This paper is aimed at analyzing the cyclical behavior of capital buffer of Islamic and conventional banks in Indonesia. More specifically, this paper has three objectives. First, to test whether ...capital buffer in Indonesian banking industry as a whole is countercyclical or procyclical. Second, to test whether there is a difference in the level of capital buffer of Islamic banks as compared to the level of capital buffer of conventional banks. Third, to test whether there is a difference in the cyclicality of capital buffer of Islamic and conventional banks. The analysis in this paper is conducted using the standard dynamic system generalized method of moments (system GMM) regressions and includes a panel of 108 banks over the period between 2004 and 2019. From the results, it can be concluded that the capital buffer of Islamic and conventional banks in Indonesia is procyclical. From the results, it can also be concluded that no difference exists in the level of capital buffer of Islamic banks as compared to conventional banks and in the cyclicality of capital buffer in Islamic and conventional banking. If the countercyclical capital buffer is achieved, a policy measure to alter the cyclical behavior of capital buffer of Islamic and conventional banks in Indonesia therefore is a must. Such policy measure needs not to be specified for Islamic or conventional banking industry.
We use the 2007-2008 financial crisis as a lens to study the link between banks’ financial health and the strength of transmission of financial sector shocks to the real economy. We find that banks ...with ex-ante stronger balance sheets, in particular higher levels of common equity, were better able to maintain credit supply when faced with liquidity shocks during the crisis. Bank recapitalizations mitigated the lending gap between high and low capital banks, but only in countries with strong sovereigns. These findings support the view that strong financial intermediary balance sheets are key for the recovery of credit and economic performance after large financial sector shocks.
By providing liquidity to depositors and credit-line borrowers, bankscanbe exposed to double-runs on assets and liabilities. For identification, we exploit the 2007 freeze of the European interbank ...market and the Italian Credit Register. After the shock, there are sizeable, aggregate double-runs. In the cross-section,credit-line drawdowns are not larger for banksmore exposed tothe interbank market;however, they are larger when we condition on the same firms with multiple credit lines. Weshow that, ex-ante, more exposed banks actively manage their liquidity risk by grantingfewer credit lines to firms that run moreduringcrises.
Abstract
This paper compares and contrasts the resilience of the financial system, in particular banks, during the Global Financial Crisis and COVID-19. We show that banks are now part of the ...solution, rather than part of the problem, thanks to regulatory and institutional reforms over the past decade. Heeding the lessons from the Global Financial Crisis has paid dividends. We outline some early lessons from the COVID-19 crisis for the financial system going forward.
This paper investigates the impact of bank regulatory capital on Islamic bank risk using bank-level data from 29 countries and covering the period from 2004 to 2020. Applying the Generalized Method ...of Moments technique for dynamic panels, we discover that, on average, Islamic bank regulatory capital ratios exceed the level required by Basel III. Our findings provide evidence in support of the Moral Hazard Hypothesis; that is, there is a negative relationship between capital and risk. These findings indicate that Islamic banks are better protected against risk when they fulfil Basel III and IFSB regulatory capital requirements. According to our findings, authorities that aim to improve the financial stability of the banking industry should reinforce their policies and oblige banks to adhere to regulatory capital requirements during a crisis, such as COVID-19. Finally, we observe that different risk indicators have diverse correlations with regulatory capital, and our findings are robust across a variety of estimation methodologies.
This paper aims at assessing the impact of Basel Committee on Banking Supervision (BCBS) liquidity regulation announcements on bank creditors. Using an event study on Credit Default Swap (CDS) data ...of large European banks over the 2007–2015 period, we find evidence that creditors increase their expectations of a credit event following the regulatory events, with CDS spreads widening. Results from the regression analysis show that this effect depends on bank-specific factors. Specifically, the negative CDS market reaction weakens when banks hold higher liquidity and capital ratios. Conversely, the negative CDS market reaction strengthens when banks hold a higher bad loan ratio. Provisions against loan losses positively moderate this effect.
•Side effects of the Basel III liquidity regulation.•Negative effects weaken when banks are highly capitalized and have a more resilient and stable funding structure.•Measuring banks’ abnormal credit default swap spreads.
This paper uses a sample of quarterly observations of insured US commercial banks to examine whether the effect of bank capital on lending differs depending upon the level of bank liquidity. We find ...that the effect of an increase in bank capital on credit growth, defined as growth rate of net loans and unused commitments, is positively associated with the level of bank liquidity only for large banks and that this positive relationship has been more substantial during the recent financial crisis period. This result suggests that bank capital exerts a significantly positive effect on lending only after large banks retain sufficient liquid assets.
Using a large bank-level dataset, we test the relevance of both structural liquidity and capital ratios, as defined in Basel III, on banks' probability of failure. To include all relevant episodes of ...bank failure and distress (F&D) occurring in the EU-28 member states over the past decade, we develop a broad indicator that includes information not only on bankruptcies, liquidations, under receivership and dissolved banks, but also accounts for state interventions, mergers in distress and EBA stress test results. Estimates from several versions of the logistic probability model indicate that the likelihood of failure and distress decreases with increased liquidity holdings, while capital ratios are significant only for large banks. Our results provide support for Basel III's initiatives on structural liquidity and for the increased regulatory focus on large and systemically important banks.
This paper analyzes the evolution of bank funding structures in the run up to the global financial crisis and studies the implications for financial stability, exploiting a bank-level dataset that ...covers about 11,000 banks in the U.S. and Europe during 2001–09. The results show that banks with weaker structural liquidity and higher leverage in the pre-crisis period were more likely to fail afterward. The likelihood of bank failure also increases with pre-crisis bank risk-taking. In the cross-section, the smaller domestically-oriented banks were relatively more vulnerable to liquidity risk, while the large cross-border (Global) banks were more vulnerable to solvency risk due to excessive leverage. In fact, a 3.5 percentage point increase in the pre-crisis capital buffers of Global banks would have caused a 48 percentage point in their probability of failure during the crisis. The results support the proposed Basel III regulations on structural liquidity and leverage, but suggest that emphasis should be placed on the latter, particularly for the systemically-important institutions. Macroeconomic and monetary conditions are also shown to be related with the likelihood of bank failure, providing a case for the introduction of a macro-prudential approach to banking regulation.
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