Optimal bank interest margin under capital regulation: bank as a liquidity provider

2019 ◽  
Vol 11 (2) ◽  
pp. 158-173 ◽  
Author(s):  
Fu-Wei Huang ◽  
Shi Chen ◽  
Jeng-Yan Tsai
Keyword(s):  
Default Risk ◽  
Banking System ◽  
Capital Regulation ◽  
Knock Out ◽  
Content Type ◽  
Loan Rate ◽  
Negative Effect ◽  
Demand Deposits ◽  
Option Model ◽  
Interest Margin

Purpose This paper aims to develop a barrier cap option model, i.e. a cap option model where default can occur at any time before the maturity date, to evaluate the equity and the default risk of a bank. The model implies the bank as a liquidity provider that one institution carriers out both lending and deposit-taking functions under the same roof. This paper studies the impacts of demand deposits and capital regulation on the optimal bank interest margin, i.e. the spread between the loan rate and the deposit rate. Design/methodology/approach This paper characterizes the bank’s equity value by a barrier cap option framework. In the model, default can occur at any time before the maturity and loan markets are imperfectly competitive. Findings This paper has two main results. First, increases in demand deposits reduce the bank’s interest margin and further increase the bank’s default risk. The negative effect on the optimal bank interest margin which ignores the barrier leads to significant overestimation; the positive effect on the default risk which ignores the barrier leads to underestimation. Second, the same pattern of capital regulation as previously applies. Capital regulation as such makes the bank more prone to loan risk-taking, thereby adversely affecting the stability of banking system. Originality/value This paper reintroduces the knock-out value and bank interest margin determination within a synergy banking function to the cap option model. The results confirm the need to model bank equity as a barrier cap option and demonstrate its usefulness in capital regulation.

Insurer interest margin management, default risk, and life insurance policyholder protection

2018 ◽  
Vol 13 (3) ◽  
pp. 718-735
Author(s):  
Jyh-Horng Lin ◽  
Xuelian Li ◽  
Fu-Wei Huang
Keyword(s):  
Life Insurance ◽  
Default Risk ◽  
Risk Measures ◽  
Insurance Company ◽  
Life Insurance Company ◽  
Content Type ◽  
Loan Rate ◽  
Negative Effect ◽  
Positive Effect ◽  
Interest Margin

Purpose This paper aims to theoretically examine the effects of regulatory policyholder protection on spread behavior and default probability of a life insurance company. Design/methodology/approach The authors construct a contingent claim model for the valuation of the equity of a life insurance company. Then, they extend it to model default risk measures associated with a more appropriate behavioral mode of strategic invested asset rate-setting under regulation. Findings The findings established that the optimal insurer interest margin is explicitly modeled by a spread between the loan rate and the required guaranteed rate of the company. The effect of the guaranteed rate on the insurer interest margin is positive when the barrier is low, whereas it is negative when the barrier is high. As the barrier increases, the positive effect of the guaranteed rate on the default risk is increased, the negative effect of the participation on the insurer interest margin is decreased and the positive effect of the participation on the default risk is decreased. Practical implications Several results derived that should be of interest to investors, analysts, supervising agencies and policymakers. For example, policyholders protected by increasing the guaranteed rate may create a higher risk for the life insurance company to meet its obligations. Originality/value The authors’ approach is a significant departure from the existing literature; they differentiate among path-dependent, barrier options and suggest that the life insurance company’s defaults are more commonly triggered by regulatory responses than debt default.

Interest rate in Oman: is it fair?

Humanomics ◽  
2015 ◽  
Vol 31 (3) ◽  
pp. 330-343 ◽  
Author(s):  
Saeed Al-Muharrami
Keyword(s):  
Interest Rate ◽  
Banking System ◽  
Weighted Average ◽  
Operating Costs ◽  
Loan Loss ◽  
Reserve Requirement ◽  
Content Type ◽  
Interest Income ◽  
Income Statement ◽  
Interest Margin

Purpose – The purpose of this study is to try to answer whether the banking system in Oman is fair for both depositors and entrepreneurs. Design/methodology/approach – The interest margin decomposition is based on the methodology proposed in Randall (1998). The income statement of banks defines profits before taxes (P) as interest income (II), plus non-interest income (NII), minus interest expense (IP), minus operating costs (OC) and minus provision for loan losses (Prov). After rearranging this identity, the net interest revenue can be expressed as follows: II – IP = OC + Prov + P – NII. The above expression decomposes the margin into the following cost and profit components: reserve requirement costs, operational costs, loan loss provision costs, profitability and non-interest income (with a negative sign). Findings – A trend analysis of commercial banks’ interest rate spreads in Oman exposes the following facts: First, the implicit interest margin is relatively small (in the neighborhood of 1 percentage point); second, profits constitute a substantial proportion of the margin; third, the share of operating costs in the margin has been broadly constant over time; fourth, reserve requirement costs have been reduced following the decline of the reserve requirement ratio; and fifth, the weighted average interest rate on deposits base is lower than the rate of inflation. Originality/value – This work is original.

Sunflower management and life insurance: modeling the CEO’s utility function

2019 ◽  
Vol 11 (3) ◽  
pp. 309-323
Author(s):  
Jyh-Horng Lin ◽  
Fu-Wei Huang ◽  
Shi Chen
Keyword(s):  
Utility Function ◽  
Life Insurance ◽  
Risk Taking ◽  
Limited Liability ◽  
Chief Executive ◽  
Insurance Company ◽  
Life Insurance Company ◽  
Content Type ◽  
Loan Rate ◽  
Interest Margin

Purpose The purpose of this paper is to develop a theoretical framework to answer the following question: What are the consequences of sunflower behavior as well as spread behavior for how asset-liability management is administrated in a life insurance company? Design/methodology/approach This paper takes into account the following: the chief executive officer (CEO) of a life insurance company confirms the board of directors’ belief – the preference of the like of higher return relative to the dislike of higher risk; the authors call such behavior sunflower management; the life insurance policyholder is entitled to a guaranteed interest rate and a participation percentage of the company’s investment surplus; and the authors examine the optimal insurer interest margin, i.e., the spread between the loan rate and the guaranteed rate. Findings Sunflower management translates into lower utility for the CEO and makes the CEO more prudent to risk-taking at an increased insurer interest margin for the provision of life insurance contracts. The effect of the guaranteed rate on the margin is ambiguous and depends on the level of guarantee itself. An increase in the participation level decreases the CEO’s loan risk-taking at an increased margin. It is shown that a trend toward higher return like of the board’s belief produces a corresponding trend toward the CEO’s decreasing risk-taking when the return like is revealed strongly. The results indicate that sunflower management as such is an important determinant in ensuring a safe insurance system. Originality/value This is the first paper to construct a contingent claim model to evaluate the expected value of the CEO’s utility function defined in terms of the equity returns and the equity risks of a life insurance company. The model explicitly considers CEO sunflower behavior, CEO spread behavior and the limited liability of shareholders.

The interrelationship between net interest margin and non-interest income: evidence from Vietnam

2017 ◽  
Vol 13 (5) ◽  
pp. 521-540 ◽  
Author(s):  
Tu DQ Le
Keyword(s):  
Negative Impact ◽  
Rank Order ◽  
Banking System ◽  
Policy Makers ◽  
Content Type ◽  
Interest Income ◽  
Net Interest Margin ◽  
Bank Managers ◽  
The Impact ◽  
Interest Margin

Purpose The purpose of this paper is to investigate the interrelationship between non-interest income (NII) and net interest margin (NIM) in the Vietnamese banking system between 2006 and 2015. Thereafter, the impact of NII on risk-adjusted returns is also examined. Design/methodology/approach Various analysis techniques are used to achieve the research objectives. Findings The findings show a negative two-way link between NII and NIM, thus supporting the subsidisation hypothesis. Furthermore, NII is found to have a negative impact on risk-adjusted returns. When observing this relationship in sub-samples, the findings indicate that the negative impact of NII on risk-adjusted returns still holds in the first subsample (2006-2011). The coefficient of NII becomes positive but not significant for the subsequent period (2012-2015). In addition, the Spearman rank-order correlations of returns on assets and NII for both sub-samples are negative. Together, the author concludes that there are no diversification benefits in the Vietnamese banking system. Practical implications The evidence suggests a trade-off between non-interest activities and traditional lending ones. In addition, the findings demonstrate that the Vietnamese banks may use NIIs to expand leverage and herd by coordinating NII strategy during the economic downturns. Thus, the banking system may be exposed to a greater risk. The research has implications for bank supervisors, policy-makers and bank managers. Originality/value This study is the first attempt to investigate the interrelationships between net NII and NIM in the Vietnamese banking system.

scholarly journals The interrelationships among default risk, capital ratio and efficiency

2015 ◽  
Vol 41 (5) ◽  
pp. 507-525 ◽  
Author(s):  
Thanh Pham Thien Nguyen ◽  
Son Hong Nghiem
Keyword(s):  
Default Risk ◽  
Banking System ◽  
Seemingly Unrelated Regression ◽  
Bank Risk ◽  
Regression Equations ◽  
Risk Capital ◽  
Content Type ◽  
Private Banks ◽  
Public Banks ◽  
The Impact

Purpose – The purpose of this paper is to examine the interrelationships among default risk, capital and efficiency of the Indian banking system over 1990-2011. This study also took into account the impact of ownership on these interrelationships Design/methodology/approach – This paper employed Data Envelopment Analysis (DEA) Windows Analysis to estimate efficiency levels and trends of individual banks. This paper then used a model of seemingly unrelated regression equations (SURE) to examine the interrelationships among default risk, capital and efficiency. Findings – This study found a two-way negative association between efficiency and default risk, and between capital ratio and default risk. However, this study found a two-way positive relationship between capital ratio and only profit efficiency. Public banks behaved differently from private banks regarding the association between capital and efficiency. Moreover, public banks had greater probability of default risk, lower capital ratio but higher efficiency level than private banks. Further, default risk, capital ratio and efficiency of the Indian banking system increased over time, but the two formers were driven by public banks while the latter was driven by private banks. Practical implications – The findings of this study appear to favour capital ratio as an efficient tool to improve efficiency and reduce default risk of the Indian banking system. Originality/value – This paper is the first investigating the interrelationships between bank risk, capital and efficiency of the Indian banking system, where bank risk is measured by Z-score value and efficiency is captured by cost, revenue and profit efficiencies, and then considering the impact of agency issues on these interrelationships.

Basel III: where should we go from here?

2019 ◽  
Vol 11 (4) ◽  
pp. 457-469 ◽  
Author(s):  
Quang Thi Thieu Nguyen
Keyword(s):  
Design Methodology ◽  
Banking System ◽  
Capital Regulation ◽  
Risk Sensitivity ◽  
Effective Mechanism ◽  
Content Type ◽  
Market Participants ◽  
Basel Committee ◽  
Capital Ratios ◽  
Practical Implications

Purpose This paper aims to propose the directions for potential reforms for the capital regulation. The focus is on the simplicity and comparability of the regulation, in addition to its risk sensitivity. Design/methodology/approach The author reviews the development of the Basel standards and identify the existing issues. On this basis, the recommendations are suggested. Findings The paper found that the capital regulation has become so complexed that it undermines its own efficiency in promoting the safety and soundness of the banking system. In addition, the current framework prevents a comparison of capital ratios across countries and over time. This discourages the market participants to supervise the bank’s operations. Therefore, there are still a need for the capital regulation reform. Practical implications By making the regulation simpler while ensuring the credit sensitivity, the market participants can play the most of their role and support the regulators in supervising banks. Originality/value The directions for the revised framework would be useful for the Basel Committee and central bank governors in designing an effective mechanism to supervise and discipline banks.

Bank failure intensity modeling: an ACD model approach

2018 ◽  
Vol 19 (5) ◽  
pp. 454-477 ◽  
Author(s):  
Vasileios Siakoulis
Keyword(s):  
Default Risk ◽  
Past History ◽  
Banking System ◽  
Bank Failure ◽  
Financial Contagion ◽  
Bank Failures ◽  
Content Type ◽  
Arrival Times ◽  
Market Effects ◽  
Acd Model

PurposeThe purpose of this study is to employ a duration-based approach to model the inter-arrival times of bank failures in the US banking system for the period of 1934-2014, in line with the suggestions of Focardi and Fabozzi (2005), who used a similar model for explaining contagion in credit portfolios.Design/methodology/approachConditional duration models that allow duration between bank failures to depend linearly or nonlinearly on its past history are estimated and evaluated.FindingsThe authors find evidence of strong persistence along with nonmonotonic hazard rates, which imply a financial contagion pattern, according to which a high frequency of bank failures generates turbulence, which shortly after leads to additional fails, whereas prolonged periods without abnormal events signify the absence of contagious dependence, which increases the relative periods between bank failure appearance. Further, the authors obtain statistically significant results when they allow duration to depend linearly on past information variables that capture systemic bank crisis factors along with stock and bond market effects.Originality/valueThe originality of this study consists in proposing a new time series approach for the prediction of bank probability of default by incorporating a default-risk contagion mechanism. As contagious bank failures are a key topic in macroprudential supervision, this study could be of value for supervisory authorities in setting pro-active actions and tightening regulatory measures.

The path of support-to-sales: mediating role of seller collaborative information exchange in social commerce

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Li Chen ◽  
Fengxia Zhu ◽  
Murali Mantrala
Keyword(s):  
Information Exchange ◽  
Instrumental Support ◽  
Trade Volume ◽  
Social Commerce ◽  
Content Type ◽  
Mediating Role ◽  
The Social ◽  
Source Data ◽  
Negative Effect

Purpose This paper aims to systematically investigate the direct and indirect effects of four types of support – peer instrumental support, peer emotional support, platform business support and platform communication support – on seller trade volume in social commerce. It also aims to uncover the path of support-to-sales of the seller from a platform perspective and provides a more complete picture of the social commerce phenomenon. Design/methodology/approach This paper uses multi-source data including primary survey data and secondary data on trade volume to test the hypotheses. PROCESS mediation model is used to analyze the multi-source data set. Findings This study finds that the positive effects of peer instrumental support, platform business support and platform communication support on seller trade volume are fully mediated by seller collaborative information exchange. Also, peer emotional support has a significant negative effect on seller trade volume and collaborative information exchange can serve as a buffer to mitigate the negative effect. Research limitations/implications The authors provide new insights into what types of support are or are not conducive to improving transaction volume of individual sellers and highlight the mediating role of seller information exchange in this value generation process in social commerce. These findings advance current knowledge of how seller interactions increase value in social commerce. The chosen research setting may limit the generalizability of the findings of this study. Practical implications This paper offers valuable implications for social commerce platforms on how to better serve their sellers to achieve high growth. Specifically, the findings suggest that platforms should encourage instrumental support and information exchange among peer sellers. In addition, platforms should expand seller support from a single-focus on sellers’ business to a dual-focus on both sellers’ business and socialization in social commerce. Originality/value This paper fulfills an identified need to study how sellers can better derive value from the social interactions and how social commerce platforms can effectively influence transactions, support sales and serve as a selling platform.

scholarly journals Natural Disasters and Economic Growth: The Mitigating Role of Microfinance Institutions

2021 ◽  
Vol 13 (9) ◽  
pp. 5055
Author(s):  
John Sseruyange ◽  
Jeroen Klomp
Keyword(s):  
Developing Countries ◽  
Natural Disasters ◽  
Legal Status ◽  
Agricultural Sector ◽  
Banking System ◽  
Fe Model ◽  
Microfinance Institutions ◽  
Natural Event ◽  
Negative Effect

In this study, we explore whether microfinance institutions (MFIs) can mitigate the adverse macroeconomic consequences of natural disasters. The provision of capital immediately following a natural event is recognized as one of the necessary conditions for a fast economic recovery. However, one concern is that a large majority of natural disasters occur in developing countries where households and the private sector have only limited access to the formal banking system. As an alternative, MFIs may fill up this gap in providing liquidity in the form of microcredit. The existing evidence on how MFIs respond to disaster effects is foremost based on case and micro-level evidence. In turn, the focus of this study is more on the macro impact of MFI activities after a natural disaster. Based on the finding obtained from an OLS-FE model using an unbalanced panel considering more than 80 developing countries and emerging economies, we can conclude that natural disasters harm macroeconomic performance primarily through their effect on the agricultural sector. However, access to lending facilities from MFIs mitigates a large part of this negative effect. Moreover, the extent to which MFIs are able to mitigate these effects depends to a great extent on their nature, i.e., their organizational structure, profitability, legal status, age, and the number of clients they serve.

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