How Does Bank Competition Affect Solvency, Liquidity and Credit Risk? Evidence from the MENA Countries PDF Download
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Author: Raja Almarzoqi
Publisher: International Monetary Fund
ISBN: 1513505831
Category : Business & Economics
Languages : en
Pages : 43
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Book Description
The paper analyzes the relationship between bank competition and stability, with a specific focus on the Middle East and North Africa. Price competition has a positive effect on bank liquidity, as it induces self-discipline incentives on banks for the choice of bank funding sources and for the holding of liquid assets. On the other hand, price competition may have a potentially negative impact on bank solvency and on the credit quality of the loan portfolio. More competitive banks may be less solvent if the potential increase in the equity base—due to capital adjustments—is not large enough to compensate for the reduction in bank profitability. Also, banks subject to stronger competitive pressures may have a higher rate of nonperforming loans, if the increase in the risk-taking incentives from the lender’s side overcomes the decrease in the credit risk from the borrower’s side. In both cases, country-specific policies for market entry conditions—and for bank regulation and supervision—may significantly affect the sign and the size of the relationship. The paper suggests policy reforms designed to improve market contestability and to increase the quality and independence of prudential supervision.
Author: Raja Almarzoqi
Publisher: International Monetary Fund
ISBN: 1513505831
Category : Business & Economics
Languages : en
Pages : 43
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Book Description
The paper analyzes the relationship between bank competition and stability, with a specific focus on the Middle East and North Africa. Price competition has a positive effect on bank liquidity, as it induces self-discipline incentives on banks for the choice of bank funding sources and for the holding of liquid assets. On the other hand, price competition may have a potentially negative impact on bank solvency and on the credit quality of the loan portfolio. More competitive banks may be less solvent if the potential increase in the equity base—due to capital adjustments—is not large enough to compensate for the reduction in bank profitability. Also, banks subject to stronger competitive pressures may have a higher rate of nonperforming loans, if the increase in the risk-taking incentives from the lender’s side overcomes the decrease in the credit risk from the borrower’s side. In both cases, country-specific policies for market entry conditions—and for bank regulation and supervision—may significantly affect the sign and the size of the relationship. The paper suggests policy reforms designed to improve market contestability and to increase the quality and independence of prudential supervision.
Author: Raja Almarzoqi
Publisher:
ISBN: 9781513538457
Category : Bank failures
Languages : en
Pages :
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Book Description
Author: MissLiliana Schumacher
Publisher: International Monetary Fund
ISBN: 1463924615
Category : Business & Economics
Languages : en
Pages : 51
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Book Description
This paper proposes and demonstrates a methodology for modeling correlated systemic solvency and liquidity risks for a banking system. Using a forward looking simulation of many risk factors applied to detailed balance sheets for a 10 bank stylized United States banking system, we analyze correlated market and credit risk and estimate the probability that multiple banks will fail or experience liquidity runs simultaneously. Significant systemic risk factors are shown to include financial and economic environment regime shifts to stressful conditions, poor initial loan credit quality, loan portfolio sector and regional concentrations, bank creditors' sensitivity to and uncertainties regarding solvency risk, and inadequate capital. Systemic banking system solvency risk is driven by the correlated defaults of many borrowers, other market risks, and inter-bank defaults. Liquidity runs are modeled as a response to elevated solvency risk and uncertainties and are shown to increase correlated bank failures. Potential bank funding outflows and contractions in lending with significant real economic impacts are estimated. Increases in equity capital levels needed to reduce bank solvency and liquidity risk levels to a target confidence level are also estimated to range from 3 percent to 20 percent of assets. For a future environment that replicates the 1987-2006 volatilities and correlations, we find only a small risk of U.S. bank failures focused on thinly capitalized and regionally concentrated smaller banks. For the 2007-2010 financial environment calibration we find substantially elevated solvency and liquidity risks for all banks and the banking system.
Author: Taweewan Sidthidet
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
The objective of this dissertation is to shed light on the decision-making behavior of banks under liquidity and credit risks as well as the impact of market structure (competition and mergers) on such behavior. The analysis of this dissertation differs from the previous studies in that we explicitly analyze the effects of liquidity and credit risks on banks' decisions and profits. The analysis of this dissertation can be separated into two main parts. The first part focuses on the effect of liquidity risk on banks' decisions and profits (Chapters 2 and 3) while the second part concentrates on the effects of credit risk and bank regulations (Chapter 4). The main objective of Chapter 2 is to investigate how the uncertainty in terms of early withdrawals from depositors (which creates liquidity shortage) affects banks' behavior. We examine a model of horizontal mergers within the banking industry based on an inventory-theoretic approach. In our model, banks ...
Author: Rama Cont
Publisher: International Monetary Fund
ISBN: 1513546139
Category : Business & Economics
Languages : en
Pages : 39
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Book Description
The traditional approach to the stress testing of financial institutions focuses on capital adequacy and solvency. Liquidity stress tests have been applied in parallel to and independently from solvency stress tests, based on scenarios which may not be consistent with those used in solvency stress tests. We propose a structural framework for the joint stress testing of solvency and liquidity: our approach exploits the mechanisms underlying the solvency-liquidity nexus to derive relations between solvency shocks and liquidity shocks. These relations are then used to model liquidity and solvency risk in a coherent framework, involving external shocks to solvency and endogenous liquidity shocks arising from these solvency shocks. We define the concept of ‘Liquidity at Risk’, which quantifies the liquidity resources required for a financial institution facing a stress scenario. Finally, we show that the interaction of liquidity and solvency may lead to the amplification of equity losses due to funding costs which arise from liquidity needs. The approach described in this study provides in particular a clear methodology for quantifying the impact of economic shocks resulting from the ongoing COVID-19 crisis on the solvency and liquidity of financial institutions and may serve as a useful tool for calibrating policy responses.
Author: Thi Ngoc My Nguyen
Publisher:
ISBN:
Category :
Languages : en
Pages : 910
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Book Description
This thesis investigates the impact of market power on bank liquidity; the association between competition and systemic liquidity; and whether the associations between liquidity and stability at both bank- and systemic- levels are affected by competition. The first research question is explored in the context of 101 countries over 1996-2013 while the second and the third, which require listed banks, use a smaller sample of 32 nations during 2001-2013. The Panel Least Squares and the system Generalized Method of Moments estimators are employed to assess these associations. These research issues are further examined separately for countries with different level of economic development. Such divisions are essential since these countries exhibit varying degrees of market power, banking competition, liquidity risk preference, regulations and financial infrastructures.Regarding the market power-liquidity relationship, the findings suggest an inverted U-shaped association between market power and bank liquidity. With an initial increase in market power, banks increase their liquid assets and become net lenders in the interbank markets. When market power exceeds a certain threshold, however, banks hold less liquid assets and become net interbank borrowers. For a given level of market power, ceteris paribus, banks in more developed nations have lower investments in asset liquidity and obtain more funding through the interbank market than those in their developing country counterparts. While competition benefits bank-level asset and funding liquidity, it decreases systemic liquidity. By affecting loan profitability and banks' incentives to hold liquid reserves, competition influences interbank market liquidity and thus asset prices. This in turn influences banks' ability to withstand liquidity shocks and systemic liquidity crises. On the impact of competition on the association between liquidity and stability, bank market power seems to reinforce the positive impact of funding liquidity on bank stability. In contrast, banking systemic liquidity appears only to enhance systemic stability in less competitive markets. This is because greater competition encourages banks to assume more risks (i.e. credit and capital risks) that offset systemic liquidity's positive impact. This thesis offers several contributions to the bank liquidity hoarding and industrial organization literatures by showing that bank liquidity risk varies with market power. It similarly expands the financial intermediation literature by providing evidence that strategic interactions among banks expose them to systemic liquidity crises. It further adds to the competition-stability literature by providing evidence that competition leads to a reversal of the benefits of liquidity on stability at both bank- and systemic- levels. It also improves the prior methodology by deriving a systemic liquidity risk indicator using a Principal Component Analysis, examining both bank- and systemic-levels of liquidity and stability, employing a three year rolling window to reflect more frequent changes of competition over time and using bank distance-to-capital proposed by Chan-Lau and Sy (2007) in addition to the traditional distance-to-default in calculating banking systemic stability. These findings should have implications for policymakers, regulators, central bankers and investors in wide-range of countries. Policy makers should benefit from learning that the new international bank liquidity standards (fully implemented by 2019) incorporate an adjustment to reflect bank market power and competition. Regulators should also avoid "one size fits all" approach as bank liquidity is influenced by cross-country differences in regulation, industry characteristics, financial development and presence/absence of explicit deposit guarantees. Central bankers should learn the impact of competition on liquidity and stability when extending their liquidity support. Finally, investors should be aware their banks' competitive environment and liquidity position before investing.
Author: Yoram Landskroner
Publisher:
ISBN:
Category :
Languages : en
Pages : 16
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Book Description
Liquidity risk is one of the major risks faced by banks in addition to credit risk, market risk and operating risk. In this paper we construct a stylized model of bank management where the asset and liabilities liquidity structure are a key element in determining the bank's exposure to liquidity risk. The main results of our model are that liquidity risk increases when competition in the credit market increases while increasing competition in the deposit market will decrease the liquidity shortage. Our results are of particular importance as banks face increased liquidity risk due to there cent developments in the financial markets.
Author: Mr.Stefan W. Schmitz
Publisher: International Monetary Fund
ISBN: 1484300661
Category : Business & Economics
Languages : en
Pages : 46
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Book Description
This paper presents new evidence on the empirical relationship between bank solvency and funding costs. Building on a newly constructed dataset drawing on supervisory data for 54 large banks from six advanced countries over 2004–2013, we use a simultaneous equation approach to estimate the contemporaneous interaction between solvency and liquidity. Our results show that liquidity and solvency interactions can be more material than suggested by the existing empirical literature. A 100 bps increase in regulatory capital ratios is associated with a decrease of bank funding costs of about 105 bps. A 100 bps increase in funding costs reduces regulatory capital buffers by 32 bps. We also find evidence of non-linear effects between solvency and funding costs. Understanding the impact of solvency on funding costs is particularly relevant for stress testing. Our analysis suggests that neglecting the dynamic features of the solvency-liquidity nexus in the 2014 EU-wide stress test could have led to a significant underestimation of the impact of stress on bank capital ratios.
Author: Mr.Lev Ratnovski
Publisher: International Monetary Fund
ISBN: 1616356774
Category : Business & Economics
Languages : en
Pages : 41
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Book Description
Banks may be unable to refinance short-term liabilities in case of solvency concerns. To manage this risk, banks can accumulate a buffer of liquid assets, or strengthen transparency to communicate solvency. While a liquidity buffer provides complete insurance against small shocks, transparency covers also large shocks but imperfectly. Due to leverage, an unregulated bank may choose insufficient liquidity buffers and transparency. The regulatory response is constained: while liquidity buffers can be imposed, transparency is not verifiable. Moreover, liquidity requirements can compromise banks' transparency choices, and increase refinancing risk. To be effective, liquidity requirements should be complemented by measures that increase bank incentives to adopt transparency.
Author: Jian Cai
Publisher:
ISBN:
Category :
Languages : en
Pages : 49
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Book Description
This paper examines the impact of interbank competition on liquidity risk and on the interaction between liquidity and credit risks. We first show that financial intermediation with deposit insurance may increase the impact of liquidity risk, so that intermediated loans may carry higher liquidity premia for borrowers than market-financed loans. Second, with negligible interbank competition, higher credit risk may reduce liquidity risk, so a bank's need for liquidity may also induce it to take on additional credit risk. Third, we show that Bertrand competition among banks in the loan market, introduced by outside lenders purchasing the relationship-specific liquidation skilll of the incumbent lender, has two potential effects: (i) it can improve loan liquidity, and (ii) it can make credit and liquidity risks comonotonic, thereby reducing the inclination of banks to take on excessive credit risk to cope with their liquidity needs. However, interbank competition improves loan liquidity only under some conditions. We identify conditions under which greater interbank competition increases loan liquidity and reduces each bank's overall risk, which includes credit and liquidity risks.
