Risk, capital and financial crisis

Ghosh, Saibal (2014): Risk, capital and financial crisis. Published in: Borsa Istanbul Review , Vol. 14, No. 3 (June 2014): pp. 145-157.

Abstract

Employing data on over 100 banks for Gulf Cooperation Council (GCC) countries during 1996-2011, we test the relation between risk and capital. The findings indicate that banks generally increase capital in response to an increase in risk, and not vice versa. Second, there is an uneven impact of regulatory pressure and market discipline on banks attitude towards risk and capital. Additionally, Islamic banks increased their capital as compared to conventional banks.

• Item Type: MPRA Paper
• Language: English
• Keywords: Z-score; capital; 2SLS; banks; Gulf Cooperation Council
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation

References

Abedifar, P., A. Tarazi and P. Molyneux (2013). Risk in Islamic banking. Review of Finance 17, 2035-96.

Adrian, T. and H.S. Shin (2009). Money, liquidity, and monetary policy. American Economic Review 99, 600-605.

Aggarwal, R. and K. Jacques (1997). A simultaneous equations estimation of the impact of prompt corrective action on bank capital and risk. In Financial Services at the Crossroads: Capital Regulation in the 21st Century, Federal Reserve Bank of New York.

Al Hassan, A., M. Khamis and N. Oulidi (2010). The GCC banking sector: Topography and analysis. IMF Working Paper No. 87. IMF: Washington DC.

Alfon I., I Argimon and P. Bascunana-Ambros (2004), What Determines how Much Capital is Held by UK Banks and Building Societies, Occasional Paper Series 22, FSA, London.

Altunbas, Y., S. Carbo, E.Gardener and P.Molyneux (2007). Examining the Relationships between Capital, Risk and Efficiency in European Banking. European Financial Management 13, 49-70.

Arvai, Z., A. Prasad and K. Katayama (2014). Macroprudential policies in GCC countries. IMF Staff Discussion Note 1,IMF: Washington DC.

Avery, R. B. and A.N. Berger (1991). Loan commitments and bank risk exposure. Journal of Banking and Finance 15, 173-192.

Bank for International Settlements (2013). Annual Report. BIS: Basel.

Barry, T.A.,L.Lepetit and A.Tarazi (2011). Ownership structure and risk in publicly held and privately owned banks. Journal of Banking and Finance 35, 1327-40.

Barth, J., G. Caprio and R. Levine (2004). Bank Supervision and Regulation. What Works Best? Journal of Financial Intermediation 13, 205-48.

Basel Committee for Banking Supervision (2012). International regulatory framework for banks. BIS: Basel.

Beatty, A. and D. Harris. (1999). The effects of taxes, agency costs and information asymmetry on earnings management: A comparison of public and private firms. Review of Accounting Studies 4, 299-326.

Beck, T., A.Demirguc-Kunt and O.Merrouche (2010). Islamic vs. conventional banking. Business model, efficiency and stability. World Bank Working Paper 5446. The World Bank: Washington DC.

Besanko, D.,and G.Kantas (1996). The regulation of bank capital: Do capital standards promote bank safety? Journal of Financial Intermediation 5, 160-83.

Bouwens, J., and A.Verriest (2014). Putting skin in the game: managerial ownership and bank risk taking. Harvard Business School Working Paper 70, Cambridge: MA.

Boyd, J.H. and S.L.Graham (1988). The profitability and risk effects of allowing bank holding companies to merger with other financial firms: A simulation study. Quarterly Review Federal Reserve Bank of Minneapolis2, 3-20.

Cihak, M. and H. Hesse (2007). Cooperative banks and financial stability. IMF Working Paper 2, IMF: Washington DC.

Cihak, M., & Hesse, H. (2008). Islamic banks and financial stability: An empirical analysis. IMF Working Paper 16. IMF: Washington DC.

Cornett, M. and H. Tehranian (1994). An examination of voluntary versus involuntary security issuances by commercial banks: the impact of capital regulations on common stock returns. Journal of Financial Economics 35: 99-122.

Das, A. and S.Ghosh (2004). The relation between risk and capital: Evidence from Indian public sector banks. RBI Occasional Papers (Summer), 1-21.

Das, A., and S.Ghosh (2007). Determinants of credit risk in state-owned banks: An empirical investigation. Economic Issues 12, 48-66.

De Jonghe, O. (2010). Back to the basics in banking? A micro-analysis of banking system stability. Journal of Financial Intermediation 19, 387-417.

De Long, G. (2001). Stockholder gains from focusing versus diversifying bank mergers. Journal of Financial Economics 59, 221-52.

Demirgüc-Kunt, A. and H.Huizinga (2010). Bank activity and funding strategies: The impact on risk and return. Journal of Financial Economics 98, 626-50.

Diamond, D.W., and P.H.Dybvig (1986).Banking theory, deposit insurance and bank capital regulation. Journal of Business 59, 55-67.

Dothan,U., and J.Williams (1980). Banks, bankruptcy and public regulation. Journal of Banking and Finance 4, 65-88.

Espinosa, R and A. Prasad 2010). Nonperforming loans in the GCC banking system and their macroeconomic effects. IMF Working Paper No. 224. IMF: Washington DC.

Flannery, M. and K. Rangan (2006). Partial adjustment toward target capital structures. Journal of Financial Economics 79, 469-506.

Furlong, F. (1988). Changes in bank risk-taking. Economic Review Federal Reserve Bank of San Francisco (Spring), 2, 5-19.

Furlong, F. and M.Keeley (1988). Capital regulation and bank risk taking: A note. Journal of Banking and Finance 13, 883-91.

Furlong, F., and M.Keeley (1989). Capital regulation and bank risk taking: a note. Journal of Banking and Finance 13: 883-91.

Gardo, S. and R. Martin (2010). The impact of the global economic and financial crisis on Central, Eastern and South-Eastern Europe: A stock-taking exercise. ECB Occasional Paper 115. ECB: Frankfurt.

Ghosh, S., D.M.Nachane, A.Narain and S.Sahoo (2003). Capital requirements and bank behaviour: An empirical analysis of Indian public sector banks. Journal of international Development 15, 145-156.

Hasan, M., and J.Dridi (2010). The effect of the global crisis on Islamic and conventional banks: A comparative study. IMF Working paper 201. IMF: Washington DC.

Hellmann, T., K.Murdock and J.E.Stiglitz (2000). Liberalization, moral hazard in banking and prudential regulation: Are capital requirements enough? American Economic Review 90, 147-65.

Huang, R. and L. Ratnovski (2011), The dark side of bank wholesale funding, Journal of Financial Intermediation 20, 248-63.

Hughes, J. P., W. Lang, L. J. Mester and C-G Moon (1994). Recovering technologies that account for generalized managerial preferences: An application to non-risk-neutral banks. Working Paper 21, Department of Economics, Rutgers University.

Iannotta, G., G.Nocera and A.Sironi (2013). The impact of government ownership on bank risk. Journal of Financial Intermediation 22, 152-76.

Ianotta, G., G. Nocera and A. Sironi (2007). Ownership Structure, Risk and Performance in the European Banking Industry. Journal of Banking and Finance 31, 2127-2149.

Imam, P.A. and K.Kpodar (2013).Islamic banking: How has it expanded? Journal of International Trade and Finance 49, 112-37.

International Monetary Fund (2010a). Impact of the global financial crisis on the Gulf Cooperation Countries and challenges ahead. IMF: Washington DC.

International Monetary Fund (2010b). Regional Economic Outlook - Middle East and Central Asia (April). IMF: Washington DC.

International Monetary Fund (2011). Regional Economic Outlook - Middle East and Central Asia (April). IMF: Washington DC.

International Monetary Fund (2013). Regional Economic Outlook - Middle East and Central Asia(November). IMF: Washington DC.

International Monetary Fund (2014). Macroprudential Policy in GCC Countries. Staff Discussion Note 1. IMF: Washington DC.

Ivashina, V. and D. Scharfstein (2010). Bank lending during the financial crisis of 2008. Journal of Financial Economics 97, 319-38.

Jacques, K. and P. Nigro (1997). Risk-based capital, portfolio risk, and bank capital: A simultaneous equations approach. Journal of Economics and Business 49, 533-547.

Kamaruddin, B. H., M.Safa and R. Mohammed (2008). Assessing production efficiency of Islamic banks and conventional bank Islamic windows in Malaysia. International Business Management Research 1, 31--48.

Ke, B., K. Petroni, and A. Saffieddine. (1999). Ownership concentration and sensitivity of executive pay to accounting performance measures: Evidence from publicly and privately-held insurance companies. Journal of Accounting and Economics 28, 185-209.

Keeley, M. (1990). Deposit insurance, risk and market power in banking. American Economic Review 80, 1183-1200.

Kilinc, M., Z.Kilinc and I.M.Turhan (2012). Resilience of the Turkish economy during the global financial crisis of 2009. Journal of International Trade and Finance 48, 19-34.

Kim, D. and A.M. Santomero (1988), Risk in banking and capital regulation. Journal of Finance 43,1219-1223.

Koehn, M. and A.M. Santomero (1980). Regulation of bank capital and portfolio risk. Journal of Finance 35, 1235-1244.

Kwan, S and R.A.Eisenbis (1997). Bank risk, capitalization and operating efficiency. Journal of Financial Services Research 12, 117-131.

La Porta, R., F. Lopez-de-Silanes and A. Shleifer (2002). Government ownership of commercial banks. Journal of Finance 57, 265-301.

Laeven, L. and R. Levine (2007). Is there a diversification discount in financial conglomerates? Journal of Financial Economics 85, 331-67.

Laeven, L. and R. Levine (2009). Bank governance, regulation and risk-taking. Journal of Financial Economics 93, 259-275.

Lang, L., and R.Stulz (1994). Tobin’s Q, corporate diversification and firm performance. Journal of Political Economy 102, 1248-80.

Milne, A., and E.Whalley (2001). Bank capital regulation and incentives for risk-taking. Available at http: //staff. city.ac.uk/~amilne

Myers, S. C., and N. Majluf (1984). Corporate financing and investment decisions when firms have information investors do not have. Journal of Financial Economics 13, 187-221

Orgler, Y.E.,and R.A.Taggart Jr.(1983). Implications of corporate capital structure theory for banking institutions. Journal of Money, Credit, and Banking 15, 212-221.

Ozcan-Gunay, E., Z.N.Gunay and G.Gunay (2013). The impact of regulatory policies on risk taking and scale efficiency of commercial banks in an emerging banking sector. .Journal of International Trade and Finance 49, 80-98.

Peek, J., and E.Rosengren (1995). Bank lending and the transmission of monetary policy. Paper presented at the Conference at Federal Reserve Bank of Boston.

Raddatz, C. (2010). When the rivers run dry: Liquidity and the use of wholesale funds in the transmission of the US subprime crisis. World Bank Working Paper 5203. The World Bank; Washington DC.

Ratnovski, L., and R. Huang (2009). Why are Canadian banks more resilient? IMF Working Paper No. 152. IMF: Washington DC.

Rime, B. (2001). Capital requirements and bank behaviour: Empirical evidence for Switzerland. Journal of Banking and Finance 25, 789-805.

Santos, J.A.C. (2011). Bank corporate loan pricing following the subprime crisis. Review of Financial Studies 24, 116-43.

Saunders, A.,E.Strock and N.Travlos (1990). Ownership structure, deregulation and bank risk taking. Journal of Finance 45, 643-54.

Shrieves, R.E. and D. Dahl (1992). The relationship between risk and capital in commercial banks. Journal of Banking and Finance 16, 439-457.

Srairi, S.(2013). Ownership structure and risk-taking behaviour in conventional and Islamic banks: Evidence from MENA countries. Borsa Istanbul Review 13,115-27.

Stiroh, K.J. (2004). Diversification in banking: Is non-interest income the answer? Journal of Money,Credit, and Banking 36, 853-882.

Stolz, S. (2007). Bank capital and risk taking. Springer: Heiderberg.

Titman, S., and R. Wessels, (1988). The determinants of capital structure choice, Journal of Finance 43, 1-19.

Van Roy, P. (2008). Capital requirements and bank behavior in the early 1990s: Cross country evidence. International Journal of Central Banking 4, 29-60.

World Bank (2012). Bank regulation and supervision database. The World Bank, Washington DC.