constrained banks. Unconstrained banks, on the other hand, are more likely to invest in unnecessary CSR, thus reducing bank performance and increasing bank risk-taking.Research limitations/implicationsThe first implication from this study is that CSR activities might be considered as a risk-mitigating tool and should be invested in that respect. Secondly, regulatory units and investors should be more cautious about CSR expenditures since this type of spending could increase default risk, especially for banks with easy access to external financing. One particular limitation of this study is the low number of observations available for banks in Vietnam. Future studies could use texture analysis to expand the sample or consider macro-level governance characteristics to examine which factors might modify the relationship between CSR and bank risk.Originality/valueVery limited studies discussed the link between corporate social responsibility and bank performance and bank risk. There are even fewer papers examining the relationship between CSR and risk, and most of these papers deal with advanced economies. Furthermore, no studies investigate the interaction effect of CSR and financial constraint, which should be prevalent in developing countries on bank risk. As a consequence, the current study seeks to verify the impact of financial constraints on the link between CSR and bank risk.

How do banks’ capital regulation and risk-taking respond to COVID-19? Empirical insights of ownership structure

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Syed Moudud-Ul-Huq ◽  
Kawsar Ahmed ◽  
Mohammad Ashraful Ferdous Chowdhury ◽  
Hafiz M. Sohail ◽  
Tanmay Biswas ◽  
...  
Keyword(s):  
Ownership Structure ◽  
Risk Taking ◽  
Financial Stability ◽  
Generalized Method Of Moments ◽  
Capital Regulation ◽  
Data Set ◽  
Content Type ◽  
Private Banks ◽  
Three Stage Least Squares ◽  
The Relationship

Purpose This study aims to investigate the relationship between capital regulation and risk-taking behavior (financial stability) concerning the impacts of the recent global (COVID-19) crisis and diverse ownership structure. Design/methodology/approach The analysis uses an unbalanced panel data set from 32 commercial banks of Bangladesh for 2000–2020. The authors use the two-step system generalized method of moments and three-stage least squares to produce the study outcomes. Findings The robust results reveal that the relationship between capital regulation and risk (financial stability) is negative (positive) and bi-directional. More significantly, COVID-19 makes banks fragile and demands more capital to absorb risk. However, the effect of COVID-19 is heterogeneous when the authors consider ownership structure. Among the diverse ownership styles, Islamic and active shareholding show their controlling wheel on capital regulation and risk-taking aptitude (financial stability) during the global (COVID-19) crisis. In normal economic conditions, private banks and minority active shareholding can be a good determinant for capital regulation and risk (financial stability). On the other hand, state-owned and large banks have been found as less capitalized and highly risky. Originality/value This study is the pioneer in exploring capital regulation and risk toward the recent global (COVID-19) crisis.

Interest rate liberalization and bank liquidity creation: evidence from China

2020 ◽  
Vol 10 (4) ◽  
pp. 377-391 ◽  
Author(s):  
Jiaming Zhang ◽  
Xiangrong Deng
Keyword(s):  
Interest Rate ◽  
Risk Taking ◽  
Least Square ◽  
Mediation Effect ◽  
Bank Risk ◽  
Firm Level ◽  
Content Type ◽  
Asset Price Bubbles ◽  
Interest Rate Liberalization ◽  
The Relationship

PurposeThis study aims to empirically analyze how interest rate liberalization affects bank liquidity creation, and investigate whether the relationship between them is linear.Design/methodology/approachBased on panel data on 145 banks in China over the period 1997–2015, this paper regresses the econometric model by conducting feasible generalized least square estimation.FindingsThe regression results show that, first, interest rate liberalization has a nonlinear impact on bank liquidity creation, and the relationship between them is inverted U-shaped. In other words, as interest rate liberalization progresses, bank liquidity creation increases first, and then decreases. Second, through the mediation effect tests, this study found that interest rate liberalization affects bank liquidity creation through bank risk-taking. That is, interest rate liberalization leads to changes in bank risk-taking, thus resulting in changes in bank liquidity creation.Research limitations/implicationsThe effect of interest rate liberalization on bank liquidity creation is nonlinear, so promoting interest rate liberalization faces a trade-off because excessive bank liquidity creation may lead to asset price bubbles, while insufficient bank liquidity creation may inhibit economic growth.Practical implicationsInterest rate liberalization has a significant impact on bank liquidity creation; therefore, bank liquidity creation should be added to the objective function of the regulator that determines interest rate liberalization reform in China.Social implicationsInterest rate liberalization has a direct impact on bank risk-taking, so the consequences of interest rate liberalization should be included in the framework of macro-prudential supervision.Originality/valueInterest rate liberalization is one of the most important financial reforms in China, yet its potential impact on firm-level bank liquidity is little explored. This paper attempts to fill the gap.

scholarly journals Bank institutional setting and risk-taking: the missing role of directors’ education and turnover

2019 ◽  
Vol 19 (4) ◽  
pp. 774-805 ◽  
Author(s):  
Antonio D’Amato ◽  
Angela Gallo
Keyword(s):  
Risk Taking ◽  
Bank Risk ◽  
Institutional Setting ◽  
Policy Debate ◽  
Risk Propensity ◽  
Data Set ◽  
Content Type ◽  
Cooperative Banks ◽  
The Relationship ◽  
Board Turnover

Purpose This paper aims to analyze the relationship between bank institutional setting and risk-taking by exploring whether board education and turnover are drivers of the risk propensity of cooperative banks compared to joint-stock banks. Design/methodology/approach Based on a comprehensive data set of Italian banks over the 2011-2017 period, this paper examines whether these board characteristics affect the risk propensity of cooperative and joint-stock banks. Bank risk is measured by the Z-index, profit volatility and the ratio of non-performing loans to total gross loans. Findings The findings show that cooperatives take less risk than joint-stock banks and have lower board turnover and education. Furthermore, this study finds that while board education mediates the relationship between the cooperative model and bank risk-taking, there is no evidence for board turnover. Thus, the lower educational level of cooperative directors contributes to explaining the lower risk-taking of cooperative banks. Implications The findings have several implications. In terms of the more general policy debate, the results point to the need to strengthen the governance model for both joint-stock and cooperative banks while supporting the view that a more ad hoc perspective on the best models and practices for each type of institutional setting would be preferable. In particular, the study reveals how board education’s effects on bank risk-taking should be carefully monitored. Originality/value Through a mediation framework, this study provides empirical evidence on the relationship between bank institutional setting (by distinguishing between cooperative and joint-stock banks) and risk-taking behavior by exploring the underlying mechanisms at the board level, which is novel in the literature.

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