Early Warning Early Action for the Banking Solvency Risk in the COVID-19 Pandemic Era: A Case Study of Indonesia

The COVID-19 pandemic has affected people’s lives and increased the banking solvency risk. This research aimed to build an early warning and early action simulation model to mitigate the solvency risk using the system dynamics methodology and the Powersim Studio 10© software. The addition of an early action simulation updates the existing early warning model. Through this model, the effect of policy design and options on potential solvency risks is known before implementation. The trials conducted at Bank BRI (BBRI) and Bank Mandiri (BMRI) showed that the model had the ability to provide an early warning of the potential increase in bank solvency risk when the loan restructuring policy is revoked. It also simulates the effectiveness of management’s policy options to mitigate these risks. This research used publicly accessible banking data and analysis. Bank management could also take advantage of this model through a self-stimulation facility developed in this study to accommodate their needs using the internal data.

Bank solvency: The role of credit and liquidity risks, regulatory capital and economic stability

Banking stability is essential to any economy due to its many functions, including intermediation, payment facilitation, and credit creation. Thus, the stability of the banking industry is one of the critical ingredients in economic growth. This paper analyzes how bank capital requirements, credit, and liquidity impact bank solvency using ten major banks that control 90% of the market share in the UK in 2009–2018. The GMM model indicates a strong association between credit and liquidity risks. That is, when banks finance a risky or distressed project, this will lead to an increase in non-performing loans (NPL), which reduces bank liquidity. Poor liquidity profile of the bank may restrict it from providing financial intermediation role. In addition, the findings indicate that efficiency, asset quality, and economic growth have a significant positive effect on the solvency of banks. The results also show that the regulatory capital (tier1) has a positive significant influence on solvency of the banks. Further, the results indicate that during the economic boom, banks tend to increase their regulatory capital. Therefore, there is a need to ensure that during the “good time”, banks can accumulate enough capital that is genuinely capable of absorbing negative shock. Also, it is important for banks to ensure that they are efficient but also have robust credit appraisal system to reduce NPL. This paper also demonstrates the implication of increased capital requirements. That is, increased capital requirements ensure not only banks are liquid but also solvent which enables them to provide financial intermediation.

ANALISIS KINERJA KEUANGAN PERBANKAN SYARIAH INDONESIA PADA MASA PANDEMI COVID-19

Financial sector is an important thing for a country development. Indirectly, the financial sector will support the economy especially during the pandemic, including the Islamic banking industry. This study aims to analyze the financial performance of Islamic banking in Indonesia based on profitability ratios consisting of BOPO, ROA, ROE, liquidity ratios consisting of Cash ratio and FDR, as well as solvency ratios as measured by the CAR ratio, during the COVID-19 pandemic. This research is descriptive quantitative research by measuring the financial performance of the bank through the level of profitability ratios. The results of this study show that there is a fluctuation changing in the performance values during the COVID-19 pandemic. Bank performance through profitability ratios shows that some sharia banks are classified as efficient and some have decreased the performance. In the liquidity ratio, the average bank experienced a decline in the cash ratio component, with the lowest being at BRI Syariah, which fell by 50.9%. Bank solvency ratio generally shows good performance.

United States banking stability: An explanation through machine learning

In this paper, an analysis of the prediction of bank stability in the United States from 1990 to 2017 is carried out, using bank solvency, delinquency and an ad hoc bank stability indicator as variables to measure said stability. Different machine learning assembly models have been used in the study, a random forest is developed because it is the most accurate of all those tested. Another novel element of the work is the use of partial dependency graphs (PDP) and individual conditional expectation curves (ICES) to interpret the results that allow observing for specific values how the banking variables vary, when the macro-financial variables vary.It is concluded that the most determining variables to predict bank solvency in the United States are interest rates, specifically the mortgage rate and the 5 and 10-year interest rates of treasury bonds, reducing solvency as these rates increase. For delinquency, the most important variable is the unemployment rate in the forecast. The financial stability index is made up of the normalized difference between the two factors obtained, one for solvency and the other for delinquency. The index prediction concludes that stability worsens as BBB corporate yield increases.

Norway

Much of the work of the FSAP was conducted prior to the COVID-19 outbreak. The risk and vulnerability analysis integrates the original work with a quantification of the impact of the COVID-19 crisis on bank solvency under two separate scenarios. The original ‘market shock’ scenario explores additional risks that feature less prominently in the COVID scenarios.

Trinidad and Tobago

The FSAP work was mostly conducted prior to the COVID-19 crisis. Given the FSAP’s focus on medium-term challenges and tail risks, its findings and recommendations for strengthening policy and institutional frameworks remain pertinent. As the growth projections were significantly revised downward since the FSAP, the quantitative risk analysis on bank solvency was complemented to include illustrative scenarios to quantify the possible implications of the COVID-19 shock on bank solvency.

Norway

Much of the work of the Financial Sector Assessment Program (FSAP) was conducted prior to the COVID-19 pandemic, with the missions ending on February 13, 2020. Given the FSAP’s focus on medium-term challenges and vulnerabilities, however, its findings and recommendations for strengthening policy and institutional frameworks remain pertinent. The report was updated to reflect key developments and policy changes since the mission work was completed. It also includes a risk analysis that quantifies the possible impact of the COVID-19 crisis on bank solvency. Since the previous FSAP in 2015, the Norwegian authorities have taken welcome steps to strengthen the financial system. Regulatory capital requirements for banks were raised and actions were taken to bolster the weak capital position of insurers. Alongside other macroprudential measures, temporary borrower-based measures for residential mortgages were introduced, which seem to have had some moderating impact on segments of the housing market. The resolution framework was also strengthened, with the implementation of the Bank Recovery and Resolution Directive (BRRD) and the designation of Finanstilsynet (FSA) as the resolution authority.

Country comparative assessment of Islamic banks' financial economic situation

Purpose: Promote a country comparative assessment of the Islamic banks economic and financial situation. Methodology: We used a descriptive and documentary analytical approach. We collected data on Islamic bank financial indicators in 21 countries and analyzed it in light of the standards recommended by the Islamic Financial Services Board (IFSB) and the Basel Committee on Banking Supervision (BCBS). The sample consisted of all countries with available data in the IFSB database (PSIFIs). Data refers to the second quarter of 2018 grouped by countries. We used a simple descriptive statistic, in figures form, to analyze the collected data. Results: This document points out that 90% of Islamic financial institutions (IFIs) in the sample calculate the capital adequacy ratio (CAR) according to BCBS recommendations. In addition, 95% have CARs above 8% (the minimum set by BCBS and IFSB). Therefore, 95% of countries have secure financial systems in terms of bank solvency. In terms of asset quality, the Islamic financial system in Oman showed the best quality in managing its resources. Sudan has shown the highest ratios of profitability in its Islamic banks. In the liquidity analysis, it was not possible to identify precisely which country has the best liquidity ratios in short and long term as more than 60% of the countries did not present sufficient data. In terms of net assets over total assets, and short-term compliance, the Islamic financial systems of Egypt and Afghanistan, respectively, led with better liquidity ratios, showing the ability and security to meet their obligations. Contributions of the Study: Identify countries with the highest / lowest risk considering IFSB and BCBS requirements and recommendations.

THE LINKAGE BETWEEN BANK RESTRUCTURING AND BANK DEPOSITS OF COMMERCIAL BANKS OPERATING IN KENYA

Bank restructuring and bank deposits are important concepts to commercial banks because of their role in the financial intermediation. Intervention through financial innovations, increasing the capital base to address the aspect of size and legal and regulatory framework review are important to ensure successful bank restructuring to record increased level of deposits. Commercial banks in Kenya have undertaken restructuring so as to be more competitive, to restore bank solvency and to mobilize more deposits. However, researchers on bank restructuring and bank deposits found conflicting results. The main objective of the study was to investigate the effect of bank restructuring on deposits of commercial banks in Kenya. The population of the study entailed all the 44 commercial banks licensed and registered under the banking act to do business in Kenya. Out of that data was availed from financial statements and annual reports of 39 commercial banks which were in operation for the period ranging from 2002 to 2014. Descriptive and inferential data analysis methods were used to analyze the secondary data collected. The empirical findings revealed that commercial banks use all the four types of bank restructuring which were financial, capital, operational and asset restructuring. It was further established that operational restructuring statistically affected bank deposits positively. Asset restructuring was found to have significant but negative influence on the deposits of commercial banks in Kenya. The research therefore, concludes that deposits can be mobilized through operational restructuring but can reduce significantly if there is asset restructuring. Deposits can therefore be increased through operational restructuring as an aspect of financial inclusion and financial deepening. KEY WORDS: Bank restructuring, capital, financial, asset, operational, bank deposits.