Explaining banking stability in Sub-Saharan Africa

The study examined banking stability in Sub-Saharan Africa. The results reveal that banking spread (Net Interest Margin – NIM) is the main determinant of stability and the major means to achieve stability during crises periods. We however find the existence of a threshold effect in NIM.Crises in the banking sector consistently showed to reduce stability. While the results show that high percentage of foreign banks reduce stability, we find foreign banks help stabilize the banking sector in periods of crises. The results show that diversification could also have a positive impact on stability (Z-score) even though this relationship was not robust enough. The results also largely support the competition-fragility view. Particularly, we find that less competition during crises periods can help improve stability. Again, we find evidence for both concentration-stability and concentration-fragility hypotheses depending on the stability measure used. We however find that when large banks in concentrated markets are well regulated, stability could be improved. Weak regulatory environment reduces stability (Z-score) directly and matters during crises periods. Our results are robust to the use of different indicators of stability and estimation methods.     

The relationship between net interest margin and noninterest income using a system estimation approach

This paper examines the determinants of bank net interest margin (NIM) and non-traditional banking activities (NII). A system estimation approach is employed to control for the simultaneity between NIM and NII for commercial banks in a group of 28 financially liberalized countries during the period between 1997 and 2004. We find a statistically significant negative relationship between NIM and NII for the period between 1997 and 2002. A generally positive but statistically insignificant association between NIM and NII is found for the subsequent period (2003–2004). Banks’ increasing involvement in non-traditional activities is negatively correlated with risk-adjusted profitability measures in the former subperiod, suggesting no obvious diversification benefits. However, the share of noninterest income is positively related to the return on assets (ROA) and the return on equity (ROE) for the latter subsample.     

Islamic Banking: How Has It Expanded?

We investigate the determinants of the pattern of Islamic bank expansion around the world using country-level data for 1992-2006. The analysis illustrates that income per capita, share of Muslims in the population, and economic integration with Middle Eastern countries are linked to the development of Islamic banking. Interest rates have a negative impact, while the quality of institutions is not found to be significant. The September 11, 2001, attacks were not a major factor in the expansion of Islamic banking, but they coincided with rising oil prices. Islamic banks also appear to be complements to, rather than substitutes for, conventional banks.     

The Association Between Market and Exchange Rate Risks and Accounting Variables: A GARCH Model of the Japanese Banking Institutions

This study has two purposes. First, it estimates the market, interest rate, and exchange rate sensitivities (betas) of the Japanese banking institutions. Second, it investigates the relationship between the market-based measures of risk and accounting-based financial ratios. We extend the literature in three important ways. First, we employ a multi-factor GARCH model to estimate the betas. This framework incorporates non-linearities in the bank stock return modeling and allows for time-varying risk premia. Second, we investigate the determinants of market and exchange rate risk in terms of bank financial ratios. To this end, we regress the beta measures derived from the GARCH model against the corporate decision variables to determine the direction and the magnitude of the impact of the latter on the market and exchange rate risk exposures. Third, by using data on the Japanese banking institutions, we provide a comparison of the bank interest rate and exchange rate sensitivities and the strength of the links between the risk measure and the corporate decision variables between the U.S. and the Japanese banking institutions. This comparison sheds light on the robustness of the results concerning interest rate and exchange rate risk, and their determinants, across the two countries. Several interesting results are obtained. First, empirical results indicate that interest rate is only occasionally significant while market and exchange rate variables are significant for all the banks in the sample. Second, market and exchange rate risk measures do impound information in the financial ratios with the explanatory power of the market beta model being higher than that of the exchange rate beta model. Third, the association of the market-based risk measures and the financial ratios is weaker for the Japanese banks than those found for their U.S. counterparts in the existing literature.JEL Classification: G21, F37     

利率市场化程度与银行业集中度关系研究

目前,我国大多数领域的利率已经实现市场化,利率市场化改革将深刻改变商业银行的生存环境,为商业银行的经营和发展带来空前的机遇和挑战.论本文运用最小二乘回归,就利率市场化水平和银行业集中度之间的关系进行线性回归,发现两者之间存在非常高的负相关性.利率市场化加剧了银行业的竞争,为中小银行的崛起提供了空间,转变了银行业的市场结构,使得银行业更加高效的发展.     

Credit risk,managerial behaviour and macroeconomic equilibrium within dual banking systems: Interest-free vs. interest-based banking industries

In this paper, an attempt has been made to explore the determinants of credit risk in the banking system with a particular interest toward the Islamic banking industry. We analyze the link between credit risk and a set of bank-specific and macroeconomic along with institutional variables using two complementary approaches. First, we investigate the factors of credit risk using one-step generalized method of moments (GMM) system estimator. Then, we explore the feedback between credit risk and its determinants in a panel vector autoregressive (PVAR) model. We have used a sample of Middle Eastern, North African (MENA) and Asian countries to apply our model. The major purpose of this paper is to find factors that could explain credit risk within the interest-free banking system relative to the interest-based one.     

Macroeconomic and bank-specific determinants of non-performing loans in Greece: A comparative study of mortgage,business and consumer loan portfolios

This paper uses dynamic panel data methods to examine the determinants of non-performing loans (NPLs) in the Greek banking sector, separately for each loan category (consumer loans, business loans and mortgages). The study is motivated by the hypothesis that both macroeconomic and bank-specific variables have an effect on loan quality and that these effects vary between different loan categories. The results show that, for all loan categories, NPLs in the Greek banking system can be explained mainly by macroeconomic variables (GDP, unemployment, interest rates, public debt) and management quality. Differences in the quantitative impact of macroeconomic factors among loan categories are evident, with non-performing mortgages being the least responsive to changes in the macroeconomic conditions.     

International investment in financial services

This paper analyzes and models the significant components of international trade in financial services, namely, foreign direct investment in banking for the US, the UK and Germany. It distinguishes between banks' activities abroad and FDI in banking by banks and non-banks. A model for FDI in banking is proposed which contains certain explanatory variables peculiar to FDI in banking as compared to FDI in manufacturing. The components of the model of FDI in banking is different from those models designed to explain banks activities abroad. The empirical results of this study of FDI in banking indicate that bilateral trade, banks' foreign assets, the cost of capital, relative economic growth, exchange rates and FDI in non-finance industries are the major determinants of foreign investment in banking.     

Equity market information,bank holding company risk,and market discipline

For market discipline to be effective, market factors such as changes in firm equity and debt values and returns, must influence firm decision making. In banking, this can occur directly via bank management or indirectly though supervisory examinations and oversight influencing bank management. In this study, we investigate whether equity market variables can provide timely information and add value to accounting models that predict changes in bank holding company (BOPEC) risk ratings over the 1988–2000 period. Using a variety of equity market indicators, the findings suggest that one-quarter lagged market data adds forecast value to lagged financial statement data and prior supervisory information in the logistic regressions. Furthermore, using extensive out-of-sample testing for the years 2001–2003, we find: (1) that multiple models estimated over different phases of the business and banking cycles are superior to a single model for forecasting BOPEC rating changes; (2) that equity data adds economically significant power in forecasting BOPEC rating upgrades and performs well for identifying no changes; (3) that for downgrades, the accounting model forecasts the best; (4) that modeling the three possible risk ratings categories simultaneously (downgrade, no change and upgrade) minimizes both Type I and Type II classification errors; and (5) that using multiple models to forecast risk ratings enhances the overall percentage of correct classifications.     

Accounting regulations,enforcement, and stock price crash risk: Global evidence in the banking industry

This study uses the banking industry as a unique testing setting to examine the impact of accounting and enforcement regulations on stock price crash risk. We find that stocks are less likely to crash in countries with stricter accounting regulations and enforcement standards. More importantly, we provide evidence that the impact of accounting regulations is more significant in countries with stricter enforcement standards, suggesting that enforcement mechanisms and accounting regulations are complementary. We find that the main channels for accounting regulations and enforcement standards to affect stock price crash risk are regulations that strengthen information disclosure and improve the effects of direct supervision and external auditors. Our findings are robust after we include more control variables, employ regional regulatory developments as instrumental variables, conduct change regressions, use alternative measures of enforcement, and estimate in various subsamples. Our study has policy implications for how to design accounting regulations and enforcement mechanisms in a more effective manner.     

The Main Determinants of the Use of the Cost Accounting System in Portuguese Local Government

Abstract: This paper explores the main determinants of the use of the cost accounting system (CAS) in Portuguese local government (PLG). Regression analysis is used to study the fit of a model of accounting changes in PLG, focused on cost accounting systems oriented to activities and outputs. Based on survey data gathered from PLG, we have found that the use of information in decision‐making and external reporting is still a mirage. We obtain evidence about the influence of the internal organizational context (especially the lack of support and difficulties in the CAS implementation) in the use for internal purposes, while the institutional environment (like external pressures to implement the CAS) appears to be more deterministic of the external use. Results strengthen the function of external reporting to legitimate the organization's activities to external stakeholders. On the other hand, some control variables (like political competition, usefulness and experience) also evidence some explanatory power in the model. Some mixed results were found that appeal to further research in the future. Our empirical results contribute to understand the importance of interconnecting the contingency and institutional approaches to gain a clear picture of cost accounting changes in the public sector.     

Loan loss provision decisions: An empirical analysis of the Spanish depository institutions

Accountants and financial economists have long held concerns that inefficient loan loss accounting may have a material impact on reported capital and earnings, especially in the banking industry. Prior research has examined banks’ incentives to manipulate loan loss provisions (LLPs) and the resulting impact. However, most of this research has focused on management incentives and other determinants of LLP decisions without addressing the relevant factors associated with best-practiced or efficient LLP decision-making. In this paper, we identify a stochastic frontier model that examines the “efficiency” of the LLP decisions of bank managers. Further we explore the relationship between efficient LLP decision-making and relevant factors that could potentially explain any inefficiency. Our evidence indicates that there is considerable inefficiency in loan loss decision-making among the sample institutions. The research is based on data from the Spanish banking industry, which is particularly relevant in light of the recent deregulatory initiatives in Spain. The findings in this study with regard to the existence of inefficiency in loan loss decisions and the causes of such inefficiency have far-reaching implications for regulators throughout Europe.     

AGENT BANK BEHAVIOR IN BANK LOAN SYNDICATIONS

Using Shared National Credit (SNC) Program data from 1995 to 2000, we extend previous empirical work on bank loan syndications. First, we examine recent trends in the volume and examiner‐based credit quality of loans syndicated through the banking system. Second, we estimate a panel regression model to explain changes in an agent bank's retained share of a syndicated loan in terms of information asymmetries, loan credit quality, capital constraints, and loan age and maturity. We find that these variables are significant determinants of the proportion of a SNC loan retained by an agent bank for its portfolio over time.     

The return to retail and the performance of US banks

The US banking industry is experiencing a renewed focus on retail banking, a trend often attributed to the stability and profitability of retail activities. This paper examines the impact of banks’ retail intensity on performance from 1997 to 2004 by developing three complementary definitions of retail intensity (retail loan share, retail deposit share, and branches per dollar of assets) and comparing these measures with both equity market and accounting measures of performance. We find that an increased focus on retail banking across US banks is linked with significantly lower equity market and accounting returns for all banks, but lower volatility for only the largest banking companies. We conclude that retail banking may be a relatively stable activity, but it is also a low return one.     

Do environmental variables affect the performance and technical efficiency of the European banking systems? A parametric analysis using the stochastic frontier approach

The paper compares the efficiency of the European banking systems in view of the constitution of the European Monetary Union. Since competition among banks will increase, it is important to identify the most efficient banking system able to play a role in that market. A parametric approach is adopted, based on the estimation of a stochastic cost frontier. This methodology enables one to measure X-inefficiency and to model it as a function of environmental variables which may influence firms' efficiency. By means of this analysis it is possible to identify the most efficient banking systems and to focus on the determinants of deviations from cost minimizing. The analysis highlights significant efficiency gaps among the performances of banks in different countries and of different institutional types. In particular, it is found that the Mittel-European model is the one that operates closest to the efficient frontier. This may indicate that, compared with separated banks, the universal banking system allows for production plans which come closer to the optimal frontier. The analysis suggests that, at the beginning of European Monetary Union, national barriers and regulatory frameworks are still responsible for deviation from the efficient frontiers.     

The Value of Market Information in Banking Supervision: Evidence from Italy

We examine the potential use of signals arising from financial markets as a complement to the information set available to banking supervisors. We provide empirical evidence on Italian banks, using a unique dataset matching accounting ratios, market variables, and supervisory ratings. To verify what type of signal they are able to convey, we analyze the behavior of four equity-based indicators for the Italian banks listed on the Milan stock exchange. We then investigate whether the same indicators provide additional information for supervisors. Econometric results confirm the informative content of market variables and their complementarity with supervisory information.JEL Classification: Bank, banking supervision, early warning, market discipline     

Changes in accounting estimates: An update of priors or an earnings management strategy of “last resort”?

Evidence from prior research is mixed about whether accounting estimate changes are strategically motivated, on average, or whether they reflect new or updated information. To interpret this difference, we investigate, by category of material changes in accounting estimates, the association between estimate changes and subsequent restatements. We also explore the determinants of both income-increasing and income-decreasing estimate changes for different categories of estimate changes. We find that the motivations for and the determinants of estimate changes depend on the type of change and on whether the changes in estimates are income-increasing or income-decreasing. Overall, we conclude that when companies are motivated to bias earnings and they cannot do so by manipulating other within generally accepted accounting principles (GAAP) accruals, they sometimes resort to using estimate changes. Our more detailed investigation of estimate changes at the account level suggests a more nuanced view of the determinants of changes in accounting estimates. We develop a more complete model of the determinants of changes in accounting estimates than those used in this emerging literature, which should be of interest to accounting academics, regulators, audit practitioners and audit committee members.     

Do customers patronize Islamic banks for Shari’a compliance?

The purpose of this article is to investigate whether Islamic bank customers view Shari’a compliance and conventional banking services as two distinct and different sets of bank patronage factors and, if so, to find the relative importance of each. The article is based on the primary data collected from 357 Islamic bank customers in Pakistan. The analytical tools used in this piece of research are factor analysis and mean ranking. A total of six variables were fed into the factor analysis, which resulted in the identification of two factors accounting for about 76 per cent of the total variance in the variables. The resulting factors were then analysed through mean ranking to investigate them for the relative importance of each factor. The findings reveal that customers consider Shari’a compliance and conventional banking services as two distinct and different packages of bank patronization factors. It is further revealed that conventional banking services are rather more important than Shari’a compliance. The article has important implications for Islamic financial institutions (IFIs) in Pakistan. On the one hand, it signifies the importance of Shari’a compliance as an additional discrete factor for customers’ bank-selection decision, and on the other, it highlights the importance of customers’ traditional banking needs. In order to be sustainable, IFIs must be competitive with the conventional banking industry in the first place and stay Shari’a compliant in the second place for obtaining marginal competitive edge.     

A Top-down Approach to Stress-testing Banks

We propose a simple, parsimonious, and easily implementable method for stress-testing banks using a top-down approach that captures the heterogeneous impact of shocks to macroeconomic variables on banks’ capitalization. Our approach relies on a variable selection method to identify the macroeconomic drivers of banking variables as well as the balance sheet and income statement factors that are key in explaining bank heterogeneity in response to macroeconomic shocks. We perform a principal component analysis on the selected variables and show how the principal component factors can be used to make projections, conditional on exogenous paths of macroeconomic variables. We apply our approach, using alternative estimation strategies and assumptions, to the 2013 and 2014 stress tests of medium- and large-size U.S. banks mandated by the Dodd-Frank Act, and obtain stress projections for capitalization measures at the bank-by-bank and industry-wide levels. Our results suggest that accounting for bank heterogeneity yields expected capital shortfalls that can be over 30 percent larger than in the case where heterogeneity is ignored. Furthermore, we find that while capitalization of the U.S. banking industry has improved in recent years, under reasonable assumptions regarding growth in assets and loans, the stress scenarios continue to imply sizable deterioration in banks’ capital positions.