Banking Resilience and Global Financial Stability

The following sections are included:

• Preface
• About the Editors
• About the Contributors
• Contents

The capital buffer concept for banks misses its target: The capital buffers do not harm financial stability. However, they do not make a positive contribution either. Based on sobering practical experience, an alternative capital buffer concept has been developed. What is striking is that capital buffers for a bank no longer consist of seven components. Instead, the capital buffer consists of only two components: a resilience buffer and a sustainability buffer. The alternative capital buffer concept is effective in generating sufficient financial stability. It is not per se about higher capital buffers for banks. Instead, simple and transparent handling is highly beneficial to both banks and supervisors. However, this simple handling requires comprehensive analyses of systemic risks. Stress tests have an essential role to play here.

This chapter examines the bank stability indicators under two different accounting regimes: Local GAAP-compliant and mixed accounting standards. The objective is to determine whether adopting Local GAAP and IAS/IFRS contributes to bank stability in Asia, focusing on China, Japan, South Korea, Hong Kong, Taiwan, Indonesia, Malaysia, Thailand, Singapore, and the Philippines from 2005 Q1 to 2021 Q4. The findings indicate Local GAAP may have had a detrimental effect on banks’ stability, but the transition to IAS/IFRS improves bank stability. The results also suggest the procyclicality of bank stability for Local GAAP-compliant and mixed accounting banks, increased risk-taking, and bank capitalization during economic/financial upturns. Further, Local GAAP-compliant banks are more susceptible to changes in excessive credit growth, and mixed accounting banks are more vulnerable to changes in economic activities. In addition, the rise in risk appetite is greater than the rise of regulatory buffers for economic and financial upturns for Local GAAP-compliant banks.

The banking system is expected to contribute many important aspects to the economic development in each country. The banking system is predominantly managed by the governments to ensure both system stability and economic development. The objective of this study is to assess the impact of the stability of the banking system on economic growth in 24 typical countries during the period 2011–2020. Using advanced quantitative research methods, analyzing the defects in the regression model as well as testing the robustness of the model, the research results show that the stability of the banking system has no impact on economic growth: although it has a positive effect, it is not statistically significant. The research also suggested that the investment rate of the economy, financial development, and quality of human resources have a positive impact on economic growth. However, foreign direct investment, trade openness, and population have no impact on economic growth.

This study aims to look into the effect of intellectual capital efficiency on Islamic banks’ financial stability after controlling the bank-specific and macroeconomic variables. This study employed a hierarchical two-step system generalized method of moment (2SYS-GMM) estimation technique to analyze the data collected from 94 Islamic banks in 18 Asian Islamic countries during the period 2010–2020. The empirical findings show that ICE components, specifically SCE and RCE, have a positive and statistically significant effect on Islamic banks’ financial stability. Our findings suggest that policymakers and top management at Islamic banks should pay closer attention to ICE resources, which have the potential to improve bank efficiency and stability while also keeping them competitive in times of distress.

This paper analyses the effect of regulatory pressure on bank behavior, using a sample of Tunisian banks covering the period 2005–2020. First, the paper examines the impact of regulatory capital on bank profitability and risk. Second, it contributes to the literature which has received scant attention from researchers investigating the nonlinear impact of regulatory pressure on bank behavior. Third, we consider different determinants of bank profitability and risk. Finally, we use both static and dynamic models to test for the persistence of bank profitability and risk, as well as to make sure that the results are not biased by endogeneity. The results suggest that regulatory capital pressure improves bank profitability and stability. This effect is, however, conditioned by the existence of a certain threshold, after which stringent capital regulation may have adverse effects. Our results have important policy implications on optimal bank capital regulation.

Financial institutions’ heterogeneity, a high degree of dissimilarity across multiple dimensions, including business focuses, correlated asset holdings, capital structures, and funding sources, reduces systemic risk. We empirically test this hypothesis using a bank holding company (BHC) level heterogeneity index based on granular balance sheet, income statements, cash flow statements, and off-balance-sheet information for U.S. bank holding companies over a sample period spanning the second quarter of 2000 to the fourth quarter of 2021. We find that the BHC-level heterogeneity negatively correlates with BHC-level systemic risk, SRISK, measured both at the global and local levels. We also construct a sector-heterogeneity index and demonstrate that a reduction of heterogeneity occurred in the U.S. financial sector prior to both the Great Recession (2007–2009) and the COVID-19 Recession, especially for the largest BHCs. As such, a declining level of financial sector heterogeneity may exacerbate the consequences of systemic shocks.

In this chapter, we aim to see the effects of the foreign exchange (FX) debt level of Turkish banks on the riskiness of the banking sector between January 2008 and December 2021. We use two explanatory variables: the ratio of foreign loans to total assets and the ratio of Turkish Lira denominated deposits to total credits. Our results show that an increase in the ratio of foreign loans to total assets triggers an increase in the riskiness of the banking sector. However, the ratio of Turkish Lira-denominated deposits to total credits does not have a significant effect on the volatility measure.

This chapter studies the use of a proposed integrated competency development approach to address the challenges which a bank’s risk management function faced during the COVID-19 pandemic. It studies the challenges and regulatory reforms after the 2008 Global Financial Crisis. It argues that these reforms were not sufficient to address the challenges in the longer term. It revisits the key features of the proposed integrated approach to risk management competency development. Next, it studies and identifies four major challenges together with the corresponding risk management competency development requirements. It finds that these requirements can be inferred from the proposed integrated approach. It proposes that this integrated approach is, and will likely remain, relevant to helping banks build resilience as they confront future pandemics and challenges.

This chapter reviews scientific work conducted in support of the policy-making processes of the European Commission in reforming the financial sector. It first discusses how the introduction of new prudential requirements, resolution, and supervision tools in the aftermath of the Global Financial Crisis has allowed for a considerable reduction in the risk of systemic crises. This chapter also discusses how further benefits could come from further harmonization of resolution and insolvency frameworks, as well as from the completion of the Banking Union, including the introduction of a European Deposit Insurance Scheme, and of a European Safe Asset. Finally, this chapter briefly overviews more recent research underpinning policy efforts to enhance financial resilience toward the risks linked to climate change and the green transition, as well as to the impacts of the digital transformation.

This study analyses how stock and bond market illiquidity affect the bank lending channel. Our empirical analysis comprises a sample of 862 listed banks from 21 OECD countries between 2002 and 2015. We find that the bank lending channel plays an important role in the transmission mechanism of the monetary policy when financial markets are very liquid. However, as market liquidity decreases, the bank lending channel becomes less relevant and ends up being ineffective.

This study proposes a theoretic trilemma model for the case of a monetary union and measures it empirically. Accordingly, there exists a trade-off between stabilizing the monetary union, maintaining free capital mobility, and exiting expansionary monetary policy in the euro area. Our results underscore the existence of this trilemma and point out the importance of resolving it without jeopardizing the euro and financial stability in the European Union.

Countercyclical capital buffer (CCyB) is an essential instrument of macroprudential policy. Over the last couple of years, many studies have dealt with finding adequate indicators of credit activity monitored for CCyB calibration purposes. The credit-to-GDP gap is widely used and recognized as the leading indicator of credit dynamics for CCyB decision-making. Research and applications in practice regarding the stability of the credit-to-GDP gap are still lacking today. This stability refers to the end-point problems within the statistical filtering part of the analysis and problems with the GDP volatility, especially during crises, such as COVID-19. This chapter focuses on several practical approaches to correcting the credit-to-GDP gap as the primary indicator of credit dynamics in real time. Moreover, the chapter deals with possible corrections of the credit-to-GDP gap. The solutions allow for lower volatility of indicators over time so that the decision-maker can use stable signals.

This study contributes to the literature by evaluating the ability of Altman’s Z”-score model to predict the economic distress of 12 Kazakh banks over the period 2008–2014. The original Z”-score model with a cut-off point implied by Altman (2005) produced a prediction accuracy ratio of 44.05% and correctly classifies 76.19% of the observations as an economically distressed group. This study then re-estimates the model using three approaches, namely, the “leave-one-out”, Direct, and Wilks’ methods, and identifies new, optimal cut-off points for the re-estimated models. The re-estimated models, together with the new, optimal cut-off points, improved the prediction accuracy ratio to 70% and correctly classified over 90% of the observations originally assigned to the economically distressed group. The results imply that the Kazakh banking regulator and other market participants could use Altman’s Z”-score model to detect economically distressed banks.

Although many economic, social, and environmental crises have occurred in the past, the recent novel coronavirus (COVID-19) disease is believed to have generated the most severe impact worldwide. Motivated by the lack of data from the global microfinance sector with respect to COVID-19, we have attempted to understand the effect of the pandemic on the microfinance industries through the lens of the 2007–2009 Global Financial Crisis (GFC). In so doing, global data of 2,995 microfinance institutions (MFIs) from 2000 to 2018 were analyzed, highlighting the effect of the GFC on the outreach and financial objectives of MFIs. Our assessment revealed that the GFC mostly had a negative impact on the dual goals of MFIs. Most importantly, the GFC triggered the transformation of the legal status of MFIs from Non-Governmental Organizations (NGOs) to other types (e.g., non-bank financial institutions). Similar outcomes are expected in the aftermath of the COVID-19 in the microfinance industries.

Using quarterly data on the banking sector covering the period 2002–2020, this chapter assesses the impact of uncertainty on banks’ liquidity hoarding in Qatar. To implement this empirically, we utilize the country-specific uncertainty measure and integrate it with a novel measure of bank-specific liquidity hoarding developed in recent research. The findings reveal that banks respond to economic uncertainty by increasing liquidity hoarding, especially on the asset side of their balance sheet, and there is a differential impact for Islamic banks, that too primarily on their asset side. Robustness tests validate these findings.

The following section is included:

• Index