International Journal of Banking, Accounting and Finance (8 papers in press)
An assessment of the Fundamental Review of the Trading Book:
The capital requirement impact on a stylised financial portfolio
by Pederzoli Chiara, Torricelli Costanza
Abstract: This paper assesses the impact on capital requirements of the Fundamental Review of the Trading Book (FRTB) based on a stylised financial portfolio sensible to the risk factors affected by the review. Our results show the order of magnitude of the increase across the two regulations and the two possible approaches: the standard approach and the internal model approach. We further disentangle the components of the expected increase implied by the FRTB. The most interesting result emerges for the internal model approach, whereby the increase in the capital charge is attributable not only to the change in the risk measure and the inclusion of longer liquidity horizons, but most importantly to the dampening of the diversification benefit.
Keywords: fundamental review of the trading book; capital requirements; trading portfolio; VaR; stressed VaR; expected shortfall; liquidity risk; bank regulation; Basel Committee on Banking Supervision.
Borrower characteristics and loan performance: Evidence from micro and small Greek firms
by Vasileios Giannopoulos, Eleftherios Aggelopoulos, Antonios Georgopoulos
Abstract: Using a unique dataset of 3,294 micro and small enterprise loans granted before the recession by one of the four systemic banks in Greece, this study identifies diverse borrower-specific characteristics of these loans that transformed into non-performing loans (NPLs) during the recession. Also, we capture how their impact on NPLs changes as recession escalates. More detailed, we find that homeownership, the bank deposit relationship, the existence of own facilities, the business equipment lending purpose, and the cash loan collateral are crucial factors for NPL avoidance in recession years. In contrast, high levels of loan to turnover ratio and the age of the firms owner seem to increase substantially the delinquency risk. The paper provides originality as it explicitly utilizes primary micro-specific information substantially differing from the related literature that utilizes aggregated, macroeconomic data, with important implications for policymakers and bank staff regarding lending and repayment policies.
Keywords: Non-Performing Loans; micro and small enterprises; borrower-specific characteristics; Greece.
Assessing competitiveness in MENA banking sector in the context of quality of the institutional variables and political conflict risk
by Hatem Elfeituri
Abstract: This paper investigates competitive conditions and the role of institutional environments and political risk as revenue drivers for commercial banks in the Middle East and North Africa (MENA) region. We examine an extended period (1999-2015) consisting of political and economic unrest and transformation that includes the 2007 global crisis and the recent Arab uprising 2011. The Panzar-Rosse model and Arrelano-Bond and GMM methodologies have been employed to examine such issues. Our findings indicate that MENA banks are still operating under monopolistic competition conditions. With regards to political instability, bank revenues are negatively affected by such matters and policies that favour deregulation and a more inclusive role for all stakeholders in the banking system to stimulate the growth. The findings are beneficial in terms of valuable policy implications to structure the banking system of these countries optimally.
Keywords: Panzar-Rose; Institutional; Monopolistic; Competition; Deregulation; MENA.
Effective Monetary policy, Banks' Pricing Behavior and Human development in Africa.
by Abdul Ganiyu Iddrisu, Alhassan Andani, Joshua Abor
Abstract: This paper empirically examines the effect of monetary policy effectiveness on human development in Africa. We employ both micro-bank level and macro-country level data. Bank level data are taken from the Bank scope database maintained by Fitch/IBCA/Bureau Van Dijk. Series are yearly, covering a sample of 320 banks across 29 African countries. Panel fixed effects, random effects and IV regressions were estimated for the period 2002 to 2013. For our IV estimation, the paper explores an instrumental variable based on the fact that, effective monetary policy is conditional on the independence of the central bank. The regression results that ensued suggests that; first, effective monetary policy translates to high banks loan and deposit prices. Building on these results and employing various specifications of banks pricing strategy, the second test suggests that, high banks pricing induced by effective monetary policy tends to increase human development. Results of the net effects eventually suggest that effective monetary policy, overall, does not improve human development.
Keywords: Effective Monetary Policy; Human Development; Banks’ Pricing Behavior; Central Bank Independence; Africa.
Dependence between Islamic banks and conventional banks and risk factors
by Mohamed Amin Chakroun, Mohamed Imen Gallali
Abstract: This study aims to identify the risk factors amplifying the contagion risk between the Islamic to conventional banks. Using the copula approach and the panel VAR model, findings justify the presence of a dependent relationship between the two types of banks, where the sense of causality of this phenomenon is unidirectional derived from conventional to Islamic banks. Hence, our results indicate that the market risk, the credit risk and the size of the financial institution represent the major factors triggering the contagion risk between both types of banks. To this extent, Islamic banks should consider more restricted standards to be able to ensure their independence and to handle their contagion risk.
Keywords: Islamic finance; contagion; systemic risk; copula; marginal expected shortfall; MES; panel VAR; GJR-DCC-GARCH.
Accruals quality and analyst forecast accuracy: evidence from the property-casualty insurance industry
by In Jung Song
Abstract: This paper examines the association between property-casualty insurer accruals quality and analysts' earnings forecasts (i.e., accuracy and dispersion of forecasts). Using insurer-specific accruals, loss reserves, we calculate accruals quality which can be decomposed into its innate and discretionary components. Our results provide evidence that higher accruals quality - as measured by lower standard deviation of loss reserve errors - is positively associated with analysts' forecast accuracy. In other words, our results suggest that analysts provide less accurate forecasts for firms with higher reserve error volatility. Also, we show that lower accruals quality is associated with higher forecast dispersion indicating more disagreement among analysts. Our results hold consistent with decomposed components of accruals, innate and discretionary, and conclude that both managerial discretion and basic operations of firms affect insurers analysts' earnings forecasts.
Keywords: insurance; earning management; loss reserves; loss reserve error volatility; managerial discretion; accruals quality; analyst forecast; earnings forecast; property-casualty insurers.
Does CEO overconfidence matter for shareholders' wealth? Evidence from the UK takeover market
by Chen Huang
Abstract: This study examines how CEO overconfidence affects shareholders' wealth (e.g., stock returns) in mergers and acquisitions (M&As). The main measure adopted to link CEO overconfidence is based on whether a CEO holds stock options until the year before the expiration date. Using a sample of M&As in the UK, we document that acquiring firms' stock returns are negatively affected around the announcement date if their CEOs are characterised by overconfidence. The results hold after addressing omitted variable concerns and using a propensity score matching (PSM) analysis. The findings are also robust to the implementation of the alternative measure of managerial overconfidence, such as media portrayal of CEOs. This study offers an important implication for firms to mitigate CEO overconfidence in order to protect the interests of shareholders.
Keywords: CEO overconfidence; hubris; M&As; stock options; shareholders' wealth; UK.
Borrowers' perceptions of lending conditions: worlds apart or closer than close?
by Dimitrios Anastasiou, Konstantinos Drakos
Abstract: Given that lenders and borrowers interact in the same (credit) market, an interesting research question that arises is whether the demand side of the market correctly comprehends the actual credit market conditions that are primarily shaped by the supply side. We explore this by utilising available surveys conducted separately for the two sides of the credit market and empirically investigate whether, and by which mechanism, demand-side perceptions relate to supply-side credit conditions. Our results indicate that demand-side perceptions do not match one-for-one supply-side conditions, but are rather described by an adaptive mechanism. This mechanism suggests that demand-side perceptions are modified every period by a fraction of the last period's perception error. Additionally, we find that demand-side perceptions systematically overshoot the actual conditions, and this overshooting is accentuated for periphery countries and smaller firms.
Keywords: loan terms and conditions; bank lending conditions; bank lending survey; survey of access to finance; borrowers' perceptions.