The Importance Of The Global Financial Crisis

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The global financial crisis has highlighted the importance of early identification of the riskier banks, because this allows for solving the problem at lower cost. The factors that influence bank risk can be divided into two main groups: (1) bank specific factors, which are a result of direct managerial decision and includes non-deposit/wholesale funding, asset structure, capitalisation, profitability, efficiency and size and (2) factors related to industry structure and macroeconomic environment, which include industry concentration, economic growth, inflation, unemployment and interest rates. The financial crisis revealed that many banks were excessively dependent on short-term wholesale funding and that many banks experienced an outflow …show more content…
Bank loan to the private sector has increased rapidly in times of economic expansion. The share of loan to the private sector in total banking assets is an important source of credit risk. Studies such as Blasco and Sinkey (2006), De Nicolo et al., (2003) and Mamnasoo and Mayes (2009) have found that an increase in percentage of loan to total assets is positively correlated with an increase in non-performing loans, insolvency due to long-term bank mismanagement, greater liquidity risk due to banks inability to accommodate decrease in liabilities or fund increases on the asset side of the balance sheet. Therefore, we expect a positive relationship between the relative percentage of loans in the assets of a bank and its …show more content…
Empirical studies have shown that the impact on concentration on a bank’s risk could be either positive or negative. Firstly, Allen and Gale (2000) argue that a less concentrated banking sector with many banks may be more prone to financial crises than a concentrated banking sector with few banks. Monopolistic banks in a concentrated banking system may enhance profit, thus reducing financial fragility by maintaining higher capital buffers (Park and Peristiani, 2007). Secondly, bank supervision will be more effective in concentrated banking system because they are relatively easier to monitor, and thus systemic crises will be less pronounced. Contrary to this is a view supported by Boyd and de Nicole (2005), who postulated that large banks can charge higher interest to their clients, who in turn need to be engaged in riskier investments to meet financing costs. This leads to more loans defaults, which increases the probability of bank failure. Based on the above arguments there can either be a positive or a negative relationship between industry concentration and bank

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