From a sample of commercial banks in Asia Pacific over the 1994-2009 period, this study highlights that banks in less competitive markets exhibit lower loan growth and higher instability. Such instability is further followed by a decline in deposit growth, suggesting that Asian banks are also subject to indirect market discipline mechanisms through bank market structure. This study therefore sheds light on the importance of enhancing bank competition to overcome bank risk and strengthen financial intermediation. This study also advocates greater reliance on market discipline to promote bank stability.
We investigate the impact of global and local crises on bank stability and examine the effect of owning bank subsidiaries in other countries. We consider banks from MENA countries which experienced both types of crises during our sample period. Our findings highlight a negative impact of the global financial crisis of 2007-2008 on bank stability but, on the whole, no negative impact of the 'Arab Spring'. A deeper investigation shows that owning subsidiaries outside the home country is a source of increased fragility during normal times, yet a source of higher stability during the 'Arab Spring' but not during the global financial crisis. Moreover, owning foreign subsidiaries in one or two world regions is insufficient to neutralize the 'Arab Spring' crisis, while being present in three or more regions is more stabilizing during the 'Arab Spring' but also more destabilizing during the global financial crisis. Our findings contribute to the literature examining bank stability and have several policy implications. (T. Al Raheb). c Email: amine.tarazi@unilim.fr (A. Tarazi) 2 Local Versus International Crises, Foreign Subsidiaries and Bank Stability: Evidence from the MENA Region. Abstract We investigate the impact of global and local crises on bank stability and examine the effect of owning bank subsidiaries in other countries. We consider banks from MENA countries which experienced both types of crises during our sample period. Our findings highlight a negative impact of the global financial crisis of 2007-2008 on bank stability but, on the whole, no negative impact of the 'Arab Spring'. A deeper investigation shows that owning subsidiaries outside the home country is a source of increased fragility during normal times, yet a source of higher stability during the 'Arab Spring' but not during the global financial crisis. Moreover, owning foreign subsidiaries in one or two world regions is insufficient to neutralize the 'Arab Spring' crisis, while being present in three or more regions is more stabilizing during the 'Arab Spring' but also more destabilizing during the global financial crisis. Our findings contribute to the literature examining bank stability and have several policy implications.
We investigate the impact of global and local crises on bank stability and examine the effect of owning bank subsidiaries in other countries. We consider banks from MENA countries which experienced both types of crises during our sample period. Our findings highlight a negative impact of the global financial crisis of 2007-2008 on bank stability but, on the whole, no negative impact of the 'Arab Spring'. A deeper investigation shows that owning subsidiaries outside the home country is a source of increased fragility during normal times, yet a source of higher stability during the 'Arab Spring' but not during the global financial crisis. Moreover, owning foreign subsidiaries in one or two world regions is insufficient to neutralize the 'Arab Spring' crisis, while being present in three or more regions is more stabilizing during the 'Arab Spring' but also more destabilizing during the global financial crisis. Our findings contribute to the literature examining bank stability and have several policy implications. (T. Al Raheb). c Email: amine.tarazi@unilim.fr (A. Tarazi) 2 Local Versus International Crises, Foreign Subsidiaries and Bank Stability: Evidence from the MENA Region. Abstract We investigate the impact of global and local crises on bank stability and examine the effect of owning bank subsidiaries in other countries. We consider banks from MENA countries which experienced both types of crises during our sample period. Our findings highlight a negative impact of the global financial crisis of 2007-2008 on bank stability but, on the whole, no negative impact of the 'Arab Spring'. A deeper investigation shows that owning subsidiaries outside the home country is a source of increased fragility during normal times, yet a source of higher stability during the 'Arab Spring' but not during the global financial crisis. Moreover, owning foreign subsidiaries in one or two world regions is insufficient to neutralize the 'Arab Spring' crisis, while being present in three or more regions is more stabilizing during the ...
S'inspirant des récentes mesures du Comité de Bâle, ce papier présente un modèle théorique analysant le comportement des banques sous différentes régulations de leur levier. Nous examinons la prise de risque, l'aléa moral et l'endettement des banques avec une régulation commune, puis avec l'ajout d'un volant de capital pour les banques systémiques, puis lorsqu'un ratio de levier contracyclique est imposé. Nous montrons que les banques sont incitées à maximiser leur taille lorsqu'une restriction commune sur le levier est appliquée, mais sans opter pour davantage de risque. Un volant de capital supplémentaire pour les banques systémiques réduit l'aléa moral de ces banques, mais l'aléa moral de l'ensemble des banques est amplifié par la mise en place d'un ratio de levier contracyclique.
S'inspirant des récentes mesures du Comité de Bâle, ce papier présente un modèle théorique analysant le comportement des banques sous différentes régulations de leur levier. Nous examinons la prise de risque, l'aléa moral et l'endettement des banques avec une régulation commune, puis avec l'ajout d'un volant de capital pour les banques systémiques, puis lorsqu'un ratio de levier contracyclique est imposé. Nous montrons que les banques sont incitées à maximiser leur taille lorsqu'une restriction commune sur le levier est appliquée, mais sans opter pour davantage de risque. Un volant de capital supplémentaire pour les banques systémiques réduit l'aléa moral de ces banques, mais l'aléa moral de l'ensemble des banques est amplifié par la mise en place d'un ratio de levier contracyclique.
The failures of the banking sector to promote sustainable lending and to build strong capital and liquidity buffers prior to the 2008 Financial Crisis addressed the rationale for implementing the banking regulatory regime Basel III. In this paper, we question the fundamental role of this new regulatory regime in promoting bank lending and ensuring the adequate funding structure of the banking sector regarding the introduction of unprecedented international liquidity standards notably. We build a theoretical model of bank behaviour under a regulatory regime à la Basel III which points to two major results. First, Regulatory Authorities need to define the objectives and thus, the underlying tools implemented in order to achieve the optimum-optimurum. Second, we show that the competitive structure of the markets the bank faces is a determinant to take into account for achieving this optimum-optimurum.
The failures of the banking sector to promote sustainable lending and to build strong capital and liquidity buffers prior to the 2008 Financial Crisis addressed the rationale for implementing the banking regulatory regime Basel III. In this paper, we question the fundamental role of this new regulatory regime in promoting bank lending and ensuring the adequate funding structure of the banking sector regarding the introduction of unprecedented international liquidity standards notably. We build a theoretical model of bank behaviour under a regulatory regime à la Basel III which points to two major results. First, Regulatory Authorities need to define the objectives and thus, the underlying tools implemented in order to achieve the optimum-optimurum. Second, we show that the competitive structure of the markets the bank faces is a determinant to take into account for achieving this optimum-optimurum.
The Great Recession of 2007-2009 piqued the interest of policymakers worldwide, prompting various initiatives to stabilize the financial system and advance financial inclusion. However, few studies have considered their interconnectedness or whether any synergies or trade-offs exist between them. This paper investigates how financial inclusion affects the stability of the European banking system. The findings indicate that advancements in financial inclusion through more account ownership and digital payments have a stabilizing effect on the banking industry. A deeper investigation shows that such a stabilizing impact is mainly driven by the targeting of disadvantaged adults who are young, undereducated, unemployed, and who live in rural areas. Hence, along with its known benefits to society as a whole, financial inclusion has the additional benefit of improving the stability of the financial system. Such findings call for policy configurations that are specifically designed to achieve financial inclusion for disadvantaged individuals.
The Great Recession of 2007-2009 piqued the interest of policymakers worldwide, prompting various initiatives to stabilize the financial system and advance financial inclusion. However, few studies have considered their interconnectedness or whether any synergies or trade-offs exist between them. This paper investigates how financial inclusion affects the stability of the European banking system. The findings indicate that advancements in financial inclusion through more account ownership and digital payments have a stabilizing effect on the banking industry. A deeper investigation shows that such a stabilizing impact is mainly driven by the targeting of disadvantaged adults who are young, undereducated, unemployed, and who live in rural areas. Hence, along with its known benefits to society as a whole, financial inclusion has the additional benefit of improving the stability of the financial system. Such findings call for policy configurations that are specifically designed to achieve financial inclusion for disadvantaged individuals.
Banks are subject to capital requirements because their privately optimal leverage is higher than the socially optimal one. This is in turn because banks fail to internalize all costs that their insolvency creates for agents who use their money-like liabilities to settle transactions. If banks can bypass capital regulation in an opaque shadow banking sector, it may be optimal to relax capital requirements so that liquidity dries up in the shadow banking sector. Tightening capital requirements may spur a surge in shadow banking activity that leads to an overall larger risk on the money-like liabilities of the formal and shadow banking institutions.
Banks are subject to capital requirements because their privately optimal leverage is higher than the socially optimal one. This is in turn because banks fail to internalize all costs that their insolvency creates for agents who use their money-like liabilities to settle transactions. If banks can bypass capital regulation in an opaque shadow banking sector, it may be optimal to relax capital requirements so that liquidity dries up in the shadow banking sector. Tightening capital requirements may spur a surge in shadow banking activity that leads to an overall larger risk on the money-like liabilities of the formal and shadow banking institutions.
Frictions prevent banks to immediately adjust their capital ratio towards their desired and/or imposed level. This paper analyzes (i) whether or not these frictions are larger for regulatory capital ratios vis-à-vis a plain leverage ratio; (ii) which adjustment channels banks use to adjust their capital ratio; and (iii) how the speed of adjustment and adjustment channels differ between large, systemic and complex banks versus small banks. Our results, obtained using a sample of listed banks across OECD countries for the 2001-2012 period, bear critical policy implications for the implementation of new (systemic risk-based) capital requirements and their impact on banks' balance sheets.
Frictions prevent banks to immediately adjust their capital ratio towards their desired and/or imposed level. This paper analyzes (i) whether or not these frictions are larger for regulatory capital ratios vis-à-vis a plain leverage ratio; (ii) which adjustment channels banks use to adjust their capital ratio; and (iii) how the speed of adjustment and adjustment channels differ between large, systemic and complex banks versus small banks. Our results, obtained using a sample of listed banks across OECD countries for the 2001-2012 period, bear critical policy implications for the implementation of new (systemic risk-based) capital requirements and their impact on banks' balance sheets.
Using a simple two-region model where local or central regulators set bank capital requirements as risk sensitive capital or leverage ratios, we demonstrate the importance of capital requirements being set centrally when cross-region spillovers are large and local regulators suffer from substantial regulatory capture. We show that local regulators may want to surrender regulatory power only when spillover effects are large but the degree of supervisory capture is relatively small, and that bank capital regulation at central rather than local levels is more beneficial the larger the impact of systemic risk and the more asymmetric is regulatory capture at the local level.
Using a simple two-region model where local or central regulators set bank capital requirements as risk sensitive capital or leverage ratios, we demonstrate the importance of capital requirements being set centrally when cross-region spillovers are large and local regulators suffer from substantial regulatory capture. We show that local regulators may want to surrender regulatory power only when spillover effects are large but the degree of supervisory capture is relatively small, and that bank capital regulation at central rather than local levels is more beneficial the larger the impact of systemic risk and the more asymmetric is regulatory capture at the local level.
