“How using derivative instruments and purposes affects performance of Islamic banks? Evidence from CAMELS approach”

The increase of the use of derivative instruments by Islamic banks for different purposes motivate us to conduct this study. This work has twice objective: firstly, to investigate the effect of each derivative instrument (forwards, futures, swaps or options) on the performance of Islamic banks, and secondly to examine the effect of each derivative purpose (hedging or trading) on the performance of Islamic banks.To reach this end, dynamic panel data econometrics with GMM system are conducted on 32 Islamic banks during the period from 2007 to 2017. The CAMELS approach is used to measure the performance of sample banks.Statistics on sample banks reveal that Islamic banks are substantial users of derivatives, prefer using derivatives for trading purpose than for hedging purpose, and have acceptable level of performance.The main results confirm that using options affects positively and moderately the performance of sample banks. In the same way, we find that swaps have positive and weak impact on the performance of sample banks. However, the results reveal that using forwards decrease the performance of sample banks. Finally, we find that futures have ambiguous and marginal effect on the performance of sample banks.As regards derivative purposes, results do not see which purpose mainly motivate the Islamic banks to invest in the derivatives market.As theoretical implication, we suggest for further studies to explore more the differences between using derivatives by Islamic banks for trading and hedging purpose.Finally, as practical implications, we recommend for managers of Islamic banks to enlarge their use of options and swaps, to supervise their use of forwards and to stop their use of futures.     

Does female management influence firm performance? Evidence from Luxembourg banks

In this study, we examine the relationship between the proportion of women in top management positions at banks and these institutions’ financial performance. Using prudential data from supervisory reporting for all credit institutions in the Grand Duchy of Luxembourg from 1999 to 2013, we find a positive association between female management and firm performance. The economic effect is substantial: a 10 % increase in women in top management positions improves the bank’s future return on equity by more than 3 % p.a. Moreover, we show that this positive relationship is (i) almost twice as large during the global financial crisis than in stable market conditions and (ii) non-linear, with banks having 20–40 % female management being the most successful.     

Does prudential regulation contribute to effective measurement and management of interest rate risk? Evidence from Italian banks

This paper contributes to prior literature and to the current debate concerning recent revisions of the regulatory approach to measuring bank exposure to interest rate risk in the banking book by focusing on assessment of the appropriate amount of capital banks should set aside against this specific risk. We first discuss how banks might develop internal measurement systems to model changes in interest rates and measure their exposure to interest rate risk that are more refined and effective than are regulatory methodologies. We then develop a backtesting framework to test the consistency of methodology results with actual bank risk exposure. Using a representative sample of Italian banks between 2006 and 2013, our empirical analysis supports the need to improve the standardized shock currently enforced by the Basel Committee on Banking Supervision. It also provides useful insights for properly measuring the amount of capital to cover interest rate risk that is sufficient to ensure both financial system functioning and banking stability.     

Is monetary policy effective in dampening fiscally induced exchange market pressures? Evidence from Ghana

Episodes of currency crises in Ghana over the recent past were examined. We also address two fundamental questions using VAR framework. First, how does fiscal policy relate to exchange market pressures (EMPs) in Ghana? Second, whether persistent fiscal slippages hinder the effective use of interest rate as monetary policy tool to influence undesirable exchange rate fluctuations? We found sterilization interventions to be more effective than interest rate as a monetary policy tool in moderating tensions in foreign exchange market. Higher recurrent expenditure was generally associated with higher EMP, while capital expenditures tend to assuage EMP. We recommend strong policy coordination between the fiscal and monetary authorities to ensure macroeconomic stability.     

Capital structure of Islamic banks: How different are they from conventional banks?

This paper uses comprehensive data for 112 Islamic and 709 conventional banks from 23 countries over 1995–2015 to compare the capital structure of Islamic banks (IBs) and conventional banks (CBs) from several perspectives. We find that IBs and CBs seem to face different cost pressures in the process of adjusting towards the target capital structure. Asset growth is a key driver of capital structure change, and CBs adjust leverage more aggressively in response to changes in total assets compared to IBs, because they have an advantage in obtaining external funds and can achieve leverage adjustments faster and at a low cost. IBs have more regulatory capital, but their ability to respond to risks is weaker than traditional banks. The results of this paper suggest that Islamic banks are in a disadvantaged position compared to CBs in capital structure management. The conclusion suggests that IBs need to expand its financing tools and funding sources to reduce adjustment costs and improve their capability to deal with asset risk.     

Is there a bright side to government banks? Evidence from the global financial crisis

Using a sample of banks from 56 countries, this paper investigates the lending behavior of government banks during the crisis of 2008, and its association with bank performance and the economy. Contrary to the traditional wisdom, we find that government banks can play a beneficial role under certain circumstances. Government banks have higher loan growth rates than private banks during the crisis. In countries with low corruption, the increased lending by government banks is associated with better bank performance and more favorable GDP and employment growth in the crisis period. In contrast, the results for countries with high corruption are more consistent with the political view: the increased lending by government banks is associated with underperformance relative to private banks, and creates no beneficial effects on either GDP growth or employment.     

What determines the profitability of banks? Evidence from Spain

This paper empirically analyses the factors that determine the profitability of Spanish banks for the period of 1999–2009. We conclude that the high bank profitability during these years is associated with a large percentage of loans in total assets, a high proportion of customer deposits, good efficiency and a low doubtful assets ratio. In addition, higher capital ratios also increase the bank’s return, but only when return on assets (ROA) is used as the profitability measure. We find no evidence of either economies or diseconomies of scale or scope in the Spanish banking sector. Finally, our study reveals differences in the performance of commercial and savings banks.     

Does monitoring by the media improve the performance of government banks?

By examining cross-country data for the period from 2000 to 2010, this study investigates whether monitoring by the media affects the performance of government-owned banks (GOBs). The results indicate that GOBs under strong monitoring do not underperform privately owned banks (POBs), whereas those under weak monitoring do underperform POBs. Further, we find that the strength of the media's monitoring has an important effect on corruption behavior and banks’ performance. This result provides an important policy implication that the government should minimize its ownership, and therefore its influence, in the media sector if it intends to improve the performance of its GOBs.     

Is conservative reporting attractive to foreign institutional investors? Evidence from an emerging market

This study investigates the relation between conservative reporting and foreign institutional ownership using a unique dataset of firms in Turkey. In doing so, we distinguish between foreign funds and corporations. Contrary to prior findings, our analysis shows that conservative reporting is not necessarily a desirable accounting feature for foreign institutional investors. We also find that the interplay between conservative reporting and ownership is significantly different between foreign funds and corporations. The estimated negative relation holds only for foreign funds. Further analysis reveals that foreign funds do not find conservative reporting desirable in low-asymmetric information firms and reduce ownership with greater accounting conservatism in such firms. The analysis sheds significant lights on the relevance of conservative reporting in alleviating the negative consequences of asymmetric information.     

Are banks using hidden reserves to beat earnings benchmarks? Evidence from Germany

Section 340f of the German Commercial Code allows banks to provision against the special risks inherent to the banking business by building hidden reserves. Beyond risk provisioning, these reserves are implicitly accepted as an earnings management device. By analyzing financial statements of German banks for the period 1997–2009, we see these hidden reserves being used to (1) avoid a negative net income, (2) avoid a drop in net income compared to the previous year, (3) avoid a shortfall in net income compared to a peer group, and (4) reduce the variability of banks’ net income over time. Our analysis also shows that if bank managers are unable to reach the targets as set out in (1)–(3), they are more inclined to keep the hidden reserves for use in future periods.     

Which firms engage small, foreign, or state banks? And who goes Islamic? Evidence from Turkey

We study a representative dataset from Turkey that identifies firm–bank connections. Banks in Turkey differ not only in size and nationality, but also in ownership and orientation (non-Islamic versus Islamic)—resulting in at least six distinct bank types. We estimate a multinomial logit of the choice by the firm of bank type. We document a strong correspondence between bank type and firm characteristics that is not always the same as has been documented so far for US datasets. For example, small firms engage large rather than small banks. Young, large, multiple-bank, and industry-diversified firms, that are located in or close to Istanbul, team up with foreign banks. Islamic banks mainly deal with young, multiple-bank, industry-focused and transparent firms.     

Is Japanese management superior? Evidence from the performance of the USA targets in partial acquisitions

This paper examines the efficacy of Japanese management and corporate governance by comparing the long-term post-merger operating performance of the U.S. targets acquired by Japanese bidders compared to the performance of well-matched U.S. targets of U.S. bidders. Unlike prior studies that focus on short-term stock price reactions of target firms, it is possible to undertake this long-term analysis of performance by identifying targets that survive as independent entities because of partial acquisitions. The findings suggest that targets of Japanese bidders either perform no differently from targets of U.S. bidders, or possibly even underperform. Thus, the evidence does not support the oft-claimed superiority of Japanese management and corporate governance system.     

Do banks really monitor? Evidence from CEO succession decisions

We demonstrate that banks play an important monitoring role in CEO succession that is not observed for other types of lenders, particularly public bondholders. There is a stronger relation between cash flow performance and forced CEO turnover for firms issuing bank debt during the year of CEO turnover than for firms not issuing bank debt, and bank debt issuance increases the likelihood of external CEO succession. The stock price reaction to CEO succession is higher when bank monitoring is prevalent. Our results are consistent with theories of relationship banking that propose a valuable monitoring role for well informed, incentivized bank lenders.     

Is language an economic institution? Evidence from R&D investment

Some languages encode future timing more ambiguously than others. We identify two economic channels through which more ambiguous reference to future timing leads to higher levels of R&D investment. Our empirical tests on country- and firm-level R&D investment confirm this prediction, even after controlling for an extensive set of formal and informal economic institutions and addressing endogeneity concern in multiple ways. Tests on patent generation provide further evidence that ambiguous reference to future timing leads to more innovation.     

Does access to external finance improve productivity? Evidence from a natural experiment

We study the relation between access to finance and productivity. Our contribution to the literature is a clean identification of a causal effect of access to finance on productivity. Specifically, we exploit an exogenous shift in demand for a product to expose how producers adapt their productivity in the presence of varying levels of access to finance. We use a triple differences testing approach and find that production increases the most over the sample period in areas with relatively strong access to finance, even in comparison with a control group. This result is statistically significant and robust to a variety of controls, alternative variables, and tests. The causal effect of access to finance on productivity that we find speaks to the larger role of finance in economic growth.     

Do foreign investors insulate firms from local shocks? Evidence from the response of investable firms to monetary policy

Extant research shows that stock returns of investable firms are highly sensitive to foreign market and global information shocks, suggesting that having foreign investors might insulate investable firms from shocks to local fundamentals. Examining 24 emerging markets, we find that both investable and non-investable firms are sensitive to local monetary policy shocks. This allays the concern that emerging-market opening reduces the efficacy of local monetary policy. We also find that in 11 countries (46% of our country-sample), investable firms are more sensitive to local shocks than non-investable firms. Differences in leverage, stock liquidity, size, domestic product-market exposure, or industry cyclicality do not drive this finding.     

Do foreign banks take more risk? Evidence from emerging economies

This paper addresses the impact of foreign ownership on the risk-taking behavior of banks. Using bank-level panel data of more than 1300 commercial banks in 32 emerging economies during 2000–2013, we find that foreign owned banks take on more risk than their domestic counterparts. We further examine several factors that may potentially contribute to foreign banks’ differentiated riskiness from four perspectives, namely, foreign banks’ informational disadvantages, agency problems, the contagious effect of parent banks’ financial conditions and the disparity between home and host markets. We find supportive evidence that these factors play a significant role in affecting foreign banks’ risk-taking.     

Does foreign bank penetration affect the risk of domestic banks? Evidence from emerging economies

We investigate whether foreign bank penetration affects the risk of domestic banks in emerging economies. By using bank-level data from 35 markets during the period of 2000–2014, we find significant evidence that the risk of domestic banks increases with the presence of foreign banks in the host economy, and this finding is shown to be consistent in a series of robustness tests. We also find that the incidence of such effects is more pronounced for domestic banks which are less efficient and less based on traditional activities. Foreign banks exert more pronounced impacts on domestic banks’ risk when they enter the host market via M&A, as opposed to greenfield investments, and when they belong to foreign conglomerates which provide strong internal support.     

Is there an alternative way to avoid another eurozone crisis to the Five Presidents' Report?

The EU Commission's Five Presidents' Report proposes new rules for the eurozone covering fiscal policy, banking and financial markets designed to avert another eurozone crisis. This paper examines the causes of the current eurozone crisis and discusses whether the Report's proposals are likely to succeed. It is argued that the main causes of the crisis were EMU and the failure of financial markets to price risk correctly. It is claimed that the Report may not solve these problems. Having already lost their monetary policy instrument, the Report's fiscal proposals would remove countries' fiscal policy instrument too and deprive countries of the means of economic stabilisation. The proposals would also transfer to an undemocratic and unaccountable Commission important national competences.     

Are regulatory capital adequacy ratios good indicators of bank failure? Evidence from US banks

Motivated by massive bank failures during the financial crisis, this paper examines whether capital adequacy ratios required by regulators are associated with bank failure. It investigates whether the association is affected by the bank's proximity to the minimum required capital ratios. If results show a significant association between regulatory capital and failure of banks falling below the minimum capital ratios, then the ratios are set at an adequate level. Examining a sample of 560 US bank holding companies for the period 2003–2009, results reveal that the association between the core (Tier 1) capital ratio and bank failure becomes significant only if the bank holding company has a Tier 1 capital ratio of less than 6%. This is the level below which US bank regulators do not regard banks as being well capitalized. During the financial crisis period of 2007–2009, there is a significant association only when the criterion is set at or above 8%. Market-based probability of default is more significantly associated with failure relative to Tier 1 capital ratio. The findings of this paper are relevant to regulatory policy discussions and Basel III deliberations on capital adequacy at times of financial turmoil.