International Journal of Banking, Accounting and Finance (8 papers in press)
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.
Auditor's expertise and the effect of the European banking sector CEO skill on audit quality during the European financial crisis
by Panagiotis Tachinakis, Michalis Samarinas
Abstract: The paper examines whether Eurozone banks that replace their CEOs with highly skilled ones, also switch to industry-expert auditors, thereby increasing the quality of auditing they receive. Using a sample of Eurozone banks, we develop a logistic regression model that incorporates auditor expertise as an audit quality determinant, audit opinion and directorship skill. Moreover, various proxies are used to control for the effect on the type of auditor opinion. The findings indicate that Eurozone banks alter their approach regarding auditor choice, after replacing their CEO with one with a higher level of directorship skill. Moreover, they seem to switch towards auditors specialising in the sector, thus increasing the quality of auditing, but only if they operate in a country facing fiscal sustainability issues. Robustness checks of the results are assertive of the validity of the conclusions reached. There are important implications arising from the study, highlighting that greater managerial performance is not necessarily reflective of financial health and stability. In fact, banks operating in a harsh financial environment may seek additional reassurance by establishing a higher quality of audit.
Keywords: audit quality; Eurozone; banking; auditor expertise; CEO skills.
Future firm performance and textual characteristics of 10-K disclosures
by Anestis C. Ladas
Abstract: The paper examines the influence of contextual information within 10-K reports on the future performance of a firm. Based on an earnings expectation model, we uncover the incremental informational contribution of two fundamental textual characteristics of 10-K disclosures on future performance; readability and the frequency of terms related to accounting judgement. We assert that the higher the use of terms relating to judgement in the 10-K reports, the higher the judgement exercised in the accounting procedures and the preparation of the financial statements. Both readability, measured either using 10-K's raw size or their word count and judgement sentiment are found to be positively related to future performance. Moreover, a cross-term of the two textual characteristics has incremental information content for future firm performance. Our findings indicate that textual analysis may offer an array of new information that is related to firm performance.
Keywords: textual analysis; accounting judgement; firm performance; information asymmetry.
Stress-testing and credit risk revisited: a shipping sector application
by Anna Merika, Ioannis Negkakis, Henry Penikas
Abstract: Conventional stress-testing in credit risk management may considerably underestimate economic losses associated with the most negative scenarios. In this paper, we show that in order to properly stress-test credit risk, we need to derive initially the default correlation among assets or companies. Then a risk measure needs to be applied to the stressed default rate distribution, in order to obtain default rates attached to the most negative scenarios. We find that the application of both the stressed default correlation and the risk measure deliver considerable deviations from the conventional approach. To illustrate our approach we use 192 publicly listed shipping corporations, over 2000-2016, and show that conventional stress-testing tools may underestimate losses under certain conditions. Furthermore, we show that the Vasicek (1987) model assumption of independence, between the systemic factor and the default correlation may not hold in certain cases. This assumption may actually be the reason for the likelihood of underestimation of credit risk capital requirements as applied in the context of the Basel internal ratings-based (IRB) approach.
Keywords: default correlation; stress-testing; shipping industry; probability of default; internal ratings based; IRB.
Evaluating the role and effectiveness of the audit committee on the quality of financial reporting: evidence from Greek PIEs
by Constantinos Chalevas, Panagiotis Giannopoulos, Andreas Koutoupis, Angeliki Samara
Abstract: A new audit law was set in force in Greece in 2017 in accordance with the provisions of the European Regulation 537/2014, which reinforces the role of the audit committee (AC) and introduces new audit requirements. This study investigates the impact of the adoption of the new audit law on the quality of financial reporting. The used variables derived from the major law requirements and were measured appropriately using the responses of audit committees to a structured questionnaire developed to capture the compliance of the entities with the new law provisions. The sample is randomly selected, consists of 138 public interest entities (PIEs) for the year 2018 and concerns firms of various sizes and sectors. Our model contains a set of variables, solely derived from the new audit law. Audit committee composition and skills, its duty to make statutory auditors (or audit firms) understand the business of the entity as long with its responsibility for monitoring the independence of the statutory auditor and the effectiveness of the entity's internal quality control seem to significantly improve the quality of financial reporting.
Keywords: audit committee; financial reporting; internal audit.
An assessment of the Fundamental Review of the Trading Book: the capital requirement impact on a stylised financial portfolio
by Chiara Pederzoli, Costanza Torricelli
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; FRTB; capital requirements; trading portfolio; value-at-risk; VaR; stressed VaR; expected shortfall; liquidity risk; bank regulation; Basel Committee on Banking Supervision; BCBS.