Bank Performance and Noninterest Income: Evidence from Countries in the Asian Region

Noninterest income (NII) is income generated by banks from sources other than interest payments. Studies conducted on the relationship between NII and bank risk for the USA and Europe have found that emphasis on income diversification lowers risk in European banks but exacerbates it in American banks. Current research on Asian banks has not led to a coherent view of the relationship between NII and bank risk. We employ data over 25 years for 24 Asian countries to examine this relationship. Using the GMM estimation approach we estimate equations for two time-periods, 1996–2007 and 2008–2018, to examine the NII-bank risk relationship in the presence of some controlling financial, macroeconomic and policy variables. Our results show that non-interest income worsens bank risk for all 24 countries as well as for sub-groups of countries. We also find that, by and large, economic growth improves bank risk while inflation above a threshold worsens it. Finally, our proxy measure for monetary policy improves bank risk though fiscal policy seems to have no effect.

Capital Regulation and Risk-taking Behavior: Empirical Evidence for Islamic Banks

This paper investigates whether regulatory pressures have an impact on the relationship between change in capital and bank risk-taking. On the basis of a well developed theoretical background, capital regulation constitutes the core of prudential regulation within the banking sector. Several researches have investigated this relationship between capital and risk in conventional banks, and this subject has gained in interest since the last financial crisis. This study is one of the few studies that have attempted to provide empirical evidence on this issue for Islamic banks. We use data of Islamic banking sectors over the period 2010–2014. The results reveal that Islamic banks tend to behave differently at each level of capital adequacy. In addition, we provide some evidence that change in capital is positively related to the change in risk for highly capitalized Islamic banks.

The Effect of the Paycheck Protection Program and Financial Reporting Standards on Bank Risk-Taking

This paper examines the consequences of the paycheck protection program (PPP) for bank risk-taking and whether the shift to the current expected credit loss (CECL) model moderates this effect. We find that the extent of a bank’s PPP participation is associated with relatively greater changes in risk-taking outside of the PPP. We also show that this effect is concentrated in banks that have not early adopted the CECL model and banks with timelier pre-PPP loan loss provisions, suggesting that timelier loan loss recognition constrains risk-taking incentives. Overall, our findings provide insight into the indirect consequences of government stimulus programs administered through banks and the role of accounting in constraining bank risk-taking. This paper was accepted by Suraj Srinivasan, accounting.

Regulation, banking competition and risk-taking behavior in the MENA region: policy implications for Islamic banks

Purpose This paper aims to investigate the impact of regulation and market competition on the risk-taking Behaviour of financial institutions in the Middle East and North Africa (MENA) region. Design/methodology/approach The empirical framework is based on panel fixed effects/random effects specification. For robustness purpose, this study also uses the generalized method of moments estimation technique. This study tests the hypothesis that regulatory capital requirements have a significant effect on financial stability of Islamic and conventional banks (CBs) in the MENA region. This study also investigates the moderating effect of market power and concentration on the relationship between capital regulation and bank risk. Findings The estimation results support the view that capital adequacy ratio (CAR) has no significant impact on credit risk of Islamic banks (IBs), whereas market competition does play a significant role in shaping the risk behavior of these institutions. This study report opposite results for CBs – an increase in the minimum capital requirements is followed by an increase in a bank’s risk level, which has a negative impact on their financial stability. Furthermore, the results support the notion of a non-linear relationship between banking concentration and bank risk. The findings inform the regulatory authorities concerned with improving the financial stability of banking sector in the MENA region to set their policy differently depending on the level of concentration in the banking market. Research limitations/implications This study contributes to the literature on the effectiveness of regulatory reforms (in this case, capital requirements) and market competition for bank performance and risk-taking. In regard to IBs, capital requirements are less effective in requiring IBs to adjust their risk level according to the Basel III methodology. This study finds that IBs’ risk behavior is strongly associated with market competition, and therefore, the interest rates. Moreover, banks operating in markets with high banking concentration (but not necessarily, low competition), will decrease their credit risk level in response to an increase in the minimum capital requirements. As a result, these banks will be more stable compared to their conventional peers. Thus, regulators and policymakers in the MENA region should restrict the risk-taking behavior of IBs through stringent capital requirements and more intense banking supervision. Practical implications The practical implications of these findings are that the regulatory authorities concerned with improving banking sector stability in the MENA region should proceed differently, depending on the level of banking market concentration. The findings inform regulators and policymakers to set capital requirements at levels that would restrict banks from taking more risk to increase their returns. They are also important for bank managers who should avoid risky strategies in response to increased regulatory pressure (e.g. increase in the minimum required capital level of 8%), as they may lead to an increase in the level of non-performing loans, and therefore, a greater probability of bank default. A future extension of this study will focus on testing the effect of bank risk-taking and market competition on the capitalization levels of banks in the MENA countries. More specifically, this study will investigates if banks raise their capitalization levels during the COVID-19 pandemic. Originality/value The analysis of previous research indicates that there is no unambiguous answer to the question of whether IBs perform differently than CBs under different competitive conditions. To fill this gap, this study examines the influence of capital regulation and market competition (both individually and interactively) on bank risk-taking behavior using a large sample of banking institutions in 18 MENA countries over 14 years (2005–2018). For the first time in this line of research, this study shows that the level of market power is positively associated with the level of a bank’ insolvency risk. In others words, IBs operating in highly competitive markets are more inclined to take a higher risk than their conventional peers. Regarding the IBs credit risk behavior, this study finds that market power has a limited impact on the relationship between CAR and risk level. This means that IBs are still applying in their operations the theoretical models based on the prohibition of interest.

Analysis of the influence of intellectual capital and bank risk on the performance of maqashid sharia based Islamic banking in Indonesia

Purpose - This study aims to determine the effect of intellectual capital and bank risk on the performance of maqashid sharia based Islamic banking in Indonesia (An empirical study on Islamic Commercial Banks registered in Financial Services Authority (OJK) in 2017-2019).Method - This study used secondary data and used the multiple linear regression analysis method. The sample used was the purposive sampling method with the results of 12 Islamic Commercial Bank (BUS) as a sample of 14 BUS populations.Result - The results of this study stated that iB-VACA had a significant adverse effect on MSI variable; iB-VAHU had a positive but not significant effect on MSI variable; iB-STVA had an insignificant negative effect on MSI variable; CAR had an insignificant negative effect on MSI variable, and FDR had a positive but not significant effect on MSI variable.Implication - Islamic banking is advised to optimize its intangible assets and estimate the risks that will occur, as well as to pay attention to its sharia objectives to increase company value and performance.Originality - The secondary data source of this research is obtained from the official website of OJK, and financial report data is obtained from the website of each BUS.