Supervising Bank Safety and Soundness: Some Open Issues

1993

Bank supervision typically receives little if any attention when banks are operating without difficulty. But when banks fail in large numbers, or large banks fail, and the system itself is threatened, supervision becomes a focal point for criticism and reform (see, for example, Conference Report, 1989, Title I, IX; Pecchioli, 1987, pp. 11 ff.; and Comptroller General of the U.S., 1977).2 On such occasions, institutional changes may take equal billing with the "improvement" of supervision. But as often as not, the only thing Congress can agree on is that supervision needs to be better. This usually translates into more supervisors operating with more authority, The repeated augmentation of bank supervision may give the impression that it is a solution rather that a symptom of

2011

2000

Bank solvency questions and bank failures in the U.S. have become issues of renewed concern in recent years. Given the significance of bank solvency and bank failures for the health and stability of the U.S. economy, it is imperative to have insights into factors that systematically influence bank failures, including major federal government banking statutes that have been implemented. Accordingly, this empirical study investigates factors influencing the bank failure rate in the U.S. over the period 1970 through 2008, with emphasis on three major banking statutes: the Community Reinvestment Act of 1977 (revised and enhanced in 1995), CRA; the Federal Deposit Insurance Corporation Improvement Act of 1991, FDICIA; and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, RNIBA. After allowing for a variety of economic and financial variables over the study period, the evidence strongly implies that, FDICIA acted to reduce bank failures whereas (presumably by increasing competition and/or increasing costs through branch bank expansion) RNIBA induced a net increase in bank failures in the U.S. Finally, the evidence implies that, the CRA also led to increased bank failures in the U.S., arguably by exposing banks to greater credit risk.

Asian Journal of Finance & Accounting, 2019

Bank failures are costly to customers and the wider market. Prevention is always better than cure but in light of recent economic downturns, it has become increasingly difficult for regulators to allocate more resources towards in-depth monitoring of banking practices. In this paper, we construct a tool that is able to predict bank failures ahead of time with reasonable accuracy. Through a logistic regression on a matched sample of 536 failed and non-failed US banks, we determine the financial indicators that most accurately predicts bank failure. From the regression, we construct a Bank Health Index that assesses a bank's propensity to failure. In-sample and out-of-sample tests show that our model is about 90% accurate two years prior to failure, and 95% accurate the year before failure. The accuracy and efficiency of the model and index provides a more efficient and effective tool for assessing a bank's propensity to failure besides requiring far less resources. With these methods, regulators will be able to take preventive measures at least one year before failure, saving the economy millions if not billions in the process.

2000

The causes of systemic bank distress are complex and multi-dimensional involving economic, financial, regulatory and structural weaknesses. This also means that regulatory approaches also need to be multi-dimensional. The paper suggests that an optimum "regulatory regime" needs to incorporate seven key components: regulation (the rules imposed by official agencies), official supervision, incentive structures within banks, market discipline, intervention arrangements in the event of distress, corporate governance arrangements with banks, and the accountability of regulatory agencies. All are necessary but none alone are sufficient for systemic stability. As there are trade-offs between the components, regulatory strategy needs to focus on the overall impact of the regime rather than only the regulation component.

Economy & finance

In the first part of our two-part study, we summarize the parallel history of the four failed US banks, carefully analysing financial data from the pre- and post-COVID periods. The banks were unable to adequately manage the liquidity shocks caused monetary cycles (first easing, then brutal tightening). Their distorted business model, i.e., their reliance on closely affiliated customers and in particular uninsured deposits, left them vulnerable. But the panic itself was triggered by misinterpretation of HTM portfolios. Second part of the paper, on one hand deals with the in-depth analysis of risks and failures in risk management, on the other hand, discusses some widespread (mis)diagnoses and remedies.

This paper was prepared for the Federal Reserve Bank of Boston's 54 th Economic Conference, "After the Fall: Re-evaluating Supervisory, Regulatory and Monetary Policy." October 20-23, 2009. We thank Luis G. Dopico for criticisms and suggestions. The views expressed here are not necessarily those of the FDIC or its staff. Any remaining errors are ours alone.

Journal of Financial Services Research, 2012

This special issue of the Journal of Financial Services Research includes a selection of papers originally presented at the Tenth Annual FDIC-JFSR Fall Banking Research Conference in October 2010. The papers in this special issue were invited by the editors of the JFSR but were subjected to the regular JFSR referee process. We also invited the conference paper discussants to draft their comments for publication in this special issue. In the first article of this special issue, "Dèjá Vu All Over Again: The Causes of U.S. Commercial Bank Failures This Time Around," Cole and White (2012) use a logistic regression framework to identify factors associated with more than 300 bank failures since 2009. This paper was presented in the "Reflections of the Financial Crisis" session of the Conference. The authors find that many failing banks tended to have loan exposures to real estate construction and development, commercial real estate and multifamily residential mortgages. Unlike many of the largest banks that were negatively impacted by their exposures to wholesale subprime mortgage securitization activities, residential mortgage exposures in smaller community banks tended to reduce the probability that these banks failed. The discussant for the session was Pete Kyle and his discussion underscores the importance of capital especially for small banks. Kyle (2012) also differentiates short-term and long-term effects of capital where capital is more important in the short-term but volatility of asset returns dominates in the long term. For large banks the prescription is heightened supervision, which should be geared toward understanding new risky business lines, especially those that may pose systemic risk. Three of the papers in this special issue, presented in the "Measuring Systemic Risk" session of the program, focus on the measurement of systemic risk. Robert DeYoung provides a unified discussion of systemic risk and the contributions made by each of these papers. As DeYoung (2012) points out, the profession has yet to decide on a single focused

Journal of Money Laundering Control, 2020

Purpose-This paper aims to examine how central Banks (in the narrow purview of Bank of Uganda) exercise their supervisory mandate to foster an efficient sound business environment for banks to operate efficiently. The authors were motivated to write on the subject of bank supervision because of the closure of Crane Bank and putting it under administration in 2016. The closure of this bank generated a lot of controversies on both sides of the political divide and in the press. Initially, the popular view was that Crane bank was poorly supervised, and as a result, it was exploited by insiders to commit money laundering, fraud, insider dealing, just to mention but a few. This put Bank of Uganda (the Central Bank) in a negative spotlight for failure to provide the required oversight of this bank. In Uganda, the supervision of banks and other financial institutions is the responsibility of Bank of Uganda. Design/methodology/approach-The authors adopted a qualitative research approach using secondary data sources, including books, journal papers and websites, and evaluating primary legislation but also empirical evidence both in Uganda and other jurisdictions. The secondary data was evaluated to draw comparative analyses of causes of banks failures in countries both in Africa, Europe, USA and others jurisdictions across the globe. Findings-It would be onerous to charge central banks with the responsibility of preventing bank failures, even though they would are required to institute measures to prevent banks from collapsing and its ripple effects on the economy. Effective banking supervision is a core factor for the success of every bank, but it cannot single-handedly prevent a bank from collapsing. A well-supervised bank can also fail not necessarily because of inherent weaknesses within its banking supervision, but it could fail because of extraneous factors beyond the control of individual banks. For example, Lehman Brothers Ltd (a highly leveraged of broker dealers) collapsed due to factors beyond its control, the Northern Rock and Royal Bank of Scotland in the UK were nationalised by the British Government. Research limitations/implications-The limitation of the paper was that data on central banks and failed banks both in Uganda and other jurisdictions (the scope of the paper) was overwhelming, and it was daunting to sift through and analyse it in depth. Practical implications-Banks play a fundamental role in the social-economic development of countries, and how they are regulated is significantly important for the stability of economies. They provide loans, guarantees and other financial products to businesses, and they are engines for economic growth and development. Social implications-Banks affect, people, societies, businesses, markets and governments. Therefore, this paper has wider implications for the foregoing constituencies. Originality/value-The originality of the paper is that this paper is unique, draws experiences across jurisdictions and evaluates in the narrow purview of banking regulation in Uganda.