The study covers both the systematically important banks and a broad sample of 142 commercial banks in four countries at the period from 2003 to 2010.
The ongoing global financial crisis has caused great turmoil in the banking sector worldwide and risk in this sector has increased significantly. It has become a critical issue to thoroughly assess the riskiness of the world’s major banks. Given that the importance of the emerging market (EM) banks in the global banking system has been increasing rapidly, further understanding of the riskiness of the EM banks is greatly needed.
Some of the key findings of the research are:
- A close examination of the risk profiles of 12 systemically important BRIC banks shows that the immediate risk of a major bank failure is low. Among the group, Banco do Brasil, Sberbank of Russia, the State Bank of India, and the Bank of China have the lowest levels of insolvency risk in each country respectively.
- The top lenders in China and Brazil have become more stable (lower insolvency risk) over time, while the stability of the top Russian banks has declined. The riskiness of the top Indian lenders does not have a monotonic trend during the same period.
- A significant portion (75%) of the systemically important banks in BRICs is state-owned. While the state ownership helped to stabilize the banking sector during the global financial crisis, it is important for policymakers to realize that the non-state-owned banks should play a bigger role under regular conditions.
- Publicly listed and savings banks showed higher stability in the BRICs. On the other hand, being a systemically important bank and relying more on non-interest income are associated with higher risk-taking for a BRIC bank. To reduce the moral hazard problem in the systemically important banks and thus increase their solvency, the “too important to fail” doctrine in the current regulatory system may need to change.
The research notes that one common feature of the top BRIC lenders is their rapid loan growth, especially to the real estate sector, in recent years. This may become the main driver for increased NPLs and the overall riskiness in the next two to three years. The concern is especially serious for the Chinese banks.
The monthly brief concludes that BRICs have a stable short-to-medium outlook in terms of the solvency of their major banks and the overall banking sector, helped by rapid economic growth. However, an economic slowdown may lead to considerably higher insolvency risk for the BRIC banks. Policymakers should pay close attention to any early warning signs of an economic slowdown and adjust their banking regulations accordingly.
Download Riskiness of BRIC Banks in English or Russian.
