العتوم راضي

Banks in Jordan encounter sometimes sudden shocks, thus leading to strain burdens on the success of fiscal and monetary policies and to adversely affect the macroeconomic function of banks. The notion of this study stems from the fact that though Jordan has been facing many banking crises since 1985, it has no systematic means or systems to predict and deal priori with banking crises. This study aims at analyzing Jordan's banking crises in order to set up a model that helps in predicting the banking crisis and identifying the steps to be taken to minimize and/or alleviate its vulnerability. The study benefited from secondary data and applied the techniques of the comparative approach, historical analysis and industrial norms analysis. A CAMELs approach utilizing the above-mentioned techniques in addition to advanced statistical techniques, Ohlson’s Logit Model and Multivariate Discriminate approach are used, to prove the intended aims. The population of the study consists of 26 banks; 16 sustained banks and 10 failed ones, using cross - sectional data. It should be noted that few banks suffered bankruptcy and so they withdrew from the banking system. Historical data are sometimes used for comparative analysis and for data mining indicators preceding banks’ failure. The study concludes that banks failures in Jordan occurred mainly due to the individual bank’s mismanagement. Thereby, lack of transparency, weak regulations, inactive control by the Central Bank and a spread of implicit fraud; intra-bank and inter-bank fraud are the main causes of Jordan banking sudden shocks. Also, the study has estimated banking crises' cost during 1980-2004 to be between 825 million JDs and 1099 million JDs. The Central Bank of Jordan (CBJ) advances to support banks reached almost 4.4 billion JDs during that period, in addition to approximately 84 million JDs to other financial institutions. The study has built a model based on financial soundness indicators (FSI) in view of CAMELs approach of analysis. The proposed model is developed to encompass all threatening factors that help analyze and highlight bank ongoing operations. Thereby it envelops 121 indicators, of which 73 are developed in this study. The study reached the following conclusions:- 1. Generally speaking, failed banks experienced a high level of dispersion (deviation) against industry norms, in comparison to operating banks. 2. Among operating banks, foreign banks showed a better soundness indicators’. 3. Rapid, consistent and comprehensive responses to banking crises definitely reduces the negative macroeconomic impact. On the contrary, monetary authority’s delay in response may create a breakdown in the payment system, reduce public confidence and increase the negative macroeconomic consequences. 4. Legal environment, effective bank regulation and supervision coupled with a well funded depository insurance scheme and a flexible lender of last resort facility help reduce the negative macroeconomic impact of banking crisis. 5. Capital Adequacy Indicators (CA), Asset Quality Indicators (AQ), Earnings, Profits, Efficiency & Competitiveness Indicators (EPEC), Liquidity indicators (L), and Sensitivity to Market Risk and Openness indicators (SMR) can accurately classify operating banks (failed and sustained) with 81.7%, 91.5%, 81.7%, 76.3% and 70% accuracy rates respectively. The prediction probabilities of these indicators of bankruptcy incidence are 20.5%, 7.8%, 7.5%, 39.8% and 24.5% respectively. 6. Summing up the above-mentioned net results of the four model components (CA, AQ, EPEC, L and SMR), the study found three significant independent efficiency ratios, asset to own capital and net interest margin. These indicators have shown a significant negative impact on the bankrupted banks’ status. The model can correctly classify failed and sustained banks by 88.3%. The indicators showed a prediction probability of 19.5 % of bankruptcy status and the model has a stable explanatory relationship. 7. All groups of financial indicators have inverse relationships with bankruptcy. 8. The probability of bankruptcy for failed banks is much higher than that for sustained banks to all groups of indicators apart from sensitivity and openness group. The study has the following recommendations: 1. To establish an "Early Warning System Unit" or "Financial Institutions Monitoring Unit" under the supervision of three independent institutions (the Central Bank of Jordan (CBJ), the Ministry of Finance (MOF) and the Ministry of Planning & International Cooperation (MOP). The committee should be responsible for forming a macroprudential analysis to include a detailed analysis of two major indicators, micro prudential indicators, which is almost based on CAMELs indicators; and Macroeconomic indicators. 2. To establish a "Banking Safety Net" to ensure the stability of banking soundness as well as the soundness of the market economy. The Net is proposed to be comprised of Central Bank of Jordan, Ministry of Planning & International Cooperation, Ministry of Industry & Trade, Ministry of Finance, Jordan Loan Guarantee Corporation, Deposit Insurance Corporation, two representatives of insurance companies, a representative of Amman Stock of Exchange market, Banks Association, money exchangers, two academics and two interested researchers. Finally, this study envelops six chapters, the first introduces the methodology and revision of related studies, Ch2 reviews the theoretical perspective of banking crisis’ determinants. Analyzing banking crises’ status in Jordan is shown in detail in Ch3. Whereas, Ch 4 focuses on building the Early Warning model utilizing an initiative criteria of benchmark and industry norm approaches, this chapter relied on financial and nonfinancial soundness indicators to form the warning system. Ch 5 deals with the prediction of banking crises in Jordan using Logit approach and finally the conclusions and recommendations are covered in Ch 6.