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Journal ArticleDOI

Funding liquidity and bank risk taking

01 Sep 2017-Journal of Banking and Finance (North-Holland)-Vol. 82, Iss: 9, pp 203-216
TL;DR: This paper examined the relationship between funding liquidity and bank risk taking and found that banks with lower funding liquidity risk, as proxied by higher deposit ratios, take more risk than banks with higher liquidity risk.
Abstract: This study examines the relationship between funding liquidity and bank risk taking. Using quarterly data for U.S. bank holding companies from 1986 to 2014, we find evidence that banks having lower funding liquidity risk as proxied by higher deposit ratios, take more risk. A reduction in banks’ funding liquidity risk increases bank risk as evidenced by higher risk-weighted assets, greater liquidity creation and lower Z-scores. However, our results show that bank size and capital buffers usually limit banks from taking more risk when they have lower funding liquidity risk. Moreover, during the Global Financial Crisis banks with lower funding liquidity risk took less risk. The findings of this study have implications for bank regulators advocating greater liquidity and capital requirements for banks under Basel III.
Citations
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Journal ArticleDOI
TL;DR: In this paper, the effects of bank FinTech on credit risk were explored using data from Chinese commercial banks between 2008 and 2017, using web crawler technology and word frequency analysis.
Abstract: Using data from Chinese commercial banks between 2008 and 2017, this paper explores the effects of bank FinTech on credit risk. We first construct and measure a bank FinTech index using web crawler technology and word frequency analysis. The results show that the development of bank FinTech is faster in state-owned banks than in other banks. Moreover, among the five subareas of bank FinTech, the development of internet technology is ahead of artificial intelligence technology, blockchain technology, cloud computing technology, and big data technology. Then, the impacts of bank FinTech on credit risk are examined. We find that bank FinTech significantly reduces credit risk in Chinese commercial banks, and further analyses show that the negative effects of bank FinTech on credit risk are relatively weak among large banks, state-owned banks, and listed banks.

105 citations

Journal ArticleDOI
TL;DR: In this article, the authors examined the effects of funding liquidity risk and liquidity risk on the bank risk-taking and found that a decrease in liquidity risk contributes to higher bank risk taking.
Abstract: Purpose This study examines the effects of funding liquidity risk and liquidity risk on the bank risk-taking. Design/methodology/approach The study employs a system GMM estimation technique and a sample of 57 banks operating in BRICS countries over the period from 2006 to 2015. Findings The results reveal that liquidity risk has a significant and negative effect on the bank risk-taking, indicating that a decrease in liquidity risk contributes to higher bank risk-taking. The study also reveals that funding liquidity risk has the substantial impact on bank risk-taking, suggesting lower funding liquidity risk results in higher bank risk-taking. These results are consistent with prior assumptions. Research limitations/implications The implications of this study highlight the fact that liquidity risk is a risk factor which drives the potential bank default, of which banks tend to take more risks when higher funding liquidity exists. Practical implications This study offers a number of valuable implications for...

49 citations

Journal ArticleDOI
TL;DR: In this article, the authors investigated whether a higher degree of fintech-based financial inclusion (FFI) intensifies banks' risk-taking by analysing data from 534 banks from 24 OIC countries.

37 citations

Journal ArticleDOI
TL;DR: In this article, the authors compared the drivers of MFI and bank solvency risk using a dataset covering 2938 banks and 1078 micro-finance institutions (MFIs) operating in 106 countries.
Abstract: Based on a dataset covering 2938 banks and 1078 microfinance institutions (MFIs) operating in 106 countries this paper compares drivers of MFI and bank solvency risk Measuring solvency risk by the non-performing loans (NPL) ratio we find that several factors driving the bank NPL ratio play a more subdued role for MFIs By contrast, MFI Z-scores, notably those of MFI banks, credit unions and other MFIs, are driven by largely the same factors as bank Z-scores The difference in results can be linked to the special characteristics of credit technologies pursued by MFIs Given that the Z-score is the broader risk measure we conclude from our results that larger and deposit taking MFIs should be subject to the same regulatory and supervisory regimes as banks

30 citations


Cites background from "Funding liquidity and bank risk tak..."

  • ...2013) or even show a significant positive effect of larger size on the Z-score (Khan et al. 2016)....

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Journal ArticleDOI
18 Mar 2019
TL;DR: In this article, the authors examined the relationship between regulatory capital and risk-taking by banks of Pakistan and concluded that regulatory capital plays a key role in the implementation of capital regulations in the banks of developing countries.
Abstract: Objective - The objective of this study is to examine the relationship between capital regulation and risk-taking by the banks of Pakistan. Design - This study was conducted on all the commercial banks of Pakistan and data were collected from the year 2005 to 2016. Findings - This study concluded the significant positive relationship between regulatory capital and risk-taking by banks in Pakistan. The findings of this study play a key role in the implementation of capital regulations in the banks of developing countries. Policy Implications - In the light of this study, the regulators must revise their implementation process of the Basel Accord capital regulations in the banks of developing countries. The prime intention of regulators are only on to maintain the minimum capital ratios but must be conscious of other important elements of capital regulation implications. Originality - This study is one of the first attempts that investigated the crucial role of regulatory capital towards risk-taking in the Pakistani context.

29 citations


Cites background from "Funding liquidity and bank risk tak..."

  • ...Similarly, Khan et al. (2017) and Hussain, Mosa, and Omran (2017), also found the bank’s regulations regarding capital are avoiding the liquidity and excess risk-taking issues in the institutions....

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References
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Posted Content
TL;DR: In this paper, the benefits of debt in reducing agency costs of free cash flows, how debt can substitute for dividends, why diversification programs are more likely to generate losses than takeovers or expansion in the same line of business or liquidationmotivated takeovers, and why the factors generating takeover activity in such diverse activities as broadcasting and tobacco are similar to those in oil.
Abstract: The interests and incentives of managers and shareholders conflict over such issues as the optimal size of the firm and the payment of cash to shareholders. These conflicts are especially severe in firms with large free cash flows—more cash than profitable investment opportunities. The theory developed here explains 1) the benefits of debt in reducing agency costs of free cash flows, 2) how debt can substitute for dividends, 3) why “diversification” programs are more likely to generate losses than takeovers or expansion in the same line of business or liquidationmotivated takeovers, 4) why the factors generating takeover activity in such diverse activities as broadcasting and tobacco are similar to those in oil, and 5) why bidders and some targets tend to perform abnormally well prior to takeover.

14,368 citations

Journal ArticleDOI
TL;DR: The authors showed that bank deposit contracts can provide allocations superior to those of exchange markets, offering an explanation of how banks subject to runs can attract deposits, and showed that there are circumstances when government provision of deposit insurance can produce superior contracts.
Abstract: This paper shows that bank deposit contracts can provide allocations superior to those of exchange markets, offering an explanation of how banks subject to runs can attract deposits. Investors face privately observed risks which lead to a demand for liquidity. Traditional demand deposit contracts which provide liquidity have multiple equilibria, one of which is a bank run. Bank runs in the model cause real economic damage, rather than simply reflecting other problems. Contracts which can prevent runs are studied, and the analysis shows that there are circumstances when government provision of deposit insurance can produce superior contracts.

9,099 citations

Posted Content
TL;DR: In this paper, the authors address the puzzle of why major problems began to arise in the early 1980s and not sooner and propose a hypothesis that increases in competition caused bank charter values to decline, which, in turn, caused banks to increase default risk through increases in asset risk and reductions in capital.
Abstract: A fixed-rate deposit insurance system provides a moral hazard for excessive risk taking and is not viable absent regulation. Although the deposit insurance system appears to have worked remarkably well over most of its 50-year history, major problems began to appear in the early 1980s. This paper addresses the puzzle of why major problems began to arise in the early 1980s and not sooner. ; The hypothesis is that increases in competition caused bank charter values to decline, which, in turn, caused banks to- increase default risk through increases. in asset risk and reductions in capital. This hypothesis is tested using pooled cross section time-series data for the 1970-1986 period for a sample of 85 large bank holding companies.

2,271 citations

Journal ArticleDOI
TL;DR: This article showed that new loans to large borrowers fell by 47% during the peak period of the financial crisis (fourth quarter of 2008) relative to the prior quarter and by 79% relative to peak of the credit boom (second quarter of 2007).
Abstract: This paper documents that new loans to large borrowers fell by 47% during the peak period of the financial crisis (fourth quarter of 2008) relative to the prior quarter and by 79% relative to the peak of the credit boom (second quarter of 2007). New lending for real investment (such as working capital and capital expenditures) fell by only 14% in the last quarter of 2008, but contracted nearly as much as new lending for restructuring (LBOs, M&A, share repurchases) relative to the peak of the credit boom. After the failure of Lehman Brothers in September 2008 there was a run by short-term bank creditors, making it difficult for banks to roll over their short-term debt. We document that there was a simultaneous run by borrowers who drew down their credit lines, leading to a spike in commercial and industrial loans reported on bank balance sheets. We examine whether these two stresses on bank liquidity led them to cut lending. In particular, we show that banks cut their lending less if they had better access to deposit financing and thus they were not as reliant on short-term debt. We also show that banks that were more vulnerable to credit line drawdowns because they co-syndicated more of their credit lines with Lehman Brothers reduced their lending to a greater extent.

2,100 citations


"Funding liquidity and bank risk tak..." refers background in this paper

  • ...In line with this view, Ivashina and Scharfstein (2010) revealed that banks with greater access to deposit funding during the 20 07–20 08 international financial crisis were willing to lend more than those that relied more on short-term debt financing....

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Journal ArticleDOI
TL;DR: In this paper, a formula is derived to evaluate the cost of issuing a guarantee of a loan by a third party, and the method used is to demonstrate an isomorphic correspondence between loan guarantees and common stock put options and then to use the well developed theory of option pricing to derive the formula.
Abstract: It is not uncommon in the arrangement of a loan to include as part of the financial package a guarantee of the loan by a third party. Examples are guarantees by a parent company of loans made to its subsidiaries or government guarantees of loans made to private corporations. Also included would be guarantees of bank deposits by the Federal Deposit Insurance Corporation. As with other forms of insurance, the issuing of a guarantee imposes a liability or cost on the guarantor. In this paper, a formula is derived to evaluate this cost. The method used is to demonstrate an isomorphic correspondence between loan guarantees and common stock put options, and then to use the well developed theory of option pricing to derive the formula.

1,983 citations