Maximilian J.B. Hall

Efficiency in Japanese banking: An empirical analysis

Abstract This paper utilises the non-parametric frontier approach, data envelopment analysis, to analyse the technical and scale efficiency in Japanese banking using a recent cross-section sample. Efficiency analysis is conducted across individual banks, bank types and bank size groups. Following Berger and Humphrey [Eur. J. Oper. Res. 98 (1997) 175], problem loans are controlled for as an exogenous influence on bank efficiency. Powerful size-efficiency relationships are established with respect to both technical and scale efficiency. Furthermore, the logic of the recent large-scale merger wave in Japan is questioned as the larger (City) banks are generally found to be operating above the minimum efficient scale and to have limited opportunity to gain from eliminating X-inefficiencies. The opposite result is found for the smaller banks. Finally, the results suggest that controlling for the exogenous impact of problem loans is important in Japanese banking, especially for the smaller regional banks.

The impact of macroeconomic and regulatory factors on bank efficiency: A non-parametric analysis of Hong Kong¿s banking system

This paper assesses the relative technical efficiency of institutions operating in a market that has been significantly affected by environmental and market factors in recent years, the Hong Kong banking system. These environmental factors are specifically incorporated into the efficiency analysis using the innovative slacks-based, second stage Tobit regression approach advocated by Fried et al (1999). A further innovation is that we also employ Tones (2001) slacks-based model (SBM) to conduct the Data Envelopment Analysis (DEA), in addition to the more traditional approach attributable to Banker, Charnes and Cooper (BCC) (1984). The results indicate: high levels of technical inefficiency for many institutions; considerable variations in efficiency levels and trends across size groups and banking sectors; and also differential impacts of environmental factors on different size groups and financial sectors. Surprisingly, the accession of Hong Kong to the Peoples Republic of China, episodes of financial deregulation, and the 1997/98 South East Asian crisis do not seem to have had a significant independent impact on relative efficiency. However, the results suggest that the impact of the last mentioned may have come via the adverse developments in the macro economy and in the housing market.

A capital adequacy framework for Islamic banks: the need to reconcile depositors’ risk aversion with managers’ risk taking

Conceptually, an Islamic bank has an equity-based capital structure, dominated by shareholders’ equity and investment deposits based on profit and loss sharing (PLS). There is no need for capital adequacy regulations if the Islamic banks are structured as pure PLS-based organizations. However, because of informational asymmetry and risk aversion by investors, there currently exist fixed claim liabilities on the Islamic banking balance sheets. This necessitates the imposition of capital adequacy requirements, which aim at maintaining systemic stability by achieving two fundamental objectives. First, capital regulations should protect risk-averse (assumed unsophisticated) depositors. This requires a minimum equity capital cushion and an optimal assets–liabilities composition. Second, capital regulations should give the right incentives to shareholders to promote prudent behaviour by the banks. This requires analysis of the effect of financial participation by shareholders on Pareto optimality, and analysis of potential behaviour by shareholders when facing financial uncertainty. This paper combines modern banking theory and principal-agent analysis to develop a framework for an optimal capital structure for Islamic banks. The proposed capital regulation includes a minimum risk-based equity capital cushion (as required under the Basel Accord), a prudent assets-liabilities (capital) structure (i.e. appropriate proportions of PLS- and non-PLS-based assets and liabilities) and a minimum ‘financial participation’ requirement. It is inferred from the analysis that such capital adequacy requirements will improve the soundness of current Islamic banking practice, thus paving the way for the wider use of PLS by Islamic banks in the long run.

The Australian Financial System

Australian financial intermediaries can be classified under the following broad headings: the central bank; the banking sector; non-bank financial intermediaries (NBFIs). Other useful categorisations distinguish banks which are subject to the 1959 Banking Act from those which are not and deposit-taking NBFIs from the rest. Details are presented in Table 1.1.

A Cost-Benefit Analysis of Basel III: Some Evidence from the UK

This paper provides a long-term cost-benefit analysis for the United Kingdom of the Basel III capital and liquidity requirements proposed by the Basel Committee on Banking Supervision (BCBS, 2010a). We provide evidence that the Basel III reforms will have a significant net positive long-term effect on the United Kingdom economy. The estimated optimal tangible common equity capital ratio is 10% of risk-weighted assets, which is larger than the Basel III target of 7%. We also estimate the maximum net benefit when banks meet the Basel III long-term liquidity requirements. Our estimated permanent net benefit is larger than the average estimates of the BCBS. This significant marginal benefit suggests that UK banks need to increase their reliance on common equity in their capital base beyond the level required by Basel III as well as boosting customer deposits as a funding source.

Productivity changes and risk management in Indonesian banking: a Malmquist analysis

In this study, we utilize a nonparametric efficiency measurement approach which combines the Semi-Oriented Radial Measure–Data Envelopment Analysis (SORM–DEA) approach for dealing with negative data (Emrouznejad et al., 2010) with the Slacks-Based Efficiency Measures (SBM) of Tone (2001, 2002) to analyse productivity changes for Indonesian banks over the period Q1 2003 to Q2 2007. The first part of the analysis showed that average productivity changes for the Indonesian banking industry tended to be driven by technological progress rather than by frontier shift, although a relatively stable pattern was exhibited for most of the period. With respect to the risk management analysis, most of the balance sheet variables were shown to have had the expected impact on Risk Management Efficiency (RME), with the state-owned grouping exhibiting the highest degree of RME and the listed and Islamic banks outperforming their nonlisted and conventional bank counterparts, respectively. A strategy based on the gradual adoption of newer technology, with a particular focus on internal risk management enhancement, seems to offer the highest potential for boosting the productivity of the financial intermediary operations of Indonesian banks.

Using the artificial neural network to assess bank credit risk: a case study of Indonesia

Ever since the Asian Financial Crisis, concerns have arisen over whether policy-makers have sufficient tools to maintain financial stability. The ability to predict financial disturbances enables the authorities to take precautionary action to minimize their impact. In this context, the authorities may use any financial indicators which may accurately predict shifts in the quality of bank exposures. This article uses key macro-economic variables (i.e. Gross Domestic Product (GDP) growth, the inflation rate, stock prices, exchange rates, and money in circulation) to predict the default rate of the Indonesian Islamic banks’ exposures. The default rates are forecasted using the Artificial Neural Network (ANN) methodology, which incorporates the Bayesian Regularization technique. From the sensitivity analysis, it is shown that stock prices could be used as a leading indicator of future problems.

International banking regulation

The Structural Foundations of International Finance examines the ways in which national economies, especially those of industrialized countries, are affected by the operations of international financial markets. Although these markets provide productive funding, there is also much speculative trading in stocks and currencies which can cause booms, slumps and hinder recovery. The authors advocate entrepreneurial coordination by productive enterprises for balanced and stable growth, with reduced risks of financial crises and recessions.

Deposit Insurance Reform in Japan: Better Late Than Never?

Introduced in 1971 as a response to the intensification in competition in the deposit-taking sector induced by the adoption of a program of “liberalization and globalization,” the deposit insurance system in Japan has since undergone a number of significant changes to accommodate developments in the local financial sector. The pace of such reform accelerated markedly in recent years to help stabilize the Japanese financial system in the face of systemic risk, be it due to the failure of the housing loan companies (the jusen) or other major institutions, such as Yamaichi Securities and the city bank Hokkaido Takushoku Bank. The evolution of local deposit insurance arrangements to cope with such events is explained here and an assessment of the policy responses is provided. The part played by deposit insurance in alleviating the pressures currently experienced by the Japanese banking sector also is addressed. Finally, the extent to which the Japanese authorities have learned from the U.S. experience with deposit insurance is examined.

Incentive compatibility and the optimal design of deposit protection schemes: An assessment of UK arrangements

Late in 2001, the Financial Services Authority (FSA) introduced a new set of arrangements for deposit protection in the UK. While the changes involve a welcome improvement on previous arrangements, much more could be done to enhance their overall cost‐effectiveness. This paper explains the flaws in previous and current arrangements and, using a relatively crude but nevertheless objective measure of the extent of their compliance with International Monetary Fund (IMF) best practice ‘rules’, compares their degree of ‘incentive‐compatibility’ (or economic efficiency ‐ ie the extent to which they minimise the problems created by adverse selection, moral hazard and principal/agency conflict) with the counterpart schemes operating elsewhere in the European Union and beyond. In this way, areas for future improvements are identified, which will ideally require accommodating changes in the guiding Deposit Guarantee Schemes Directive.