Are Islamic Banks More Resilient During Financial Panics?

Islamic 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.     

BANKING UNION IN EUROPE: HOW MUCH CENTRALISATION IS NEEDED?

We examine the efficiency of banking regulation in a federation with two tiers of government and highly integrated banking systems. We assume that policy makers have incomplete information about banks’ true health, and banking sector turmoil can generate cross‐border spill‐over effects. We show that, in such an environment, the decentralisation of policy responsibilities for the regulation of banks can achieve the first‐best allocation and ensure financial stability. While national governments design banking regulations, the federal policy maker authorises inter‐regional income redistribution payments throughout the federation. Our results suggest that strengthening national responsibilities in banking regulation and supervision in the course of the further development of the European banking union may be advisable.     

Inside Shadow Banking in China: Credit Driven Growth vs. Financial Stability

Shadow banking has been growing rapidly in China since the 2008 global financial crisis. Shadow banking has also played an increasing role in supplying credit. I investigate the development of the shadow banking sector, and assess its impacts on financial stability and economic growth in China. I argue that, due to the loose regulations and institutional characteristics of the shadow banks, these banks tend to adopt business practices that elevate institutional risks. At the systemic level, shadow banks have contributed to credit expansion and credit-driven growth. However, such growth entails significant financial risks and renders the macro-economy financially fragile. I conclude with a discussion of imminent fullblown financial crisis, calling for policy actions.     

Banking sector resilience to financial spillovers

By using a large sample of bank-level data, we analyse whether the spillover effects of US financial shocks differ with the fundamental characteristics of the banking sectors in the affected countries. We find that a banking sector characterized by a higher degree of competition and larger margin of safety is less affected by financial spillovers. The results are robust to the inclusion of bank-level control variables that capture individual banks’ lending capacity.     

The Efficiency of China's Banking Industry and the Determinants

The recent global financial crisis highlights the importance of a sound financial sector for economic development. This paper evaluates the economic efficiency of China's banking industry and investigates the determinants of this efficiency. Our analysis shows that the average economic efficiency of joint-stock commercial banks is highest, followed by the ‘Big Four’ state-owned commercial banks and city commercial banks. The economic inefficiency of these banks during the past 15 years was mainly caused by technical inefficiency, and this technical inefficiency was mainly caused by scale inefficiency. Using the scores of efficiency as dependent variables, the paper also comprehensively studies the impact of (1) the characteristics of individual banks, (2) the characteristics of the whole banking industry and (3) macroeconomic factors on banking efficiency. The results suggest a number of factors that banks can work on to improve efficiency and lend support to deepening reforms in the Chinese banking industry, including regulatory reforms that require capital adequacy in a more strict way, reforms that introduce more competition and, more broadly, reforms that aim at establishing institutions that can truly commercialize Chinese banks. Last but not least, the efficiency of banking depends on healthy growth of the overall economy.     

If the Banks are Doing So Well,Why Can't I Get a Loan? Regulatory Constraints to Financial Inclusion in Indonesia

Indonesia's financial sector has two paradoxes: (i) Indonesia has been a global leader in microfinance for the past 25 years, but access to microfinance services is declining; and (ii) Indonesia's commercial banks are liquid, solvent, and profitable, and the Indonesian economy has been doing well over the past decade, but small and medium enterprises are facing a credit crunch. Although Indonesia is underbanked, most commercial banks have been unresponsive to unmet effective demand. The behavior of banks has been in their own short‐term best interests, primarily because of the unintended consequences of Indonesia's financial sector reregulation after the East Asian crisis and contradictory monetary policies, which have produced a prudentially sound but inefficient, narrow, and homogenized banking oligopoly. Indonesia should not respond to financial exclusion by artificially pumping out and administratively allocating more credit. Instead, it should promulgate smart regulation so that banks maintain their sound risk management without pursuing noncompetitive and noninclusive business practices.     

银行业竞争、客户筛选与村镇银行二元绩效：传导机制与实证研究*

村镇银行承担着支持“三农”和发展普惠金融的重要使命,但关于银行业竞争对村镇银行经营绩效的影响及其传导机制的研究较少。利用江苏省县域村镇银行2008年至2013年的面板数据,在数理模型分析的基础上实证检验了银行业竞争对村镇银行财务绩效和社会绩效的影响。结果表明,银行业竞争显著降低了村镇银行的财务绩效,但显著提升了社会绩效。进一步分析发现,银行业竞争通过改变村镇银行市场定位和客户筛选行为的作用机制,影响村镇银行经营绩效。因此,应坚持金融改革的市场化方向并建立更加精准的补贴机制,促进村镇银行在可持续发展的同时提升社会绩效。     

Overcapacities in banking: Measurement,trends and determinants

Global banks face profitability challenges since the global financial crisis. Besides cyclical factors, structural features such as overcapacities have been identified as root causes. While policymakers agree on the need for bank consolidation, there is less consensus on the definition and measurement of overcapacities in banking. This paper contributes by conceptualising and formalising the different dimensions of overcapacities in banking and by constructing a novel measure thereof. In addition, it empirically tests the main determinants of overcapacities in banking from 2006 to 2017 and assesses their relative importance. The results indicate that non-bank competition, the interest rate environment and bank business models are the most important driving factors of banking sector overcapacities. This is because shadow banks, benefitting from regulatory arbitrage, have altered banks’ capacity needs, low rates compressed margins and increased pressure to improve cost efficiencies, and retail-oriented business models have operated extensive branch networks entailing heavy fixed costs.     

Financial Disruptions and Bank Productivity Growth: Evidence from the Malaysian Experience

This paper examines, for the first time, the productivity of the Malaysian banking sector around the Asian financial crisis 1997. The non-parametric Malmquist Productivity Index (MPI) is used to compute individual banks’ productivity levels. We find that the Malaysian banking sector has exhibited productivity regress due to the decline in efficiency. The results seem to suggest that the domestic banks have exhibited productivity progress attributed to technological change, while the foreign banks have exhibited productivity regress due to efficiency decline. We find that the large banks tend to experience productivity growth attributed to technological progress, while the small banks tend to experience productivity decline due to technological regress. The empirical results suggest that the small banks with its limited capabilities are at a disadvantage compared with their larger counterparts in terms of technological advancements, thus, rejecting the divisibility theory.     

Inefficiency in the Spanish Cooperative Banking Sector

This paper researches X-inefficiency and scale economies in Spanish cooperative banking between 1988 and 1996, using the stochastic cost frontier methodology. The Translog cost function, with three outputs and three inputs, is used to measure X-inefficiencies across time and size. During this period of time there is no important reduction in inefficiency levels, so deregulation and internationalization has little effect on the Spanish cooperative banking market. We can see that large cooperative banks are less inefficient than small ones, indicating that it would be convenient to increase the size of these kinds of banks in order to reduce inefficiencies in this sector. We also find scale economies during this period.     

Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?

Credit risk associated with interbank lending may lead to domino effects, where the failure of one bank results in the failure of other banks not directly affected by the initial shock. Recent work in economic theory shows that this risk of contagion depends on the precise pattern of interbank linkages. We use balance sheet information to estimate a matrix of bilateral credit relationships for the German banking system and test whether the breakdown of a single bank can lead to contagion. We find that in the absence of a safety net, there is considerable scope for contagion that could affect a large proportion of the banking system. The financial safety net (in this case institutional guarantees for saving banks and cooperative banks) considerably reduces—but does not eliminate—the danger of contagion. Even so, the failure of a single bank could lead to the breakdown of up to 15% of the banking system in terms of assets.     

The financial and economic performance of social banks

ABSTRACT

The financial crisis of 2008 provides evidence for the instability of the conventional banking system. Social banks may present a viable alternative for conventional banks. This article analyses the performance of social banks related to the bank business model, economic efficiency, asset quality, and stability by comparing social banks with banks where the difference is likely to be large, namely with the 30 global systemically important banks (G-SIBs) of the Financial Stability Board over the period 2000–2014. We also analyse the relative impact of the global financial crisis on the bank performance. The performance of social banks and G-SIBs is surprisingly similar.     

Did foreign banks stay committed to emerging Europe during recent financial crises?

Our objective is to investigate empirically the behavior of foreign banks with respect to real loan growth during periods of financial crisis for a set of countries in which foreign banks dominate the banking sectors due primarily to having taken over large existing former state-owned banks. The eight countries are among the most developed in emerging Europe, their banking sectors having been modernized by the middle of the last decade. We consider a data period that includes an initial credit boom (2005 – 2007) followed by the global financial crisis (2008 & 2009) and the onset of the Eurozone crisis (2010). Our two innovations with respect to the existing literature on banking during the financial crisis are to separate foreign banks into two categories, namely, subsidiaries of the Big 6 European multinational banks (MNBs) and all other foreign-controlled banks, and to take account of the impact of exchange rates during the period. Our results show that bank lending was impacted adversely by both crises but that the two types of foreign banks behaved differently. The Big 6 banks remained committed to the region in that their lending behavior was not different from that of domestic banks supporting the notion that these countries are treated as a “second home market” by these European MNBs. Contrariwise, the other foreign banks active in the region were involved in fueling the credit boom but then decreased their lending aggressively during the crisis periods. Our results also indicate that bank behavior in countries having flexible exchange rate regimes differs from that in those in (or effectively in) the Eurozone. Our results suggest that both innovations matter for studying bank behavior during crisis periods in the region and, by extension, to other small countries in which banking sectors are dominated by foreign financial institutions having different business models.     

WILL GERMAN BANKS EARN THEIR COST OF CAPITAL?

In recent years, the German banking sector has overcome major challenges such as the global financial crisis and the European debt crisis. This paper analyzes a recent development as a particular determinant of the future outlook for the German banking sector. Interest rates are at historically low levels and may remain at these levels for a considerable period of time. Such levels pose a specific challenge to banks which are heavily dependent on interest income, as is the case for most German banks. We consider different interest rate scenarios and analyze the extent to which they cause a further narrowing of the interest rate margin. Our results indicate that a projected decline in this margin will result in no more than 20% of German banks earning a cost of capital of 8% by the end of this decade. However, we show that this decline is alleviated by the fact that German banks can apply a special feature of German accounting standards by using hidden and open reserves. We discuss how these income smoothing tools will provide a cushion that supports short‐ and medium‐term adjustments through a buffer effect. (JEL G21, G28)     

Is the leverage of European banks procyclical?

Detecting whether banks’ leverage is indeed procyclical is relevant to support the view that booms and crises may be reinforced by some sort of supply side financial accelerator, whilst finding a plausible explanation of banks’ behaviour is crucial to trace the road for a sensible reform of financial regulation and managers’ incentives. By analyzing a large sample of European banks, we show that procyclical leverage appears to be well entrenched in the behaviour of those banks for which investment banking prevails over the traditional commercial banking activity.     

The effect of financial liberalization on banking sector stability

Several studies indicate that financial liberalization increases likelihood of a financial crisis without distinguishing between a normal period, unstable period preceding the onset of banking panics and crisis/post period. We explain in this paper the relationship between financial liberalization and banking sector vulnerability. Then, we argue that banking sector turmoil is most likely to occur after an intermediate degree of liberalization. Using a recently updated dataset for financial reforms, we find an inverted U-shaped relationship between liberalization and the likelihood of banking crisis for a sample of 49 countries between 1980 and 2010. We used a multinomial logit model in order to take into account what is called the ‘post crisis bias’. We ask whether the relationship remains when institutional characteristics of countries and dynamic effects of liberalization are considered. The empirical results indicate that the relationship between liberalization and banking sector stability depends strongly on the strength of capital regulation and supervision. With very weak regulation and supervision, the probability of banking crises is increasing with liberalization but this relationship is reversed as regulation and supervision become significant. The most important type of liberalization in relation to banking crises seems to be operational. A policy implication is that positive growth effects of liberalization can be achieved without increasing the risk of a banking fragility if appropriate institutions are developed.     

Western Rules for Eastern Banking

The article outlines the most significant changes in the banking sector and traces its possible future path in Central and Eastern Europe (CEE) in the context of competing banking models. The main conclusion is that despite the transition the orientation of the banking sector will be towards the government sector (including the central bank). The new network of financial interrelations that emerged during transition is characterised by the banking sector's significant net defensive position and creditor passivity. Although CEE countries are developing their financial systems in line with a universal banking model the aggregate balance sheets of their banking sectors reveal a structure that is more in line with other proposed models. Financial relations between households, the corporate sector and the state sector intermediated by the banking sector reveal a severe retreat of banks from the corporate sector in favour of maintenance of government and central bank operations.     

Bank loan versus financial lease: how do traditional and innovative approaches within the banking sector influence economic growth? A comparative analysis between the US and China

ABSTRACT

The argument over the effects of financial structures on economic growth remains unsettled. This study, therefore, compares the dynamic correlation and lead–lag relationship between the different financial approaches within the banking sector (that is, traditional bank loans versus innovative financial leasing) and economic growth. We employ a continuous wavelet analysis using time-series data from 1982–2017 from the US (the world’s largest developed country) and China (the world’s largest developing country). The empirical results show that (1) episodes of significant correlation usually emerge during periods of reform, crisis or policy implementation; and (2) in China, traditional banking promotes economic growth in the long term, while the real economy only imputes the evolution of banks during critical economic reforms in the short term. Meanwhile, financial leasing could only promote the development of the real economy under suitable regulation; and (3) in the US, before the crises, the irrational growth of the real economy could increase bank assets, while during the crises, the traditional banking approach harms economic growth, and after the crises, financial leases play an important role in recovery. Therefore, we suggest that policymakers should establish adequate policies and regulations to solve the situation.     

Credit creation under multiple banking regulations: The impact of balance sheet diversity on money supply

Since the recent financial crisis along with more concentration of banking supervision, we have stepped into a new regulatory regime where multiple regulations are at play simultaneously. In this paper, we study the collective impacts of multiple regulations on credit creation in a heterogeneous banking system. Each single regulation imposes a constraint on credit creation for each bank, while with multiple regulations, only the most stringent one plays the determinant role on money supply. For the homogeneous banking system with identical balance sheets, they share the same binding regulation. In contrast, for the heterogeneous banking system with diverse balance sheets, the binding regulation for each bank may be different from other's. Those banks, who are bound by different regulatory constraints from homogeneous banks, would bring about an overall reduction in money supply, because those binding regulations impose a lower capacity (compared with the one in the case of homogeneous banks) for the banks to extend their balance sheets in this condition. We put forward an agent-based model of commercial banks integrated with two processes: credit creation and fund transfer, to demonstrate the reduction effect. The results facilitate the understandings of the transmission mechanism of monetary policy via banks and its interaction with prudential regulations.     

Which Vested Interests Do Central Banks Really Serve? Understanding Central Bank Policy Since the Global Financial Crisis

Inspired by Thorstein Veblen’s ideas, I analyze the behavior of central banks from the perspective of how institutions are captured by vested interests. Since the global financial crisis in 2008, there has been a shift in the conduct of monetary policy. Much like the behavior of asset holders themselves, who, in times of crisis, sought to trade off lower returns with more stable asset values, monetary policy changed from a de facto policy of stabilizing rentier income to one of preserving asset prices or rentier wealth. I analyze this particularly through the lenses of what happened with quantitative easing (QE) in the US, which coincided with a collapse of real interest rates, while asset prices were stabilized. This can also be seen in the way the banking sector was supported by QE where the market for mortgage-backed securities was sustained even as it actually meant a lower profitability for the overall U.S. banking sector during the QE interventions.