Environmental determinants of banking efficiency in Austria

The great majority of Austrian banks operate on a regional or local basis and only a few banks provide their services on a national or even international scale. Obviously, the market environments regional or local banks face are different from that of nationwide operating banks. Casual evidence suggests that local markets condition is a very important external determinant of banking efficiency. Thus, not controlling for market conditions may substantially bias the measurement of managerial efficiency particularly of locally operating banks. In this paper we assess the internal technical efficiency (or X-efficiency) of the Austrian banking sector with the focus on environmental and non-controllable factors critical to banking markets. Analytically, we apply a multiple-stage approach based on a slacks-based DEA model (SBM) and a censored regression model, respectively. In order to cope with the inherent dependency problem of DEA-based efficiency analysis when incorporated into regression analysis we apply a Bootstrap estimator. In so doing we attempt to overcome the dependency problem which plagues the power of standard regression analysis based on DEA processed data. The empirical analysis is based on an unbalanced panel of data covering more than 800 Austrian banks ranging over 1995–2002.

Economic growth, liquidity, and bank runs

We construct an endogenous growth model in which bank runs occur with positive probability in equilibrium. In this setting, a bank run has a permanent effect on the levels of the capital stock and of output. In addition, the possibility of a run changes the portfolio choices of depositors and of banks, and thereby affects the long-run growth rate. These facts imply that both the occurrence of a run and the mere possibility of runs in a given period have a large impact on all future periods. A bank run in our model is triggered by sunspots, and we consider two different equilibrium selection rules. In the first, a run occurs with a fixed, exogenous probability, while in the second the probability of a run is influenced by banks’ portfolio choices. We show that when the choices of an individual bank affect the probability of a run on that bank, the economy both grows faster and experiences fewer runs.     

TO JOIN OR NOT TO JOIN? DO BANKS THAT ARE PART OF A FINANCIAL HOLDING COMPANY PERFORM BETTER THAN BANKS THAT ARE NOT?

This study compares the performance of banks that are part of a financial holding company (FHC banks) with that of banks that are not (independent banks) using Taiwan data from 2002:Q1 to 2006:Q2. The comparisons are based on 14 performance ratios resulting from the concept of CAMEL (which is an acronym for Capital adequacy, Asset quality, Management efficiency, Earnings ability, and Liquidity sufficiency). To ensure that becoming part of an FHC is a random process, we used four matching methods to select the controlled banks so that the characteristic variables of banks in the two groups are statistically indifferent. By using the data before matching, it was found that FHC banks significantly defeat independent banks, regardless of their performance ratios. Conversely, when the sample was used after the matching, the results changed dramatically. Although FHC banks still beat the independent banks in terms of capital adequacy, asset quality, and liquidity sufficiency, FHC banks and independent banks are found to have equal profitability and management efficiency. Earlier studies that do not consider the endogeneity problem tend to overestimate the joining effect.(JEL C21, G21)     

Sequential Equilibrium and Competition in a Diamond–Dybvig Banking Model

Within the framework of a Diamond–Dybvig model [J. Polit. Econ.91(1983), 401–419], but with explicitly modelling the autarky choice during the planning period, we demonstrate that a mixed strategy bank run equilibrium that does not rely on sunspots may coexist with the sunspot run equilibrium previously studied in the literature. In a version of the model with multiple banks, there exist sequential equilibria that imply positive profits. However, the zero-profit contract in which runs never occur can be supported as the unique equilibrium outcome if the agents play pure strategies only and their beliefs are restricted to be consistennt with a forward induction argument.Journal of Economic LiteratureClassification Numbers: C72, G21     

On exogenous money and bank behaviour: the Pandora's box kept shut in Keynes' theory of liquidity preference?

This essay examines Keynes' views on banking behaviour and the relationships between central banks and banks as they evolved from his Tract on Monetary Reform to The General Theory. The objective is to clarify in what sense money may be exogenous in his final work. We identify a distinctly Keynesian position on the money-supply process, featuring money exogeneity due to bank behaviour. Our findings run counter to both neoclassical synthesis view on exogenous money cum passive banks as well as the post Keynesian challenge of endogenous money cum passive banks.     

THE IMPACTS OF “SHOCK THERAPY” UNDER A BANKING CRISIS: EXPERIENCES FROM THREE LARGE BANK FAILURES IN JAPAN*

A bank failure can have various adverse consequences for clients; these adverse impacts differ depending on which bank takes over the failed banks’ operations. In this paper, we show how the new banks’ management strategies are important in mitigating the short‐ and long‐run consequences. We focus on the clients of three large failed Japanese banks and examine their responses in terms of increased bankruptcies and changes in market valuation after the banks’ operations were taken over. The results imply that the choice of “shock therapy” or “soft budget constraints” had dramatically different consequences in resolving the bad loan problems in Japan.     

The cyclicality of bank regulation in a general economic framework

This article utilizes a representative agent model to address how the regulation policies for banks should respond to the general economic condition. With the consideration of a self-fulfilling deposit insurance facility with sufficient bank reserve to meet the expected need of liquidity shock, our model suggests a counter-cyclical capital adequacy requirement in a competitive loan market. The exception might occur when the moral hazard problem becomes very unwieldy and the representative individual is rather risk averse. With regard to the closure policy, we find that it is closely related to the individual’s degree of risk aversion. A counter-cyclical closure policy is recommended when the individual is highly risk averse. Otherwise, a pro-cyclical closure policy is preferred.     

Desperately seeking cash: Evidence from bank output measurement

We examine the impact of a “near-zero” interest rate policy on bank output. Specifically, we document the existence of negative banking output on deposits for French banks from 2009. We show a structural break in banks' long run interest rate pass-through that explains this change in their business model during the 2003–2012 period. Since the crisis, banks are desperately seeking cash, and deposits have become a cost center. This is due to the new monetary policy and reveals banks' adaptation to the new banking regulation on liquidity. This new environment raises questions about banks' increasing exposure to interest rate risk and shows the necessity of coordinating monetary and regulatory policies.     

Fixed Exchange Rates and Banking Crises: When Does the Former Prevent the Latter?

Because monetary policy is constrained in fixed exchange rate regimes, banks should expect fewer money‐financed bailouts and therefore manage their risks more carefully when exchange rates are fixed than when they are flexible. It follows that we should observe fewer banking crises in countries with formal currency pegs. The 1990s however are littered with occurrences of banking crises in countries with fixed exchange rates. This paper asks whether banks in those countries could have adopted excess risk expecting money‐financed bailouts or whether their pegs discouraged such moral hazard‐type risks.     

Ex ante capital position,changes in the different components of regulatory capital and bank risk

We investigate the impact of changes in capital of European banks on their risk-taking behaviour from 1992 to 2006, a time period covering the Basel I capital requirements. We specifically focus on the initial level and type of regulatory capital banks hold. First, we assume that risk changes depend on banks’ ex ante regulatory capital position. Second, we consider the impact of an increase in each component of regulatory capital on banks’ risk changes. We find that, for highly capitalized, adequately capitalized and strongly undercapitalized banks, an increase in equity or in subordinated debt positively affects risk. Moderately undercapitalized banks tend to invest in less risky assets when their equity ratio increases but not when they improve their capital position by extending hybrid capital or subordinated debt. On the whole, our conclusions support the need to implement more explicit thresholds to classify European banks according to their capital ratios but also to clearly distinguish pure equity from hybrid and subordinated instruments.     

Effects of main bank switching on new business bankruptcy

This paper examines the effects of main bank switching on the probability of bankruptcy of new small businesses using a propensity score matching estimation approach. We use a unique firm-level dataset of approximately 1,000 small and medium-sized enterprises (SMEs) incorporated in Japan; these SMEs are young and unlisted just after incorporation. We find that switching main bank relationships increases the probability of firm bankruptcy. In addition, the result holds only when the relationship between the firm and its main bank is terminated. Specifically, the probability of bankruptcy increases when firms switch their main banks to financial institutions with which they have not previously transacted, and when the ex-post main banks are not affiliated financial institutions of their ex-ante main banks. These results may be because such switching worsens the financial condition of client firms, and thus, it leads to bankruptcy.     

Do Bank Capital and Liquidity Affect Real Economic Activity in the Long Run? A VECM Analysis for the US

This paper analyses the long‐term economic costs of the new regulatory standards (the so‐called Basel III reform) for the US. Using a Vector Error Correction Model that estimates long‐run relationships among a small set of macro‐variables over the period 1994–2008, it shows that tighter capital and liquidity requirements have negative (but rather limited) effects on the level of long‐run steady‐state output and more sizeable effects on banks’ return on equity. The economic costs are considerably below the estimated positive benefit that the reform should have by reducing the probability of banking crises and the associated banking losses ( BCBS, 2010b ).     

REGULATORY FORBEARANCE AND DEPOSITOR MARKET DISCIPLINE: EVIDENCE FROM SAVINGS BANKS IN KOREA

This paper investigates whether regulatory forbearance for savings banks in Korea affects the market discipline of depositors using data from 2000 to 2010, which are characterized by a series of exits of savings banks. We find that depositors' sensitivity to the savings banks' asset quality decreases when there is regulatory forbearance for failing savings banks. This forbearance effect is also observed in the behavior of the depositors of the neighboring savings banks in the same business area. These results suggest that regulatory forbearance may cause depositors to misjudge bank risks, increasing the expected costs of bank failure. (JEL G21, G28)     

Formation of the non‐state sector and privatisation in Kazakhstan and Uzbekistan

In this paper, we take a detailed look at one Polish bank's experiences with financial sector reforms focusing on a bank-led enterprise-restructuring plan that linked directly bank privatization and recapitalization to bad-debt workouts. Based on personal interviews and original statistical data, we evaluate the performance of Bank Depozytowo-Kredytowy (BDK) in promoting financial and operational restructuring of its clients. We found that BDK continued to provide soft lending to keep four old military‐industrial companies afloat and actually increased its exposure to these companies during the program. The five success stories among BDK's clients were companies that had external agents other than the bank promoting and monitoring their operational restructuring. From our case study of BDK, we conclude that, while banks may play a role in financial restructuring of their clients, their ability to affect operational restructuring is quite limited. Moreover, stateowned banks are particularly vulnerable to incentive problems when dealing with large state-owned enterprises that may be too big or too political to fail.     

Basel III and perceived resilience of banks in the BRICS economies

This study investigates how the additional capital and liquidity requirements of Basel III would increase the resilience of banks. In particular, using panel data from 2007 to 2014, we examine the resilience of banks in the BRICS economies. Our results suggest that a 10% increase in capital adequacy ratio (CAR), Tier 1 capital ratio (TRA), and leverage ratio (LEV), the resilience (as measured by Z-Score of banks) increases by about 2.18, 0.89 and 1.31%, respectively. Similarly, for a 100% increase in liquidity coverage ratio (LCR), the resilience of banks increases by 0.51%, 1.10% and 1.19%, respectively, in the models associated with CAR, TRA, and LEV. Hence, our findings suggest that the CAR is robust to increase the resilience of banks. Our study also reveals that the LCR and LEV are the most effective to increase the resilience of banks if implemented simultaneously. We also find that the stage of economic development does not matter in formulating policies for the BRICS economies, and finally, we provide empirical evidence that economy-wide risk, such as a financial crisis, does not affect the resilience of banks and it influences the resilience of banks in the BRICS economies in the same way before and after the crisis.     

How Islamic are Islamic banks? A non-linear assessment of Islamic rate – conventional rate relations

In this paper, we perform a non-linear assessment of Islamic rate – conventional rate relations for the case of Malaysia. Using monthly data covering the period January 1999 to November 2016, we find strong evidence supporting non-linear reactions of the Islamic investment rates to conventional rates in the long run and/or short-run for all matched maturities. More precisely, the Islamic investment rates exhibit faster upward movement (slower downward movement) in responses to conventional deposit rate increases (decreases). The asymmetric pricing behaviour of Islamic banks however tends to weaken as maturity lengthens. Accordingly, we infer that Islamic banks do not rigidly peg their investment deposit rates to conventional deposit rates as some have claimed in questioning the Islamicity of Islamic banks.     

Quantifying central banks’ scientization: why and how to do a quantified organizational history of economics

ABSTRACT

A subset of research in the history of economics is organizational history – i.e. the study of the organizations producing, circulating and applying economic ideas. This article maintains that some research questions in organizational history call for quantitative methods because they ask about magnitudes. More precisely, we claim that quantitative methods should complement rather than replace other research methods when the research question is at least partly about magnitudes. We walk the walk with a study of one type of organization, central banks, and of its changing relationship with economic science. Our results point unambiguously toward a growing dominance of central banks in the specialized field of monetary economics. Central banks have swelling research armies, they publish a growing share of the articles in specialized scholarly journals, and these articles tend to have more impact today than the articles produced outside central banks.     

The impact of earnings management on the performance of ASEAN banks

Southeast Asian financial liberalization policies have enthused both performance evaluation (a pro) and earnings management (a con). Using a sample of ASEAN commercial banks for the period 2007–2014, this study decomposes their banking performance into managerial and profitability efficiencies. An efficiency analysis reveals that Singaporean banks obtained the highest overall and profitability efficiencies, while Bruneian banks had the lowest rates of banking performance. In the stage of managerial efficiency, the most inefficient banks are those of the Philippines, whereas the greatest level is related to Malaysian banks. A frontier projection analysis suggests that Singaporean banks and Malaysian banks are generally more efficient in managing their expenditures and long-term assets in generating income in the long run. With respect to the con, a regression analysis indicates that loan loss provisions are negatively related to banking performance. Overall, it is advisable that policy makers with oversight function should promote performance evaluation from a multidimensional perspective, and keep an eye on estimates of loan loss provisions at banks over years because increases/decreases in loan loss provisions mean decreases/increases in net income or return on assets.     

Efficiency and credit rating in Taiwan banking: data envelopment analysis estimation

In this article, we use the data envelopment analysis to measure the efficiency of banks before and after credit rating is taken into consideration and we also employ the Malmquist Productivity Index to measure the total factor productivity changes from 2001 to 2003. The results are as follows: (1) There is a positive relationship between the efficiency scores and credit rating, and thus, the credit rating can be a representative to evaluate the performance and quality of a bank; (2) We use the Wilconxon two-sample test of nonparametric statistic to test the influences of credit rating. The empirical result shows that the credit rating is proven to influence the efficiency of banks; (3) The efficiency scores improve in both investment grade (above tw BBB?) and speculation grade (under tw BBB?), when credit rating is taken into consideration. The empirical results show that the efficiency scores of banks with a high credit rating improved relatively more when compared to banks with a lower credit rating; (4) In this research we also adopt the Malmquist index to observe the productivity and efficiency changes from year to year. We obtain results whereby the improvement of efficiency may be influenced greatly both from pure technical and scale efficiency changes.     

Asset quality,non-interest income,and bank profitability: Evidence from Indian banks

This paper investigates whether a shift toward non-interest income activities improves the profitability of Indian banks and, if so, how it varies across ownership groups and banks with different asset qualities. Our findings show that higher share of non-interest income yields higher profits and risk-adjusted profits; in particular when banks are involved in more trading activities. The results indicate that private foreign banks earn more risk-adjusted profits compared to public sector and private domestic banks. Furthermore, we also find that income diversification benefits more to the banks that have lower asset quality compared to the banks that have higher asset quality. The findings are insensitive to dynamic panel data estimations and alternative sample specification. The results of this paper provide valuable insights for policymakers, and conclude that ensuring diversification activities enhances bank profitability, in particular for the banks that have lower asset quality.