Bank Portfolio Allocation Strategy and Its Probability of Failure: Case of the Russian Banking Sector Purge
Abstract
This paper aims to discover portfolio allocation strategies that facilitate a bank’s stability. The paper examines the phenomenon of massive failures of Russian banks in the period from 2013 to 2019, in order to identify which of the banks’ strategic decisions regarding assets and liabilities, as well as portfolio structure, lead to higher stability. The dataset contains financial indicators and prudential ratios of 895 commercial banks operating in Russia during that period. 507 banks, or 57% of all banks, lost their license during the considered period. Cases of bank failures were classified depending on whether the Central Bank identified any illegal activities conducted by the failed bank. The high failure rate provides an opportunity to study the differences between failed and non-failed banks in order to determine the factors associated with lower
failure probability. Following the approach applied in most of the previous studies, we use a logistic regression to model the effect of different asset and liability portfolio structure on the failure probability. The hypothesis that failure probability of a bank is affected by its strategic focus of forming an assets and liabilities portfolio was statistically confirmed. We found that the focus of a bank’s activity on providing loans to individuals and attracting deposits from companies leads to lower failure probability, confirming the results of previous studies. Also, we found that more active cooperation with other banks in terms of both borrowing and lending is associated with lower failure probability. Furthermore, we found that banks are less likely to borrow from or lend money to their fellow banks that later fail with illegal activity accusations.
Finally, we found that unlike the EU banks, Russian banks with higher profitability ratios are more stable. The results are relevant for industry practitioners in facilitating the development of a more resilient bank strategy, as well as for regulators for incorporation in early warning models.
Downloads
References
Mamonov M. “Holes” in the capital of failed Russian banks: Old indicators and new hypotheses. Ekonomicheskaya politika = Economic Policy. 2017;12(1):166-199. (In Russ.). https://doi.org/10.18288/1994-5124-20171-07 DOI: https://doi.org/10.18288/1994-5124-2017-1-07
Zaitseva O. The formation of the banking system of the Russian Federation. Nauchno-metodicheskii elektronnyi zhurnal “Kontsept” = Scientific and Methodological Electronic Journal “Koncept”. 2016;(T6):166-170. URL: http://e-koncept.ru/2016/56069.htm (In Russ.).
Mironova S. Proportional regulation of the Russian banking system: Legal fundamentals and development prospects. Pravovaya paradigma = Legal Concept. 2017;16(4):105-110. (In Russ.). https://doi.org/10.15688/lc.jvolsu.2017.4.15 DOI: https://doi.org/10.15688/lc.jvolsu.2017.4.15
Seryakova E. Global problems of the banking system of Russia in the context of its systemic risk. Upravlenie finansovymi riskami = Financial Risk Management Journal. 2017;(1):18-30. (In Russ.).
Lanine G., Vennet R.V. Failure prediction in the Russian bank sector with logit and trait recognition models. Expert Systems with Applications. 2006;30(3):463-478. https://doi.org/10.1016/j.eswa.2005.10.014 DOI: https://doi.org/10.1016/j.eswa.2005.10.014
Civil Code of the Russian Federation. Part 1. November 30, 1994 N 51-FZ (as amended on December 16, 2019). URL: http://www.consultant.ru/document/cons_doc_LAW_5142/ (In Russ.).
Styrin K. X-inefficiency, moral hazard, and bank failures. EERC Working Paper Series 01-258e-2. Economic Education and Research Consortium Research Network, Russia and CIS. Moscow. 2005.
Mamonov M.E. Price interactions in the credit market and banks instability over the crisis and non-crisis periods in the Russian economy. Zhurnal Novoi ekonomicheskoi assotsiatsii = Journal of the New Economic Association. 2020;(1):65-110. (In Russ.). https://doi.org/10.31737/2221-2264-2020-45-1-3 DOI: https://doi.org/10.31737/2221-2264-2020-45-1-3
On the development of the banking sector of the Russian Federation in May 2020. Moscow: The Central Bank of Russian Federation; 2020. 10 p. URL: http://www.cbr.ru/Collection/Collection/File/27971/razv_bs_20_05.pdf (In Russ.).
Fungáčová Z., Weill L. Does competition influence bank failures? Evidence from Russia. Economics of Transition and Institutional Change. 2013;21(2):301-322. https://doi.org/10.1111/ecot.12013 DOI: https://doi.org/10.1111/ecot.12013
Cole R.A., White L.J. Déjà vu all over again: The causes of U.S. commercial bank failures this time around. Journal of Financial Services Research. 2012;42(1-2):5-29. https://doi.org/10.1007/s10693-011-0116-9 DOI: https://doi.org/10.1007/s10693-011-0116-9
Larina O. Banking crises: Identification problems and resolution. Upravlenie. 2017;5(2):9-15. (In Russ.). https://doi.org/10.12737/article_59537e6a9b2da4.92003456 DOI: https://doi.org/10.12737/article_59537e6a9b2da4.92003456
Bank of Russia annual report 2009. Moscow: The Central Bank of Russian Federation; 2010. 281 p. URL: http://www.cbr.ru/collection/collection/file/7804/ar_2009.pdf (In Russ.).
Wheelock D.C., Wilson P.W. The contribution of on-site examination ratings to an empirical model of bank failures. Review of Accounting and Finance. 2005;4(4):110-133. https://doi.org/10.1108/eb043440 DOI: https://doi.org/10.1108/eb043440
Zakirova D.F., Panteleev D.S., Zakirova E.F. Estimating bankruptcy probability of credit organizations. International Transaction Journal of Engineering, Management, Applied Sciences & Technologies. 2018;9(4). https://doi.org/10.14456/ITJEMAST.2018.27
Instruction of the Bank of Russia N 199-И dated 29.11.2019 “On mandatory ratios and allowances for capital adequacy ratios of banks with a universal license”. URL: https://www.cbr.ru/faq_ufr/dbrnfaq/doc/?number=199-%D0%98 (In Russ.).
Claeys S., Schoors K. Bank supervision Russian style: Evidence of conflicts between micro- and macro-prudential concerns. Journal of Comparative Economics. 2007;35(3):630-657. https://doi.org/10.1016/j.jce.2007.02.005 DOI: https://doi.org/10.1016/j.jce.2007.02.005
Ferri G., Liu L.-G., Majnoni G. How the proposed Basel guidelines on rating agency assessments would affect developing countries. World Bank Policy Research Working Paper. 2000;(2369). URL: https://openknowledge.worldbank.org/bitstream/handle/10986/19835/multi_page.pdf?sequence=1&isAllowed=y DOI: https://doi.org/10.1596/1813-9450-2369
Karminsky A., Kostrov A. The back side of banking in Russia: Forecasting bank failures with negative capital. International Journal of Computational Economics and Econometrics. 2017;7(1/2):170-209. https://doi.org/10.1504/IJCEE.2017.080663 DOI: https://doi.org/10.1504/IJCEE.2017.080663
Wheelock D.C., Wilson P.W. Why do banks disappear? The determinants of U.S. bank failures and acquisitions. The Review of Economics and Statistics. 2000;82(1):127-138. https://doi.org/10.1162/003465300558560 DOI: https://doi.org/10.1162/003465300558560
Alves A.J., Jr., Dymski G.A., de Paula L.-F. Banking strategy and credit expansion: A post-Keynesian approach. Cambridge Journal of Economics. 2008;32(3):395-420. https://doi.org/10.1093/cje/bem035 DOI: https://doi.org/10.1093/cje/bem035
Berardi S., Tedeschi G. From banks’ strategies to financial (in)stability. International Review of Economics & Finance. 2017;47:255-272. https://doi.org/10.1016/j.iref.2016.11.001 DOI: https://doi.org/10.1016/j.iref.2016.11.001
Altman E.I. Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance. 1968;23(4):589-609. https://doi.org/10.1111/j.1540-6261.1968.tb00843.x DOI: https://doi.org/10.1111/j.1540-6261.1968.tb00843.x
Sinkey J.F., Jr. A multivariate analysis of the characteristics of problem banks. The Journal of Finance. 1975;30(1):21-36. https://doi.org/10.1111/j.1540-6261.1975.tb03158.x DOI: https://doi.org/10.1111/j.1540-6261.1975.tb03158.x
Martin D. Early warning of bank failure: A logit regression approach. Journal of Banking and Finance. 1977;1(3):249-276. https://doi.org/10.1016/0378-4266(77)90022-X DOI: https://doi.org/10.1016/0378-4266(77)90022-X
Männasoo K., Mayes D.G. Explaining bank distress in Eastern European transition economies. Journal of Banking & Finance. 2009;33(2):244-253. https://doi.org/10.1016/j.jbankfin.2008.07.016 DOI: https://doi.org/10.1016/j.jbankfin.2008.07.016
Tam K.Y., Kiang M.Y. Managerial applications of neural networks: The case of bank failure predictions. Management Science. 1992;38(7):926-947. https://doi.org/10.1287/mnsc.38.7.926 DOI: https://doi.org/10.1287/mnsc.38.7.926
Arena M. Bank failures and bank fundamentals: A comparative analysis of Latin America and East Asia during the nineties using bank level data. Journal of Banking and Finance. 2008;32(2):299-310. https://doi.org/10.1016/j.jbankfin.2007.03.011 DOI: https://doi.org/10.1016/j.jbankfin.2007.03.011
Betz F., Oprică S., Peltonen T.A., Sarlin P. Predicting distress in European banks. Journal of Banking & Finance. 2014;45:225-241. https://doi.org/10.1016/j.jbankfin.2013.11.041 DOI: https://doi.org/10.1016/j.jbankfin.2013.11.041
Lin C.-C., Yang S.-L. Bank fundamentals, economic conditions, and bank failures in East Asian countries. Economic Modelling. 2016;52(Pt.B):960-966. https://doi.org/10.1016/j.econmod.2015.10.035 DOI: https://doi.org/10.1016/j.econmod.2015.10.035
Harnay S., Scialom L. The influence of the economic approaches to regulation on banking regulations: A short history of banking regulations. Cambridge Journal of Economics. 2016;40(2):401-426. https://doi.org/10.1093/cje/bev023 DOI: https://doi.org/10.1093/cje/bev023
Doyle R. Using network interbank contagion in bank default prediction. 2020. URL: https://arxiv.org/pdf/2005.12619.pdf
Pessarossi P., Thevenon J.-L., Weill L. Does high profitability improve stability for European banks? Research in International Business and Finance. 2020;53:101220. https://doi.org/10.1016/j.ribaf.2020.101220 DOI: https://doi.org/10.1016/j.ribaf.2020.101220
Banki.ru official website. URL: https://www.banki.ru/ (In Russ.).
The Bank of Russia official website. URL: https://cbr.ru/ (In Russ.).
Karas A. Russian bank data: Reasons of bank closure. Data in Brief. 2020;29:105343. https://doi.org/10.1016/j.dib.2020.105343 DOI: https://doi.org/10.1016/j.dib.2020.105343
Karas A., Vernikov A. Russian bank data: Birth and death, location, acquisitions, deposit insurance participation, state and foreign ownership. Data in Brief. 2019;27:104560. https://doi.org/10.1016/j.dib.2019.104560 DOI: https://doi.org/10.1016/j.dib.2019.104560
Zhivaikina A.D., Peresetsky A.A. Russian bank credit ratings and bank license withdrawal 2012-2016. Zhurnal Novoi ekonomicheskoi assotsiatsii = Journal of the New Economic Association. 2017;(4):49-80. (In Russ.). https://doi.org/10.31737/2221-2264 2017-36-4-3 DOI: https://doi.org/10.31737/2221-2264-2017-36-4-3
Copyright (c) 2022 National Research University Higher School of Economics

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.