Productivity growth and biased technological change : Credit banks in Japan

This paper investigates the productivity change of Japanese credit banks with a Malmquist index and the input technological bias during 2000-2006. Our results indicate that the traditional growth accounting method, which assumes Hicks neutral technological change, is not appropriate for analyzing changes in productivity. Our analysis unambiguously shows that management of Shinkin banks has to be improved. These must be based on the improvement of technical efficiency and/or technological change, emulating the procedures of the best-practice banks, i.e., those banks with Malmquist productivity scores higher than one and simultaneously with technical efficiency and technological change higher than one.

A time for everything : reviewing an institution’s virtual learning environment

This paper outlines a review carried out at Queensland University of Technology (QUT) in 2013 to identify the extent to which the centrally supported virtual learning environment met current and future learning and teaching needs. A range of consultation and investigation activities occurred from May to November to encourage open stakeholder feedback as well as to allow for reflection on alternative digital technologies, systems and strategies. This resulted in the development of nine recommendations, which, following a planning phase, will commence being implemented from mid-2014.

Political Risk in Credit Evaluation: Empirical Studies and Survey Results

Financing trade between economic agents located in different countries is affected by many types of risks, resulting from incomplete information about the debtor, the problems of enforcing international contracts, or the prevalence of political and financial crises. Trade is important for economic development and the availability of trade finance is essential, especially for developing countries. Relatively few studies treat the topic of political risk, particularly in the context of international lending. This thesis explores new ground to identify links between political risk and international debt defaults. The core hypothesis of the study is that the default probability of debt increases with increasing political risk in the country of the borrower. The thesis consists of three essays that support the hypothesis from different angles of the credit evaluation process. The first essay takes the point of view of an international lender assessing the credit risk of a public borrower. The second investigates creditworthiness assessment of companies. The obtained results are substantiated in the third essay that deals with an extensive political risk survey among finance professionals in developing countries. The financial instruments of core interest are export credit guaranteed debt initiated between the Export Credit Agency of Finland and buyers in 145 countries between 1975 and 2006. Default events of the foreign credit counterparts are conditioned on country-specific macroeconomic variables, corporate-specific accounting information as well as political risk indicators from various international sources. Essay 1 examines debt issued to government controlled institutions and conditions public default events on traditional macroeconomic fundamentals, in addition to selected political and institutional risk factors. Confirming previous research, the study finds country indebtedness and the GDP growth rate to be significant indicators of public default. Further, it is shown that public defaults respond to various political risk factors. However, the impact of the risk varies between countries at different stages of economic development. Essay 2 proceeds by investigating political risk factors as conveivable drivers of corporate default and uses traditional accounting variables together with new political risk indicators in the credit evaluation of private debtors. The study finds links between corporate default and leverage, as well as between corporate default and the general investment climate and measeures of conflict in the debtor country. Essay 3 concludes the thesis by offering survey evidence on the impact of political risk on debt default, as perceived and experienced by 103 finance professionals in 38 developing countries. Taken together, the results of the thesis suggest that various forms of political risk are associated with international debt defaults and continue to pose great concerns for both international creditors and borrowers in developing countries. The study provides new insights on the importance of variable selection in country risk analysis, and shows how political risk is actually perceived and experienced in the riskier, often lower income countries of the global economy.

O credit scoring em apoio ao risco de crédito: a identificação de variáveis que contribuem no sucesso da implantação de empresas franqueadas

A concessão de crédito a empresas que participam do mercado consiste na entrega de um ativo em determinado momento, com a promessa de pagamento deste bem ou direito em data futura. Tal situação se configura como um evento incerto, pois existe a possibilidade de que tal obrigação não seja honrada pela promitente compradora, originando desta forma, o risco de crédito. Cabe à parte concessora do ativo que origina o risco de crédito, verificar a capacidade de seu cliente em cumprir o compromisso futuro assumido, analisando as variáveis que sugerem o sucesso da operação de crédito. As empresas que se encontram em fase de implantação caracterizam-se não somente pela ausência de histórico das variáveis acima, como também pelo aumento considerável do risco de continuidade. Tal situação é comprovada por pesquisas realizadas em empresas com até cinco anos de atuação. A impossibilidade na mensuração da capacidade de crédito proporcionada por este cenário, ocasiona severa restrição creditícia às empresas novas, principalmente ao crédito de longo prazo, imprescindível nesta fase de investimentos. Entretanto, esta restrição não se verifica em empresas de franquia, cujo empreendedor tem o privilégio de iniciar seu negócio com linhas de crédito de investimentos já prontas no mercado com esta finalidade. Este estudo objetiva identificar quais as características presentes em empresas franqueadas que permitem a concessão de crédito segura na fase de implantação por parte das instituições financeiras e se tais características podem discriminar variáveis que são determinantes no sucesso da franqueada proponente ao crédito bancário. A aplicação de análise fatorial em banco de dados com empresas de franquia permitiu identificar com sucesso um grupo de sete principais variáveis principais, que serviram de base a um modelo de regressão logística e análise discriminante. O modelo de regressão logística mostrou-se bom para a melhora da probabilidade de acerto de empresas solventes ao passo que a análise discriminante não apresentou melhora nesses resultados.

The Financial Accountability of Irish Credit Unions: an initial empirical study

Credit unions are member-owned, voluntary, self-help, democratic, not-for-profit institutions that provide financial services to their members. They have both economic and social goals. Over this last decade they have achieved remarkable growth levels and currently there are 600 such organisations in Ireland, with approximately 50 per cent of the adult population of Ireland belonging to a credit union. Accounting for credit unions is a much-neglected area and relatively little is known about the sector's accountability. This paper presents the results of an initial empirical study of the financial accountability of Irish credit unions. A series of interviews and a basic content analysis of 178 recent financial statements were used to identify the views of key stakeholders with respect to the discharge of financial accountability by credit unions and the current quality of financial reporting. Overall, the research points to a sector where financial accountability through the medium of the annual report is weak and possible adverse consequences of this are explored. On the basis of the interviews it is suggested that if changes in financial accountability are to be achieved then some more proactive engagement of parties external to the management of individual credit unions is needed.

An Investigation into the Link between UK Credit Union Characterisitics, Location and their Success

The unique characteristics of credit unions reduces the information asymmetry that is prevalent in credit making decisions, enabling them to provide loans where other financial institutions cannot. This makes them a potential tool in the fight against financial exclusion. Yet, the UK credit union movement is not regarded as being successful, even though there is evidence of much financial exclusion. This study is cross sectional in form, and evaluates characteristics that may contribute to the success of the UK credit union movement at national and regional level, in 2000. The findings are used to consider the impact of recent regulatory changes on the movement. The key findings are that there is a significant relationship between the success of a credit union, its size and the deprivation of the ward from which it sources its members. More specifically, larger credit unions and those located in more affluent wards, are more successful. Affiliation to the Irish League of Credit Unions and having a common bond of occupation, are also found to be contributing factors to credit union success. These results are taken as providing support for the recent changes implemented by the Financial Services Authority (FSA), which is likely to result in the emergence of larger credit unions (through mergers), run by appropriately qualified persons, serving a more mixed-income membership base. It is, however, noted that the history of the UK movement is one of missed opportunities and only time will tell whether credit unions have the wherewithal to accept current opportunities.

The diversification and financial performance of US credit unions

For US credit unions, revenue from non-interest sources has increased significantly in recent years. We investigate the impact of revenue diversification on financial performance for the period 1993–2004. The impact of a change in strategy that alters the share of non-interest income is decomposed into a direct exposure effect, reflecting the difference between interest and non-interest bearing activities, and an indirect exposure effect which reflects the effect of the institution’s own degree of diversification. On both risk-adjusted and unadjusted returns measures, a positive direct exposure effect is outweighed by a negative indirect exposure effect for all but the largest credit unions. This may imply that similar diversification strategies are not appropriate for large and small credit unions. Small credit unions should eschew diversification and continue to operate as simple savings and loan institutions, while large credit unions should be encouraged to exploit new product opportunities around their core expertise.

Which Credit Unions are Acquired?

Recent years have witnessed a wave of consolidation amongst US credit unions. Through hazard function estimations, this paper identifies the determinants of acquisition for credit unions during the period 2001-06. The hazard of acquisition is inversely related to both asset size and profitability, and positively related to liquidity. Growth-constrained credit unions are less attractive acquisition targets. Institutions with low capitalization and those with small loans portfolios relative to total assets are susceptible to acquisition. The investigation presents unique empirical evidence of a link between technological capability and the hazard of acquisition. During the period 2001-06, when there was sustained growth in the use of internet technology, credit unions with no website were at the highest risk of acquisition. © Springer Science + Business Media, LLC 2009.

Credit Unions: A Theoretical and Empirical Overview

In 2009 there were over 49,330 credit unions across 98 countries with more than 184 million members and approximately $1,354 billion in assets. There is a great diversity within the credit union movement across these countries. This reflects the various economic, historic and cultural contexts within which credit unions operate. This paper traces the evolution of the credit union movement. It examines credit union objectives, and considers issues relating to efficiency, technology adoption, product diversification, merger, failure and demutualization. The regulatory environment within which credit unions operate is also explored under the themes of interest rate regulation, common bond requirements, taxation, deposit insurance and capital regulation. The overview also considers demutualization and the costs and benefits to credit unions of altering their organizational form.

Irresponsible Lending?: A Case Study of a U.K. Credit Industry Reform Initiative

There are major concerns about the level of personal borrowing, particularly sourced from credit cards. This paper charts the progress of an initiative to create a Responsible Lending Index (RLI) for the credit industry. The RLI proposed to voluntarily benchmark lending standards and promote best practice within the credit industry by involving suppliers of credit, customer representatives and regulators. However, despite initial support from some banks, consumer bodies and the Chair of the Treasury Select Committee, it failed to gain sufficient support from financial institutions in its original format. The primary reasons for this were related to the complexity of building such a robust index and the banks trade body’s fear of exposing its members to public scrutiny. A revised alternative, the Responsible Lending Initiative, was proposed which took into account these concerns. However, the Association of Payment Clearing Service (APACS), the trade body of the credit industry, then effectively destroyed the proposal. This article describes an attempt to address the challenges in the credit card industry with the initiation of the RLI, reflected in stakeholder discourse and in the context of a wider concern expressed by the involved stakeholders in terms of the need for greater responsibility in the banking industry’s lending practices.

The Impact of Extension and Ecosystem Services on Smallholders’ Credit Constraint.

On formal credit markets, access to formal credit and reasonable credit terms of smallholder farmers
in rural sub-Saharan Africa is limited due to adverse selection. Financial institutions operating in
rural areas often cannot distinguish between borrowers (farmers) that are creditworthy and those that
are not, thus, allocate limited resource to agriculture to reduce credit risk. In the presence of limited business quality signaling by smallholder farmers, financial institutions shall demand for collateral and/or offer unfavorable contract terms. Moreover, agricultural productivity of rural sub-Saharan
Africa, dominated by subsistence or small-scale farmers, is also negatively impacted by the adverse
effect of climate change. A strategy that may make the farming practices of smallholder farmer’s
climate resilient and profitable may also improve smallholder farmer's access to formal credit. This
study investigates to what extent participating in ecosystem and extension services (EES) programs
signals business quality of smallholders, thus granting them credit accessibility. We collected data
on 210 smallholder farmers in 2013, comprising farmers that receive payments for ecosystem
services (PES) and farm management training from the International Small Group Tree Planting
Program (TIST) Kenya to test the aforementioned theory empirically. We use game theory,
particularly a screening and sorting model, to illustrate the prospects for farmers with EES to access
formal credit and to improve their credit terms given that they receive PES and banking services
training. Furthermore, the PES’ long term duration (10 – 30 years) generates stable cash-flow which
may be perceived as collateral substitute. Results suggest that smallholder farmers in the TIST
program were less likely to be credit constraint compared to non-TIST farmers. Distance to market,
education, livestock and farm income are factors that determine access to credit from microfinance
institutions in rural Kenya. Amongst farmers that have obtained loans, those keeping business records
enjoy more favorable formal credit conditions. These farmers were observed to pay ca. 5 percent less
interest rate in microfinance charges. For TIST farmers, this type of farm management practices may
be attributed to the banking services and other training they receive within the program. While the
availability of classical collateral (farmlands) and PES may reduce interest rate, the latter was found
to be statistically insignificant. This research underlines the importance of an effective extension
services in rural areas of developing countries and the need to improve gains from conservation
agriculture and ensuing PES. The benefits associated with EES and PES may encompass agricultural
financing.

The impact of credit conditions on market liquidity – a case for European stock markets

The recent financial crisis has drawn the attention of researchers and regulators to the importance of liquidity for stock market stability and efficiency. The ability of market-makers and investors to provide liquidity is constrained by the willingness of financial institutions to supply funding capital. This paper sheds light on the liquidity linkages between the Central Bank, Monetary Financial Institutions and market-makers as crucial elements to the well-functioning of markets. Results suggest the existence of causality between credit conditions and stock market liquidity for the Eurozone between 2003 and 2015. Similar evidence is found for the UK during the post-crisis period. Keywords: stock

Measuring and testing for the systemically important financial institutions

This paper analyzes the measure of systemic importance ∆CoV aR proposed by Adrian and Brunnermeier (2009, 2010) within the context of a similar class of risk measures used in the risk management literature. In addition, we develop a series of testing procedures, based on ∆CoV aR, to identify and rank the systemically important institutions. We stress the importance of statistical testing in interpreting the measure of systemic importance. An empirical application illustrates the testing procedures, using equity data for three European banks.

Confidence sets for asset correlations in portfolio credit risk

Asset correlations are of critical importance in quantifying portfolio credit risk and economic capitalin financial institutions. Estimation of asset correlation with rating transition data has focusedon the point estimation of the correlation without giving any consideration to the uncertaintyaround these point estimates. In this article we use Bayesian methods to estimate a dynamicfactor model for default risk using rating data (McNeil et al., 2005; McNeil and Wendin, 2007).Bayesian methods allow us to formally incorporate human judgement in the estimation of assetcorrelation, through the prior distribution and fully characterize a confidence set for the correlations.Results indicate: i) a two factor model rather than the one factor model, as proposed bythe Basel II framework, better represents the historical default data. ii) importance of unobservedfactors in this type of models is reinforced and point out that the levels of the implied asset correlationscritically depend on the latent state variable used to capture the dynamics of default,as well as other assumptions on the statistical model. iii) the posterior distributions of the assetcorrelations show that the Basel recommended bounds, for this parameter, undermine the levelof systemic risk.

Network externalities across financial institutions

We propose and estimate a financial distress model that explicitly accounts for the interactions or spill-over effects between financial institutions, through the use of a spatial continuity matrix that is build from financial network data of inter bank transactions. Such setup of the financial distress model allows for the empirical validation of the importance of network externalities in determining financial distress, in addition to institution specific and macroeconomic covariates. The relevance of such specification is that it incorporates simultaneously micro-prudential factors (Basel 2) as well as macro-prudential and systemic factors (Basel 3) as determinants of financial distress. Results indicate network externalities are an important determinant of financial health of a financial institutions. The parameter that measures the effect of network externalities is both economically and statistical significant and its inclusion as a risk factor reduces the importance of the firm specific variables such as the size or degree of leverage of the financial institution. In addition we analyze the policy implications of the network factor model for capital requirements and deposit insurance pricing.