Bank competition, institution and economic development: Evidence from Asia during 1999-2007

From a sample of Asian countries over the period 1999-2007, this paper investigates the link between bank competition and economic development. In general, although banking market power has a U-shaped relationship with economic growth, banking market power tends to improve economic growth. However, the positive impact of banking market power on economic growth only occurs in agricultural sector, but not in industrial sector. It is also shown that higher banking market power in countries with greater economic freedom erodes overall economic growth and industrial growth. On the contrary, there is no significant relationship between banking market power and agricultural growth in countries with greater economic freedom. Therefore, when economic freedom increases and financial service investments come into a country, any policy to boost banking competition becomes necessary. In this phase, as well, industrial sector is more important than agricultural sector.Banking Competition, Economic Freedom, Economic Growth, Asia

Threshold Effect and Financial Intermediation in Economic Development

This paper analyzes the theoretical finance-growth nexus. Using the Neoclassical growth framework, we raise a new issue where our finance-growth nexus has multiple stationary states with threshold effect. Threshold effect prevents the economy to reach long-run steady state equilibrium of capital and hence financial economists in developing countries should be aware of such an impediment. We show that the development of banking sector should be more supported than financial market, since banking sector is better than financial market in order to reduce threshold effect and ensure the existence and uniqueness of a higher long-run steady state equilibrium of capital stock.Threshold Effect; Financial Intermediation; Economic Growth; Developing Countries

Threshold Effect and Financial Intermediation in Economic Development

This paper reformulates the finance-growth nexus in the case of developing countries. Using the Neoclassical growth framework, our contribution is threefold. First, we show that entrepreneurship is a growth-enhancing factor in both financial intermediary equilibrium and financial market equilibrium. Second, we show that agent's saving is one of the determinants of the optimal proportion of long-term investment and hence, we characterize the role of bank as financial intermediary. Third, our model is characterized by the existence of multiple steady states equilibrium with threshold effect that impedes the economy to reach a long-run higher steady state equilibrium. Furthermore, we show that financial intermediary is better than financial market, in order to reduce threshold effect and to ensure the long-run steady state equilibrium of capital stock.Threshold Effect, Financial Intermediary, Economic Growth, Developing Countries

Bank Competition, Institution and Economic Development: Evidence from Asia during 1999-2007

International audienceFrom a sample of Asian countries over the period 1999-2007, this paper investigates the link between bank competition and economic development. In general, although banking market power has a U-shaped relationship with economic growth, banking market power tends to improve economic growth. However, the positive impact of banking market power on economic growth only occurs in agricultural sector, but not in industrial sector. It is also shown that higher banking market power in countries with greater economic freedom erodes overall economic growth and industrial growth. On the contrary, there is no significant relationship between banking market power and agricultural growth in countries with greater economic freedom. Therefore, when economic freedom increases and financial service investments come into a country, any policy to boost banking competition becomes necessary. In this phase, as well, industrial sector is more important than agricultural sector

BANK CAPITAL INFLOWS, INSTITUTIONAL DEVELOPMENT AND RISK: EVIDENCE FROM PUBLICLY - TRADED BANKS IN ASIA

This paper examines the relationship between bank capital inflows and financial stability. Using a sample of publicly-traded commercial banks in Asia over the 2002-2008 period, our empirical results show that higher banking inflows measured by the share of foreign liabilities in banking reduces systematic risk, but increases bank-specific risk and total risk. A deeper investigation further suggests that an increase in total risk and bank-specific risk is driven by strong institutional development. Specifically, higher foreign liabilities in banking exacerbate bank-specific risk and total risk in countries with greater economic freedom. Hence, the reinforcement of prudential regulations is necessary to overcome bank-specific risk and total risk, particularly when the countries move to a more liberal economic environment. JEL Classification : G21, G28, G38 Keywords : Banking Globalization, Economic Freedom, Capital Market Measures of Ris

BANK CAPITAL INFLOWS, INSTITUTIONAL DEVELOPMENT AND RISK: EVIDENCE FROM PUBLICLY - TRADED BANKS IN ASIA

This paper examines the relationship between bank capital inflows and financial stability. Using a sample of publicly-traded commercial banks in Asia over the 2002-2008 period, our empirical results show that higher banking inflows measured by the share of foreign liabilities in banking reduces systematic risk, but increases bank-specific risk and total risk. A deeper investigation further suggests that an increase in total risk and bank-specific risk is driven by strong institutional development. Specifically, higher foreign liabilities in banking exacerbate bank-specific risk and total risk in countries with greater economic freedom. Hence, the reinforcement of prudential regulations is necessary to overcome bank-specific risk and total risk, particularly when the countries move to a more liberal economic environment.   JEL Classification : G21, G28, G38 Keywords : Banking Globalization, Economic Freedom, Capital Market Measures of Ris

The procyclicality of loan loss provisions in Islamic banks: Do managerial discretions matter?

This paper is the first to examine whether the loan loss provisioning behavior of Islamic banks is procyclical. From a dynamic panel data methodology, the empirical results show that loan loss provisioning in Islamic banks is indeed procyclical, as higher economic growth leads to a decline in loan loss provisions. A closer investigation is also conducted to examine whether capital management, income smoothing, or signaling behavior can alter the procyclicality of loan loss provisions. Specifically, our results document that only capital management behavior can overcome the procyclicality of loan loss provisions. This paper therefore advocates the importance of strengthening discretionary behavior in Islamic banks in terms of capital management using loan loss provisions, particularly during economic boom

Threshold Effect and Financial Intermediation in Economic Development

This paper analyzes the importance of financial intermediation on economic growth. Using the Neoclassical growth framework, we raise a new issue where our model has multiple stationary states with threshold effect. We further confirm that financial intermediation is better than self-financing system in order to ensure the existence and uniqueness of long-run steady state equilibrium of capital stock, as well as to decrease threshold level. The presence of threshold effect is an important finding in studying the finance-growth nexus, since it prevents the economy to raise sufficient initial capital

The procyclicality of loan loss provisions in Islamic banks

From a sample of Islamic banks around the world from 1997 to 2012, this paper examines whether loan loss provisioning in Islamic banks is procyclical. Our empirical findings highlight that loan loss provisioning in Islamic banks remains procyclical, although the " expected " loan loss model (E-LLM) has been implemented for Islamic banks in several countries. A closer investigation further documents that Islamic banks also use loan loss provisions for discretionary managerial actions, especially related to capital management in which loan loss reserves and provisions are inflated when bank capitalization declines. Eventually, this paper highlights that higher capitalization can mitigate the procyclicality of loan loss provisions in Islamic banks. In other words, loan loss provisioning becomes countercyclical for Islamic banks with higher capitalization. This paper therefore casts doubts on the adoption of the E-LLM for Islamic banks to promote countercyclical effects, because the E-LLM may be influenced by managerial discretion, including opportunistic capital management using loan loss provisions that may undermine the importance of maintaining sufficient bank capitalization

THE NUMBER OF FINANCIAL REGULATORY AUTHORITIES AND FINANCIAL STABILITY: CROSS-COUNTRY EXPERIENCES

This paper attempts to provide evidence whether or not the unification of regulatory institutions for different types of financial sector creates challenges for financial stability. From a sample of 91 countries that provide data on the financial unification index and the central bank involvement index, the empirical results reveal that higher financial unification index or the convergence toward a single supervisory institution outside the central bank, in order to control three different sectors (banking, insurance, and securities), is detrimental for financial stability. However, this finding only holds for developed countries, but dissapears for less developed countries. In parallel, the central bank involvement in financial sector supervision has no impact on financial stability in both developed and less developed countries.  Keywords: Supervisory Regimes, Financial Sectors, Financial Stability  JEL Classification: G18, G21, G2