International Journal of Banking and Finance

Financial instability, uncertainty and bank lending behavior

Dr.Vighneswara Swamy — Thu, 14 Mar 2013 18:36:22 PDT

Why do banks squeeze their lending activity” is an oft-repeated question during the times of financial crisis. This study examines an emerging economy’s banking system, and contributes to the evolving body of literature on the topic by providing answers to what causes the sluggish bank credit during times of recession. By employing cointegration technique, the study shows that bank credit has a significant positive relationship with the borrowing activities of debt users of the banks, hence, as the contrary an inverse relationship with investment activity is evident during financial crisis. Accordingly, we suggest that banks could increase their lending by increasing the borrowings rapidly either from the Central Banks or from Government supported long term lending institutions during recessionary periods.

Portfolio preferences across markets: Evidence from mutual fund ownership

Wen-Hsiu Chou — Thu, 14 Mar 2013 18:36:21 PDT

This paper is about evaluating and comparing the portfolio preferences of domestic and foreign mutual funds in developed and emerging markets over the period 1998–2007. We find that foreign and domestic mutual funds have some different preferences toward firm characteristics and firms’ information environments, and economic development affects the preferences for both types of funds. A country’s characteristics and institutions also influence mutual fund investment decisions when fund managers form their portfolio holdings. Results further show that foreign and domestic mutual funds play a monitoring role in their portfolio firms, but foreign mutual funds cannot monitor firms effectively in emerging markets.

An analysis of bank efficiency in the Middle East and North Africa

Saeid Eisazadeh et al. — Thu, 14 Mar 2013 18:21:28 PDT

This paper reports institutional factor effects on bank efficiency in Middle Eastern and North African countries during a recent 14 years. The methods used are: Stochastic Frontier Analyses and second-stage Tobit regression to investigate the impact of institutional-cum-financial as well as bank-specific variables on efficiency. Overall, the analysis shows that banks could save 20 percent of their total costs if they were operating efficiently. Factors that affect production efficiency are: macroeconomic stability, financial development, the degree of market competition, legal rights and contract laws, better governance and political stability. Differences in technology seem to be crucial in explaining efficiency differences. Our findings point to the importance of policies that aim to build stronger institutions, promote more competition, and improve governance. Policies should be aimed at giving banks incentives to improve their capitalization and liquidity. Improvements in the legal system and in the regulatory and supervisory bodies would also help to reduce inefficiency, areas of immediate concerns for this vast region. Finally, increased investments and upgrading of the stock markets in the region would help banks improve their performance through market-based investor actions.

Financial transaction and fiduciary obligation: Ethics, economics or commingled commitment?

S. Romila Palliam et al. — Thu, 14 Mar 2013 18:21:27 PDT

Financial transactions and fiduciary obligations are simply intertwined. Fiduciaries are subject to the principle of fidelity. It appears, at times at least, public trust in fiduciary commitments is declining as a result of fiduciaries’ selective reporting of financial events and the existence of conflicts when fiduciaries have selfish motives: motives being not always to maximize the trusting party’s value. It is the agency problem. This work attempts to enunciate that commitments and fiduciary obligations emanating from initial financial transactions are not to be violated or ignored as a matter of policy or practice. The questions that arise are: Should a fiduciary be obliged to guarantee a certain outcome for the counter-party, and should a fiduciary be held accountable to a certain type of outcome? We examine what the guidelines are or should be put in place. Initially, under the garb of some socio-religions edicts-cum-dicta, and then under the well-known economic analytics, we make our points and move the view to the forefront.

Thu, 14 Mar 2013 18:21:26 PDT

Performance of China-owned banks in Hong Kong

Xiaoxi Zhang et al. — Mon, 11 Mar 2013 22:51:48 PDT

This paper reports results on the performance of mainland China-owned banks operating in Hong Kong and compares them to Hong Kong (SAR) owned banks and Foreign owned banks. In general, the test model performs well under diagnostic tests on variables such as net interest margin, non-interest expense, impaired loans ratio, equity multiplier and ownership structures. Profitability, as measured by return on assets and return on equity for Chinese owned banks increased over the period 2004-2010. Chinese owned banks recorded increased performance in terms of net interest margin and equity multiplier but decreased with respect to non-interest expense and impaired loans ratio. Banks having a license also appears to be a major contributor to banks profitability across HKSAR. Compared to Hong Kong based foreign banks and local Hong Kong banks, we found that in general the mainland China banks tend to perform poorly across a number of key banking performance indicators.

Sun, 10 Mar 2013 21:26:20 PDT

Determinants of off-balance sheet business in the case of GCC banking sectors

Mohammad Elian — Sun, 10 Mar 2013 19:10:20 PDT

This paper identifies the association between off balance sheet businesses and a number of determinants identified for the banking sectors of the Gulf Cooperation Council countries. The Fixed Effects Least Squares Dummy Variable Model is used to identify the determinants for a large sample of 64 banks over a recent five-year period. The results reveal that bank-specific variables have important roles in influencing off balance businesses. As for the regulatory variable, capital items are less important, which is contrary to the long-held market discipline hypothesis, under which secure banks are predisposed to engage in more off balance businesses. The macroeconomic variable reveals that higher real GDP growth does not necessarily cause an increase in the off balance activities. However, its positive impact indicates that the off balance business actions follow business cycles, and the overall growth of economy. Prudential regulators, as a policy matter, need to consider region-wide implications of these findings. This is important given the fact that regulating how off balance business is conducted in the region would influence costs and the scope of banks, hence also the monetary policy.

Does corporate governance matter in Iran?

Saeed Ghorbani et al. — Sun, 10 Mar 2013 19:10:17 PDT

In this paper, we construct a corporate governance Index (G-index) based on 13 attributes, which are associated with good and bad governance to investigate the impact of corporate governance on a firm’s stock return. After correlating each of the governance attributes of 141 Tehran Stock Exchange listed companies with their performance separately over a period of six years, we find the direction of each attribute’s correlation. After that, we compute the G-index by aggregating the individual attributes and converting each firm’s scores on attribute into the same scale. Finally, these scores are summed up by subtracting negatively correlated attributes from positively correlated attributes for each firm. We find a significantly high correlation between the firm’s performance and firm’s G-index. In the next step, we made three governance-sorted portfolios – from low to high governance - which we use to evaluate stock returns. We find better-governed portfolios significantly outperformed the poorly governed portfolios. We find that corporate governance score really matters in since the results show statistically significant relationship between the qualities of the corporate governance as measured by our G-index and firm’s stock return.

Bank owned life insurance: A critical examination of banking strategy

Leyuan You et al. — Sun, 10 Mar 2013 19:10:15 PDT

This paper is an investigation of a rampant insurance practice in the US banking sector, namely the permitted practice of employer-paid insurance policy. Under this policy, employee’s life policy paid for by the employer, pays large sums as policy benefits to the employer not to the employee’s family. Employers suggest that taking insurance covers the possible monetary loss value of an employee departing the firm, and hence the benefit is quite permissible, kosher. Our findings show its widespread occurrence in beefing up the earnings and even the capital base of the US banks. It calls into question if this practice, though legal, is socially responsible since an employee with such employer-paid policy would be deprived of tax deduction for his own self-paid policy cover, in most instances. Banking sector’s prevalent use of this practice to cover even low-paid workers such as janitors brings into focus the ethics of this banking practice.