scholarly journals How inefficient is an inefficient credit process? An analysis of the Italian banking system

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Peter Cincinelli ◽  
Domenico Piatti
Keyword(s):  
Credit Risk ◽  
Stochastic Frontier ◽  
Banking System ◽  
Efficient Frontier ◽  
Likelihood Method ◽  
Loan Portfolio ◽  
Content Type ◽  
Credit Lines ◽  
Lending Activity ◽  
The Interest Rate

PurposeThe paper aims to disentangle the physiological credit risk from the credit risk coming from the inefficient screening and monitoring management process. The analysis is conducted on a sample of 338 Italian banks–56 joint-stock banks (SpA), 23 cooperative banks (Popolari) and 259 mutual banks (BCCs)–over the time period 2006–2017.Design/methodology/approachThe authors use the maximum likelihood method to estimate the efficient frontier, as a set of best management credit practices, which minimises the credit risk defined on the basis of the level of loans granted, the technical structure of the loan portfolio (such as credit lines, mortgages, consumer loans and other technical loan categories) and the interest rate charges.FindingsThe empirical results show that the increase in non-performing loans (NPLs) is related both to the severe and protracted recession in Italy, which significantly reduced borrowers' capacity to service their debt, and to other factors, such as banks' lending monitoring policies with limited capacity to work-out defaulted loans.Originality/valueThe authors propose a new approach to the study of the performance of the credit process. With the stochastic frontier, the physiological credit risk, assumed by the bank according to its lending activity and management choices, is separated from the credit risk resulting from an inefficient management of the screening and monitoring process. In addition, the authors analyse the determinants of the excess of NPLs. This aspect is considered particularly original because the scientific contributions which consider the causes of NPLs have largely focused on the level of NPLs not considering the physiological part, linked to the structure of the bank's loan portfolio and its operational strategy and therefore not compressible and in any case not attributable to mismanagement or moral hazard.

Credit risk in dual banking systems: does competition matter? Empirical evidence

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mohsin Ali ◽  
Mudeer Ahmed Khattak ◽  
Nafis Alam
Keyword(s):  
Credit Risk ◽  
Banking System ◽  
Islamic Banks ◽  
Content Type ◽  
Panel Data Estimation ◽  
System A ◽  
Size Groups ◽  
Conventional Banks ◽  
Fierce Competition ◽  
Data Estimation

PurposeThe study of credit risk has been of the utmost importance when it comes to measuring the soundness and stability of the banking system. Due to the growing importance of Islamic banking system, a fierce competition between Islamic and conventional banks have started to emerge which in turn is impacting credit riskiness of both banking system.Design/methodology/approachUsing the system GMM technique on 283 conventional banks and 60 Islamic banks for the period of 2006–2017, this paper explores the important impact of size and competition on the credit risk in 15 dual banking economies.FindingsThe authors found that as bank competition increases credit risk seems to be reduced. On the size effect, the authors found that big Islamic banks are less risky than big conventional banks whereas small Islamic banks are riskier than small conventional banks. The results are robust for different panel data estimation models and sub-samples of different size groups. The findings of this paper provide important insights into the competition-credit risk nexus in the dual banking system.Originality/valueThe paper is specifically focused on credit risk in dual banking environment and tries to fill the gap in the literature by studying (1) do the Islamic and conventional banks exhibit a different level of credit risk; (2) does competition in the banking system impact the credit risk of Islamic and conventional banks and finally (3) do the big and small banks exhibit similar levels of credit risk.

Measuring efficiency of Vietnamese banks

2017 ◽  
Vol 29 (2) ◽  
pp. 171-182 ◽  
Author(s):  
Thanh Ngo ◽  
David Tripe
Keyword(s):  
Cost Efficiency ◽  
Stochastic Frontier Analysis ◽  
Stochastic Frontier ◽  
Control Variable ◽  
Banking System ◽  
Alternative Methods ◽  
Content Type ◽  
Frontier Analysis ◽  
Using Data ◽  
The Cost

Purpose This paper aims to examine alternative methods for treating nonperforming loans (NPLs) in bank cost-efficiency studies using stochastic frontier analysis (SFA). Design/methodology/approach The authors consider three methods of treating NPLs in SFA: as an additional control variable, as an environmental factor or as a deduction from total loans. Using data from the Vietnamese banking system (2003-2010), the authors then compare these results with those of the base model (where total loans is used regardless of the NPLs) to see which one is more appropriate for this study. Findings The authors observed that the first two methods are inappropriate for the analysis: one cannot find the significant relationship between NPLs and the banks’ total cost, and the other cannot account for any inefficiency at all. The authors suggested that the third method of separating NPLs from total loans can provide better insights. Using the proposed method, the authors showed that the cost-efficiency of Vietnamese banks over the period examined was moderate with a slight decreasing trend. When NPLs are separated, the cost-efficiency decreases in state-owned banks and big banks, whereas it increases in small and private banks. Research limitations/implications Research is limited to Vietnamese banks during a certain period, and it would be useful to apply the same technique to other data sets. Practical implications The paper suggests a new approach to account for NPLs in cost SFA studies in banking. Originality/value The paper provides a much more searching analysis of NPLs in banking than has generally been seen in previous research.

Stochastic cost frontier analysis – a sensitivity analysis on cost measures

2016 ◽  
Vol 28 (4) ◽  
pp. 401-410 ◽  
Author(s):  
Thanh Ngo ◽  
David Tripe
Keyword(s):  
New Zealand ◽  
Cost Efficiency ◽  
Stochastic Frontier Analysis ◽  
Stochastic Frontier ◽  
Banking System ◽  
Alternative Methods ◽  
Data Sets ◽  
Content Type ◽  
Frontier Analysis ◽  
Cost Frontier

Purpose This paper aims to examine alternative methods for recording and treating costs in studies of bank efficiency. Design/methodology/approach This study used stochastic frontier analysis (SFA) models with core costs and total costs to estimate the cost efficiency of banks in two different economies, Vietnam where the banking system is under-developed (and thus is dominated by traditional banking activities) and New Zealand where the banking system is well-developed (and thus non-traditional banking activities play an important role). Findings The authors found that models using total cost tend to underestimate the banks’ cost efficiency. This underestimation relates to the extent of modern activities in a banking system: it is larger in an advanced banking system (i.e. New Zealand) and smaller in a less-developed banking system (i.e. Vietnam). Research limitations/implications Research is limited to two countries, and it would be useful to apply the same technique to other data sets. Practical implications The paper suggests a new approach to cost SFA studies in banking. Originality/value The paper provides a much more searching analysis of costs in banking than has generally been seen in previous research.

scholarly journals THE EFFECTS OF MACROECONOMIC CONDITIONS ON LOAN PORTFOLIO CREDIT RISK AND BANKING SYSTEM INTEREST INCOME

Ekonomika ◽  
2012 ◽  
Vol 91 (3) ◽  
pp. 85-100 ◽  
Author(s):  
Ričardas Mileris
Keyword(s):  
Credit Risk ◽  
Banking System ◽  
Classification And Regression Tree ◽  
Economic Environment ◽  
Statistical Dependence ◽  
Tree Model ◽  
Loan Portfolio ◽  
Portfolio Credit Risk ◽  
Macroeconomic Conditions ◽  
Interest Income

This article presents on analysis of macroeconomic conditions in the EU countries in relation loan portfolio to credit risk and banking system interest income. The changing economic environment of banks influences their risks and activity results, so it is important to find the macroeconomic indicators that can determine the changes in debtors’ credit risk and banks’ financial condition. The banking system performs very important functions in a country’s financial system, so for its stability it is important to be able to predict the financial results of the banking system in relation to changes in the economic environment. The new Basel III Agreement seeks to improve the financial sector’s resistance to the possible negative scenarios in the economy and motivates to develop the credit risk assessment models considering their dependence on business cycles. For this reason, the statistical dependence between the set of macroeconomic factors and the loan portfolio credit risk together with interest income were estimated in this research. A statistical classification and regression tree model was developed, which allows to predict the possible changes in the interest income of a country’s banks with the 82.7% accuracy.

A comprehensive approach to assessing the level of economic security of Ukrainian banks

2020 ◽  
pp. 92-99
Author(s):  
Oksana Kopylyuk ◽  
Nataliya Zhurybida
Keyword(s):  
Banking System ◽  
Economic Security ◽  
Portfolio Risk ◽  
Loan Portfolio ◽  
Micro Level ◽  
Low Levels ◽  
Methodological Approaches ◽  
Lending Activity ◽  
Security Indicators ◽  
High Level

Existing methodological approaches to assessing the level of economic security of Ukrainian banks are revealed and the need to improve them is substantiated. The author proposes the method of determining the level of economic security of banks at the micro level. Estimated values of economic security indicators and their assessment in points made it possible to group institutions by the level of economic security and to determine the positioning of banks depending on ownership. Institutions with a high level of economic security include banks, which, according to 8 indicators, have accumulated a total number of 61 to 80 points. A satisfactory level of economic security is characteristic of banks, whose quantitative assessment for a certain amount of indicators ranges from 41 to 60 points. Low levels of economic security are inherent in institutions with an overall score of 21-40. Institutions with a critical level of security include banks with a total score of up to 20 points, whose activities are accompanied by violations of indicator values and destabilizing effects on the banking system. The validation of this methodology was carried out in all solvent banks of Ukraine, which operated in 2015 and 2019. Based on the grouping of institutions by the level of economic security, the threats and dangers that accompanied the activities of banks were identified. The main threats to the economic security of state-owned banks were: the highest share of problem loans in the aggregate loan portfolio, risk of operating activities, reduction of their lending activity. Institutions of foreign banking groups were largely characterized by high, satisfactory, and low levels of economic security. This methodological toolkit is suggested to be used to strengthen the market position and increase the security of the functioning of Ukrainian banks.

Islamic bank vs conventional bank: intermediation, fee based service activity and efficiency

2016 ◽  
Vol 9 (2) ◽  
pp. 296-311 ◽  
Author(s):  
Dimas Satria Hardianto ◽  
Permata Wulandari
Keyword(s):  
Credit Risk ◽  
Stochastic Frontier ◽  
Control Variable ◽  
Islamic Banking ◽  
Islamic Banks ◽  
Control Variables ◽  
Content Type ◽  
Operating Income ◽  
Service Activity ◽  
Conventional Banks

Purpose The aim of this research is to compare the differences of intermediation, fee-based service activity and efficiency of conventional banks vs Islamic banks in Indonesia for the 2011-2013 period. Moreover, this study also includes some control variables to find their effect on the dependent variables. Design/methodology/approach This research uses two methods, namely, stochastic frontier approach and panel data regression. Findings The result indicates that Islamic banks have a higher intermediation ratio, have higher proportion on fee income-to-total operating income and are less efficient. The control variable that has a positively significant effect on intermediation ratio is size; meanwhile, inefficiency and non–loan-earning asset are negatively affecting the intermediation ratio. The control variable that show a positively significant effect on the proportion of fee income-to-total operating income is size; meanwhile, the credit risk variable has no significant effect on the proportion of fee income-to-total operating income. Size and credit risk are the control variables that have a negative relation to efficiency. Originality/value This study has significantly contributed to Indonesian Islamic banking based on which the Islamic banking manager should recognize that the intermediation level, fee-based service activity and efficiency are crucially important in establishing competition and maintaining sustainable Islamic banking.

scholarly journals MINIMIZING CREDIT RISK AND IMPROVING THE QUALITY OF THE CREDIT PORTFOLIO OF THE COMMERCIAL BANK

2017 ◽  
pp. 18-23
Author(s):  
O. M. Ermolenko
Keyword(s):  
Credit Risk ◽  
Foreign Banks ◽  
Credit Policy ◽  
Loan Portfolio ◽  
Financial Uncertainty ◽  
Main Factors ◽  
Lending Activity ◽  
Credit Portfolio

The article examines the main factors shaping the credit risk and defines the role of credit risk in the process of formation of a credit portfolio of commercial banks. In conditions of instability and financial uncertainty, credit institutions are faced with risks, including credit, because credit operations occupy the largest share in their activities. The quality of loan portfolio determines the capabilities of the Bank in its functioning on the market of credit products, which affects the level of lending activity and the possibility of recovery in the credit market. The process associated with the loans is determined by the credit quality of the banks. Statistics data of the operation activities of commercial domestic and foreign banks suggests that a well-organized loan process, efficiently formed loan portfolio and conduct credit policy, the Bank will provide prosperity in the future.

scholarly journals IMPACT OF LENDING STRUCTURE ON CREDIT RISK IN VIETNAMESE COMMERCIAL BANKS

2018 ◽  
Vol 1 (31) ◽  
pp. 1-9
Author(s):  
Diem Thi Thu Le ◽  
Tung Thanh Diep
Keyword(s):  
Credit Risk ◽  
Commercial Bank ◽  
Commercial Banks ◽  
Banking System ◽  
Bank Lending ◽  
Industrial Sector ◽  
Commercial Banking ◽  
Retail Trade ◽  
Economic Sector ◽  
Lending Activity

This study examines whether lending structure concentration leads to lower credit risk by employing GMM estimators of panel data for the Vietnamese banking system at the bank level by economic sector from 2009 to 2016. The advance point of this research is the effect of different industrial sector variables on credit risk. An important finding is that the Vietnamese commercial bank lending portfolios have, on average, higher levels of diversity across different sectors. Overall, the research finds that an increase in the mining and quarrying, manufacturing, electricity, gas and water, construction and real estate lending will contribute to the bank’s exposures to credit risk, while the lending portfolio of banks in wholesale and retail trade and other sectors reduces credit risk. This study suggests recommendations in lending activity for maintaining efficiency and stability in Vietnamese commercial banking system.  

Banks’ stability-efficiency within dual banking system: a stochastic frontier analysis

2015 ◽  
Vol 8 (4) ◽  
pp. 472-490 ◽  
Author(s):  
Salma Louati ◽  
Younes Boujelbene
Keyword(s):  
Financial Stability ◽  
Banking Sector ◽  
Stochastic Frontier Analysis ◽  
Stochastic Frontier ◽  
Banking System ◽  
Content Type ◽  
Frontier Analysis ◽  
Explanatory Variables ◽  
Banking Stability ◽  
Conventional Banks

Purpose – The purpose of this paper is to examine and compare the market power and the efficiency-stability of Islamic and conventional banks in the MENA zone and South East Asia during the 2005-2012 period. Design/methodology/approach – The author applied an empirical approach in two steps. First, the author estimates the Lerner indicator, which is a measure of competition. Then, this measure is regressed and other explanatory variables on the banking “stability-efficiency” are derived simultaneously from the estimation of a stability stochastic frontier. Findings – The author concludes that increased competition in the Islamic banking sector promotes the overall banking stability. Besides, whether there is a low or high competitiveness, the size of an Islamic bank is positively related to financial stability. However, large conventional banks operating in market with limited competitiveness become more involved in the risk behavior. The author concludes that capitalization has a positive effect on stability only in case of low competitiveness. Originality/value – The originality of this research lies in the application of the stochastic frontier approach (SFA) on the Z-score indicator. This methodology enables to take into account the differences between the current and the optimum stability that each bank can achieve, thus creating a new measure of financial stability called “efficiency-stability”.

scholarly journals Risk-adjusted efficiency and bank size in a developing economy: an analysis of Vietnamese banks

2020 ◽  
Vol 47 (2) ◽  
pp. 386-404 ◽  
Author(s):  
Minh Le ◽  
Viet-Ngu Hoang ◽  
Clevo Wilson ◽  
Thanh Ngo
Keyword(s):  
Credit Risk ◽  
Empirical Evidence ◽  
Developing Economies ◽  
Returns To Scale ◽  
Banking System ◽  
Developed Countries ◽  
Content Type ◽  
Empirical Results ◽  
Increased Risk ◽  
Small Banks

PurposeThere is ample empirical evidence to show that larger banks are more efficient than smaller banks in developed countries. However, there is very little empirical evidence to show that in small developing economies, such as Vietnam, bank size is associated with increased risk, especially credit risk. This paper aim to provide empirical evidence to fill in this gap. This paper employs a slack-based directional distance function using the intermediation approach in measuring the inefficiency of banks in Vietnam during the period 2006–2015. Non-performing loans are used as an undesirable output to capture credit risk. The results show that small banks are more efficient than large banks at the mean level and across the entire distributions of inefficiency of the two groups. Input waste, output shortage and risk surplus of big banks are nearly three times higher than those of small banks. The results are robust under constant and variable returns to scale for production technologies. The study’s empirical results contribute to the ongoing debate on the merits of enlarging bank size in a small transitional economy and suggest that policy makers should pay attention to the risk and inefficiency of large banks to enhance the performance of Vietnam's banking system as a whole.Design/methodology/approachThis paper uses the non-radial slack-based directional technology distance function developed by Färe and Grosskopf (2010) to estimate the efficiency of banks using the data envelopment analysis technique. Data for 44 commercial banks are used.FindingsThe empirical results of the paper contribute to the ongoing debate on the merits of enlarging bank size in a small transitional economy and suggest that policy makers should pay attention to the risk and inefficiency of large banks to improve the performance of Vietnam's banking system as a whole.Originality/valueThis paper extends the extant literature by examining whether efficiency is associated with size in a typical transitional developing economy. The classic Cournot model, the structure-conduct-performance and the efficiency structure hypotheses state that larger banks are more efficient than smaller banks (Bikker and Bos, 2008). Empirical studies of Berger (2003), Mester (2005), Wheelock and Wilson (2012) lend support to the statement in developed countries. However, not much empirical literature focuses on small developing economies such as Vietnam to show that bank size is associated with increased risk, especially credit risk. The study’s empirical results show that size enlargement is not positively associated with risk-adjusted efficiency. Input waste, output shortage and risk surplus of big banks are nearly three times higher than those of small banks. The results are robust under constant and variable returns to scale for production technologies.

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