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This paper examines the impact of financial market development, financial crises and deposit insurance on bank risk based on macro data of 86 countries during the period 1998-2014. The results show that banking sector development and stock market development have opposing effects on bank risk measured as bank non-performing loan ratio. The introduction of an explicit deposit insurance system plays a significant role in reducing banks’ risk. However, the bank market development after the introduction of this system also increases banks’ risk. The impact of financial market development and deposit insurance system on banks’ risk was more significant before the 2008 financial crisis. It is found that there is a nonlinear relationship between financial market development, deposit insurance, financial crises and banks’ risk. The stock market development has an asymmetric effect on banks’ risk.

Using a macro-level dataset covering 173 countries from 2000 to 2020, this study is the first attempt to examine how income diversification and market concentration are related to bank stability. Firstly, we document that bank stability is positively related to revenue diversification, suggesting that banks are more stable when they are more engaged in non-traditional activities. Secondly, market concentration is positively associated with bank stability, in line with the concentration-stability hypothesis that banks in a highly concentrated banking system are more likely to be more stable. Thirdly, we show that market concentration modifies the link between revenue diversification and bank stability. Specifically, it is shown that diversified banks are more stable in a more concentrated environment compared to those on a less concentrated market. These results are robust to multiple regression specifications with different proxies for bank stability and income diversification.

The active participation of the central bank in exchange rate management has accelerated the growth of foreign exchange reserve in India. The massive reserve stockpiling has substantially contributed to apprehensions about excess liquidity in the domestic economy. The extent to which these concerns are justified depends on the degree to which the central bank is able to mitigate its effects on monetary aggregates. This study is an attempt to assess the magnitude of the sterilization coefficient by using quarterly data from 1996 to 2019. In order to estimate sterilization and offset coefficients, the study employed the two-stage least squares (2SLS) method under the theoretical framework of simultaneous equation modelling. The findings show that the reserve accumulation through central bank interventions puts pressure on money supply. However, the RBI sterilization policy was effective as the central bank was able to sterilize 93 percent of its interventions, while the offset coefficient was 72 percent during the period of study. The low value of the offset coefficient compared to the sterilization coefficient indicates a high degree of monetary policy independence in neutralizing the central bank's purchase interventions. Based on the findings, it can be recommended that policymakers should consider the sustainability of interventions and sterilization operations as the dual policy objectives of independent exchange rate management and monetary policy cannot be achieved in the presence of a high interest rate in an inflation-targeting regime.

Foreign banks have played a major role in Central and Eastern European economic landscape over the last decades. They have spurred banking intermediation and fuelled economic growth for years. However, the global financial crisis unveiled the other side of the coin. This article analyses foreign banks' lending behaviour in Central and Eastern Europe over the period from 2000 to 2016. It aims to investigate the nexus between bank loan growth, cross-border bank claims and the cycle period. Moreover, it captures the impact of the financial cycle on foreign banks' credit behaviour and highlights whether foreign bank ownership is influenced by host- and home-country effects. Our findings reveal the strong nexus between foreign banks' loan growth and cross-border bank claims. Also, we emphasize the pro-cyclicality of foreign banks' loan growth and cross-border bank claims. Furthermore, we see clear differences related to foreign banks' lending behaviour during normal and turbulent times, triggered by host- and home-country effects. These results raise policy challenges regarding the right bank ownership balance and the use of prudential regulation.

This study aims to enhance the empirical evidence on the determinants of collateralized borrowing by small and medium-sized enterprises (SMEs) by presenting new empirical evidence on emerging market countries. Using the data from World Bank Enterprise Surveys from nine emerging markets, we find that older SMEs are less likely to provide collateral for bank loans. The results also reveal that loans received by firms whose top managers are more experienced in the industry and firms with a higher percentage of material inputs and services purchased on account are less likely to be secured. SMEs in the manufacturing industry are more likely to provide collateral for bank loans than service industry firms. The likelihood that the loan is secured is higher for firms with larger loan sizes. Furthermore, our results indicate that the probability of pledging collateral is higher for SMEs that operate in countries with higher borrower-bank proximity.

This paper contributes to the current literature dealing with drivers of bank business model changes. We analyse the relationship between fee and commission income share and banks' performance in terms of profitability, risk and risk-adjusted profitability in the European Union. We applied the System Generalized Method of Moments to a unique data set of 329 EU banks in the period 2005-2014, which resulted in three key findings. First, we did not find any diversification benefits by increasing the fee income share. Therefore, we can conclude that the increase in fee income share observed in recent years in EU banks was driven mainly by external factors, such as increased competition, rather than by internal reasons. Second, higher reliance on equity financing and better quality of provided loans enhance banks' performance. Third, bank business strategies and macroeconomic factors are crucial determinants of banks' performance.

We examine central banks' involvement in inflation forecast targeting by means of an index-based analysis and ordered logistic regression. The research encompasses the Bank of England, the Czech National Bank, the National Bank of Poland and the Sveriges Riksbank. They produce conditional or unconditional macroeconomic forecasts. Hence, two paths have been used to examine them. We examine whether the four central banks follow their forecasts to some extent. We have found that the CNB and SR are highly consistent in terms of compatibility of their decisions with the forecasts, timing of decisions, and communication by means of forecasts. The NBP follows its forecast much less consistently, while the BoE ignores it altogether. As some of the results for the BoE and NBP are unambiguous, we remain cautious while interpreting them. This paper contributes to the literature on the empirical evaluation of inflation forecast targeting.

This paper investigates how lender-borrower relationships affect credit cost for small and medium sized companies (SMEs). We use data within the period 2006–2015 for the Polish SME sector and deploy panel regression models to analyse how the number and length of banking relationships influence the financial costs of a random sample of Polish SMEs. We document that the price of capital decreases as relationships progress. Outcomes of the research are thus inconsistent with the “hold-up” hypothesis. Moreover, we find evidence that supports the view that multiple banking relationships generate more financial benefits for companies than a relationship with one lender.

This article focuses on bank valuation standards as some recommended steps how to evaluate some concrete commercial bank by the market value. Different approaches, methods and models were analysed and the final recomendations were stated. Basic valuation approaches such as the income approach, the market-based approach and the asset-based approach used for traditional entreprises valuation are recommended also for the commercial banks valuation, but it is necessary to adjust them according to some specifics of banks. After the precise analysis it is possible to recommend the application of Market-Based Valuation or in other words Relative Valuation in the combination with Bond Pricing Model. This is the best choice, but only in case there is some comparable bank or comparable transaction available. In the opposite case it is possible to recommend the application of the income approach based on DDM or DCFE in the combination with Bond Pricing Model or with Excess Return Model. Asset-Based Valuation could be used in case of valuation of different type of bank´s asset or in case of the valuation for accounting or tax purposes. The most important problem lies also in the identification of the coefficient beta that oscillates in case of the large maturity banks according to the "magic one".

This paper investigates the short and long-run relationship between credit risk and two bank profitability indicators ROA and ROE in Central and Eastern European countries during the period from 2000 to 2010. Results from previous research mostly confirm the negative relationship between profitability and credit risk by considering the current or one year lagged value of profitability. Certain crisis indicates that more profitable banks before the crisis became more risky during the time of crisis. These results motivate us to upgrade the model of credit risk by including earlier values of profitability. Results indicate that two or three years are necessary for growth of profitability to increase credit risk. However, the long-run relationship between foreign banks' profitability and credit risk is positive, for both indicators. For the domestic bank, the long-run effect of ROA on credit risk is positive, while for ROE this relationship is negative.

In this paper, we analyse the key determinants of bank fee and commission income in the European Union with a special emphasis on market concentration. On a sample of 258 EU banks during the 2007–2014 period, we apply System Generalized Method of Moments. First, we argue that the banks facing higher competition tend to expand more aggressively into non-traditional activities, and therefore they report a higher share of fee income in total income. Second, we found that a higher equity to assets ratio is related with higher shares of fee income since the bank needs more capital to prevent or manage the potential risks of the non-traditional activities. Finally, a high deposits to assets ratio tends to increase the fee income share, which may be possibly attributed to relatively high switching costs and to close depositor-bank relationship in the EU banks.

In this paper the authors examine the determinants of NPL ratio using a cross-county analysis from the sample of 25 emerging countries. Using the panel data approach, determinants of NPL are analysed for the period from 2000 to 2011. The main aim of this paper is to draw a relevant econometric model, to demonstrate the impact of independent variables on the dependent variable by using static and dynamic model estimation techniques. The results show that NPLs rate can be mainly explained by crucial macroeconomic factors, such as the GDP and inflation rate, and bank-specific factors, such as ROA, CAP and lagged NPLs rate.

In this paper, we contribute to the literature focusing on ethics in banking from both theoretical and empirical point of view. We argue that the recent business of the global banking industry is not sustainable and we believe that ethical banking may represent one of the alternative models. In the empirical section, we investigate how ethics in the banking business models affects their financial performance. We identified 69 ethical banks and compared them with conventional banks using Bankscope data of more than 80,000 bank-year observations for the 2003-2013 period. We apply the Within-Between estimation method to bank financial indicators of Return on Assets, Return on Equity and their respective volatilities. We conclude that ethical banks report significantly lower volatility in Return on Equity than their conventional counterparts. In addition, the hypothesis that ethical banks would have higher profitability than their peers is not rejected.

The goal of the article is to verify the credibility of time contingent Forward Guidance (FG) as well as its possible time-inconsistency based on the rarely addressed example of the National Bank of Poland (NBP). The NBP's FG constitutes a unique case study as this measure in its 'Odyssean' form was not introduced to overcome the limits of further policy rates cuts. It allowed us to verify the FG's credibility and time-inconsistency by applying OLS and GMM estimated contemporaneous and forward looking Taylor type rules with interest smoothing. Our empirical evidence reveals that the annual period of FG in Poland was perceived as a credible promise by consumers. We found that time-consistency could have been an additional factor enhancing the considerable credibility of FG. The satisfying results of the NBP's FG appear to be especially interesting, in particular, when contrasted with the often unfavourable experience with time-contingent FG of prominent central banks. We suppose that to achieve this, the central bank should act with caution and the NBP indeed did so by specifying carefully the short horizon of the commitment to be able to abandon FG when the circumstances change. We also discuss FG by opposing its advantages and the drawbacks indicated in the subject literature.

This paper evaluates the accuracy of real GDP growth forecasts published in the period 1995-2013 by two Czech institutions: the Ministry of Finance (MF) and the Czech National Bank (CNB). A two-stepped approach is adopted: first a battery of forecasting errors (MAE, RMSE, MASE) is calculated, complementary to evaluation papers already available. Then statistical analysis is carried out by comparing both MF and CNB forecasts with OECD, European Commission and consensus benchmarks (Kruskal-Wallis test), assessing the presence of systemic bias (Wilcoxon test) and determining their incremental improvement (Page trend test). The results show that although some error patterns might suggest performance deficiencies (i.e. during the recession periods), the accuracy of forecasts prepared by both the MF and CNB does not differ significantly from the benchmark forecasts; MF and CNB predictions do not contain systemic bias and their accuracy improves as the horizon shortens. The paper also highlights several methodological shortcomings in the internal evaluations conducted by both institutions, indicating a potential for further improvement.

The question on the inflation expectations management is one of the most important ones from the central bank's point of view. The inflation forecast can be a helpful tool of managing expectations. If it actually is, the interdependences of the inflation forecast and expectations can be observed. The existence of such interdependences opens the field for determining the preconditions that might support expectations formation. The hypothesis assumes that associations of inflation forecasts and inflation expectations depend on the central bank's credibility and consistency in inflation forecast targeting. The research covers the Czech National Bank, the National Bank of Hungary, the National Bank of Poland and Sveriges Riksbank. The research combines qualitative and quantitative methods. The research uses survey-based expectations quantified with probabilistic method. The main finding is that the relatively high level of credibility and consistency in inflation forecast targeting is not sufficient to achieve strong interdependences of inflation forecast and expectations.

Risk management for banking products can be challenging in general, but is even more risky in a global, low interest rate environment. This paper deals with the risk management of savings accounts, a bank product defined as a non-maturing account with embedded option that bears a relatively attractive rate of return. We focus on the interest rate risk of savings accounts. By constructing the replicating portfolio and simulating market rates and client rates, we show that under the severest scenario, some banks in the Czech Republic might face a significant capital shortage in next two years if market rates start to increase dramatically from recent low levels. We conclude that savings accounts are riskier liabilities than current accounts and term deposits for banks. Moreover, we propose imposing stricter regulation and supervision on these bank products since they might increase systemic risk of the Czech banking sector in coming years.

This study offers a scientific and methodical approach to identifying systemically important domestic banks based on the indicator-based measurement approach recommended by the Basel Committee on Banking Supervision. By improving both a set of criteria and indicators of a bank's systemic importance it is offered to distinguish its five levels - low, moderate, medium, significant and high. The approach was tested on 26 Ukrainian banks representing different groups (depending on the size of assets) according to the classification of the National Bank of Ukraine. We have discovered the absence of banks with high systemic importance in the period 2007-2011 - the majo-rity of banks are characterized by their moderate or low level. In our opinion, the best solution for systemic risk regulation would be the introduction of a differentiated regime of supervision over banks depending on their level of systemic importance and risk profile.

The paper deals with the phenomenon of foreign bank ownership, which is prevalent in the countries of Central, Eastern and South Eastern European region as well as in New Zealand. Using a sample of 17 countries and filtering out more than 140 domestically operating foreign-owned banks, we examine the determinants of their performance in relation to host country conditions over the period of seven years between 2005 and 2011. Based on our knowledge, we use the largest data set in this respect compared to other researchers. Using system GMM and fixed effects models, we reveal that macroeconomic fundamentals of the host country affect the foreign-owned banks' performance but do not suffice in explaining it fully. This result points out that sound banks with higher operational efficiency operating in growing economies with low inflation rate tend to perform better than their peers.

The 2007-2009 global financial turmoil was exacerbated by a low level of financial market regulatory coordination. Historical experience has shown that despite implementing regulations, supervision and macroeconomic policies, the financial industry regularly experiences crises. Consequently, a similar impact might be expected from the Basel III new bank regulatory framework. The aim of this paper is two-fold; in the first part dedicated to theory we describe the Basel III regulatory standards and argue that this regulation is not sufficient and will not prevent financial markets from experiencing future crises. Moreover, we discuss implementation of new banking regulation in Europe: the Capital Requirements Directive IV and stricter capital requirements for European banks set by the European Banking Authority in 2011. In the second part, we focus on an empirical analysis of the impact of stricter capital requirements as defined in the Basel III framework on the market value of European banks. Our analysis employs the fixed effects methodology on the financial data collected from 172 banks listed on European stock exchanges during the 2005-2011 period. We conclude that the impact of the Basel III regulation on the value of bank shares will probably be perceived negatively by the market, which could be reflected in a drop in the market value of the observed banks.

In case that a central bank is withdrawing excess liquidity, there arises a question whether the monetary policy based on repo operations (withdrawal repo) is identically efficient as the monetary policy relying on repo rate connected with reverse repo (issuance repo) when central banks provide liquidity. The analysis of this problem is a main subject of the article. Authors develop microeconomic model of commercial bank behaviour, which is used for the definition of conditions when the interest rate policy of central bank based alternatively on repo rates for repo and reverse repo operations is efficient. Statistical data (time series of 1998 - 2011, monthly data frequency) are analysed and econometric verification of alternative forms of econometric models is performed. The authors arrived at a conclusion that the Czech National Bank's monetary policy operating in conditions of excess liquidity withdrawal through repo operations is efficient. In case of the Czech Republic an increase in repo rate on withdrawal repo should lead to an increase in interest rates of commercial banks and to a reduction in the credit activity of commercial banks and hence to the successful implementation of Czech National Bank's restrictive monetary policy.

The origins, growth and importance of the 2007-2009 American and European credit crisis are analysed. The causes lie in the speculative bubbles, the changed attitudes to domestic property, the growth of securitisation and derivatives trading, the changing roles of financial institutions, poor policy choices and inadequate regulation. The Visegrad states are being affected by declining export markets that have triggered domestic recessions, and growing credit problems. The recession is especially penalising economies they have followed risky policies. The course of the recession is currently impossible to predict. But it is possible for these states to draw on the regulatory lessons inflicted on others, and to respond to the challenge of co-regulating the international banks that dominate their domestic markets, and which while too large to fail, are also too large to rescue unaided.

Channels through which monetary policy affects aggregate demand can be divided into three groups: traditional interest rate channel, other asset price channels and credit channel composed of balance sheet channel (named also broad credit channel), only recently separated bank capital channel and bank lending channel. Banks face troubles in keeping their present or acquiring new financial sources, when central bank tightens its monetary policy. Banks characterized by differences in size, capitalization, liquidity and ownership face different levels of informational asymmetry and are therefore differently affected by changes in monetary policy. If larger, better capitalized, more liquid, state owned and/or domestically owned banks respond weaker to changes in monetary policy it is possible to argue that bank lending channel is effective. This hypothesis is tested on a panel of annual data for individual Slovenian banks in the period between 1993 and 2007 using general method of moments. Results largely confirm the existence of the bank lending channel in Slovenia.

We investigate the influence which the financial condition of a multinational bank group may have on the lending rates of its affiliates, using data from the ten biggest banks in the Czech Republic under foreign control. The analysis is based on a theory of bank lending in which the implicit opportunity costs of lending by a foreign bank affiliate are influenced by the scarcity of funds within the multinational conglomerate. The theory predicts that parent banks' influence should be stronger in loan segments with more pronounced information asymmetry. Our empirical model, which explains the interest rate charged by the affiliate by means of affiliate-level controls and a parent influence variable, is tested for three categories of commercial non-financial borrowers (domestically owned firms, foreign-owned firms and the self-employed). Evidence of parent influence is found in a limited number of cases of banks and borrower classes for which the constraint on fund flow within the parent bank group is likely to be tight, particularly when the borrower class is of strategic importance for the affiliate's overall performance.

The objective of this paper is to investigate the relationship between non-performing loans and bank efficiency in Malaysia and Singapore. To achieve the objective, cost efficiency was estimated using the stochastic cost frontier approach assuming normal-gamma efficiency distribution model proposed by Greene (1990). The cost efficiency scores were then used in the second stage Tobit simultaneous equation regression to determine the effect of non-performing loans on bank efficiency. The results indicate that there is no significant difference in cost efficiency between banks in Singapore and Malaysia although banks in Singapore exhibit a higher average cost efficiency score. The Tobit simultaneous equation regression results clearly indicate that higher non-performing loan reduces cost efficiency. Likewise, lower cost efficiency increases non-performing loans. The result also support the hypothesis of bad management proposed by Berger and DeYoung (1992) that poor management in the banking institutions results in bad quality loans, and therefore, escalates the level of non-performing loans.

This paper assesses whether the legal independence granted to the Central Bank of Egypt (CBE) by the latest legislation promulgated in 2005 is factual. The author followed Fry's methodology, which assumes that the level of independence of the central bank is determined by fiscal attributes. In an attempt to develop Fry's method, there was used a simple criterion to assess the central bank's independence, namely, that the central bank is actually independent if it can fulfill its money supply target without squeezing the private sector. Applying this criterion to the case of the CBE, we find that the legal independence granted to the CBE by the latest legislation is not factual.

Due to the capital decree legislated by the Bank of Slovenia, Slovenian commercial banks can apply internal models for capital requirements calculation for currency risk and selected market risks (general position risk in line with debt and equity instruments, price change risk for commodities) as an alternative or in combination with standardised methodology. In risk management process banks consider the first and the second moment of a yield probability distribution as portfolio managers seek to achieve the best possible trade-off between risk represented by variance of returns and expected return. In cases when liquidity of instruments on financial markets is low, banks should consider also the third (skewness) and the fourth (kurtosis) moment of a yield probability distribution. All moments define the characteristics of yield probability distribution and therefore affect the risk measure value, being calculated on the basis of yield probability distribution function. The goal of this paper is to calculate the third moment of a yield probability distribution functions for a set of selected assets in financial market in Slovenia and to initiate implementation of a proper risk measure when yield distribution function is not elliptic.

This paper tries to assess the conditions under which the CNB operates. Using a basic framework suggested by Mishkin (2000), the aim is to find out whether the central bank is able to conduct high-quality monetary policy. First, general principles that central banks should follow to succeed in their pursuit of monetary goals are theoretically introduced. Then, these theoretical principles are looked at in the Czech context. Issues of the strictness and suitability of concrete monetary policy of the CNB will not be dealt with, rather institutional circumstances that potentially allow successful policy are at the centre of this paper. It is concluded that the CNB is functioning in a moderately good environment, but still much room for improvement does exist.

The article presents an empirically tested assessment of the Bank of Slovenia (BS), national central bank, adjustment policy to surges in capital flows during the last decade. Exchange rate appreciation, undeveloped banking sector, immoderate money market oscillation, unstable economic trends (all phenomena that can also be found in other transition countries) are just some of the detrimental effects that can be provoked by surges in capital flows if the national economy is faced with some fundamental sectoral deficiencies. Empirical results indicated that BS quite successfully mitigated listed effects of excessive foreign currency inflows during the last decade. With the suitable combination of direct and indirect adjustment methods, BS succeeded in preventing, still vulnerable Slovenian economy from a major form of financial crisis and stronger nominal tolar appreciation (this was not the case in some other countries like Hungary, Poland, Czech Republic, Croatia) although there was some real appreciation.