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With this chapter, the authors reveal the content of the concept of economic capital, explore approaches to its evaluation, assess the implementation of the concept of economic capital in the national banking system, and identify problems and possible directions for development and convergence of the Russian approach with international requirements. As a result, the need to apply the model of economic capital in assessing bank capital is substantiated. A concept (from Latin “conception” – understanding a system) is a specific way of understanding (interpreting) an object, phenomenon, or process; that is, the main point of view on the subject and the guiding idea for its systematic coverage. This term is also used to refer to a leading idea and a constructive principle in scientific activity.

Initially, since 1988, under prudential supervision – a direct, quantitative-oriented approach, there existed a concept of regulatory capital, reflected in the document “International Convergence of Measurement Methods and Capital Standards” (Basel I). Regulatory capital was calculated to meet regulatory oversight standards. It was intended to cover unforeseen losses and reserves already identified; thereafter, expected losses were created.

The concept of regulatory capital proceeds from the premise that if capital must cover unexpected losses, it should be borne in mind that a surprise approximates uncertainty. Consequently, the theoretical possibility of occurrence of certain events is excluded and, hence, the methodical and practical ground of the concept of economic capital disappears, which is based on the assessment of default probability and the magnitude of its negative consequences for creditors.

The change in trends in banking regulation (the actions of supervisory authorities in matters of capital adequacy acquired a risk-oriented nature that takes into account the risks assumed by each bank and the quality of their management) led to the emergence of the concept of economic capital in 2004, which is reflected in the document “International Convergence of Capital Measurement and Standards of Capital: New Approaches” (Basel II).

According to this concept, commercial banks must have sufficient capital to cover not only credit and market, but also the operational risks. Thus, economic capital takes into account all the risky circumstances that a banking institution may encounter. The need to apply the method of economic capital in assessing the capital of a bank is justified and significant.

The pre‐commitment approach to bank capital regulation proposes that banks self‐select capital reserve requirements, facing penalties ex post for incurring losses in excess of reserves, hence providing incentives for high‐ risk banks to choose higher capital requirements. In order to assess the validity of the pre‐commitment approach, this article analyzes its comparative statics within the context of a standard European option written against the bank's capital base. The author finds that this approach works when it is not needed (when banks possess unlimited capital and hence cannot fail), but not when it is.

This paper aims to offer a comprehensive comparison of the characteristics between banks that securitize and banks that do not and to provide evidence of the capital arbitrage theory of securitization.

First, the fundamental financial similarities and differences between banks that securitize assets and banks that do not participate in the securitization market are tested. Second, variables that help predict whether a bank securitizes assets are analyzed. Third, the determinants of securitization extent in banks that securitize assets are investigated – for general securitization extent and for specific type of asset securitized. Using a sample of 112 banks that securitize different assets, a matched sample of banks that do not securitize based on entity type and size is created. A quarterly panel data set of these banks dating back to 2001 is used.

The results indicate that bank size is a significant determinant of whether a bank securitizes. Further, overall securitization extent is negatively related to the bank's capital ratio (in support of capital arbitrage theory), but this result is primarily driven by credit card securitization.

Utilizing a unique data set of quarterly data from bank Call Reports; the panel data set is large relative to past studies. A matched sample approach was used to test fundamental financial similarities and differences between securitizing and non‐securitizing banks. In addition to aggregated securitization, an examination was made of how different classes of assets affect the banks' risk‐based capital ratios and test the capital arbitrage theory of securitization.

This study investigates the relationship between bank capital and liquidity creation and further examines the effect that institutional quality has on this relationship in Sub-Saharan Africa (SSA).

The data comprise 41 universal banks in nine SSA countries from 2010 to 2022. The study employs the two-step system generalized methods of moments and further uses alternative estimators such as the fixed-effect and two-stage least squares methods.

The empirical results show that bank capital has a direct positive and significant effect on liquidity creation. In addition, the positive effect of bank capital on liquidity creation is enhanced, particularly in a strong institutional environment. The results imply that nonconstraining capital regulatory policies bolster bank solvency, improve risk-absorption capacity and increase liquidity creation.

This study has several policy implications. First, it provides empirical evidence on the position of banks in SSA on the financial fragility and risk-absorption hypothesis of bank capital and liquidity creation debates. This study shows that the effect of bank capital on liquidity creation in SSA countries is positive and supports the risk-absorption hypothesis. Second, this study highlights that a country's quality institutions can complement bank capital to increase liquidity creation. In addition, this study highlights that nonconstraining capital regulatory policies will bolster bank solvency, improve risk-absorption capacity and increase liquidity creation.

The novelty of this study is that it introduces the country's quality institutional environment into bank capital and liquidity creation links for the first time in SSA.

This study aims to examine the effect of corporate social responsibility (CSR) on banks’ capital, value and risk by investigating its impact on capital inflows and asset quality. The authors aim to investigate the value-protective characteristics of socially responsible performance.

This study uses a two-stage least squares approach with instrumental variables, with bank and year fixed effects to address concerns regarding endogeneity, specifically reverse causality and unobservable factors.

The results confirm a positive association of CSR with capital adequacy, including higher quality Tier 1 Capital. The authors find strong evidence that banks with higher CSR scores are associated with greater bank value and lower risk. The extended analyses find that the improvement in capital is from annual growth in capital and lower risky assets.

The research advances the field by providing new empirical evidence of a positive association between CSR and capital, including high-quality Tier 1 Capital. This study complements the prior research by simultaneously examining the dynamic links between CSR and capital, bank risk and bank value. The findings are consistent with the view that there is a dynamic link in which CSR affects the operations of banks.

This paper offers a framework for understanding the financial system using Marx’s theory of value. It examines how to interpret the Marxist concepts of the rate of profit and fictitious capital when analysing the financial sector, showing how accounting terms such as ‘return on equity’ and ‘leverage’ can also be understood in this context. The analysis argues that the capitalist system’s rate of profit should be conceptualised in a way that includes finance, but that one should not mix up the accumulation of financial assets with the accumulation of advanced capital. While the costs of finance are negative for the system’s average rate of profit, the paper concludes by noting how this is not inconsistent with financial operations being very profitable for imperialist powers that can use the financial system to appropriate surplus value from elsewhere in the global economy.

The 1988 Basel Accord and the proposed revisions to the Accord represent some of the most significant international regulations impacting the financial decisions of firms, in this case, financial services firms, in recent years. The revisions to the Accord incorporate operational risk into the capital, supervisory and market requirements. In our review of the issues in this area, we provide insight into the workings of an important international regulation. We also present suggestions for further research in this area that will become feasible when data on the impact of the new regulations become available after the proposed implementation in 2006.

This study aims to examine the triple relationship between capital regulation, banking lending and economic growth in a dual markets. Specifically, the author seeks to explore how changes in capital regulation can impact banking lending practices and subsequently influence economic growth, while also investigating the reciprocal effects of banking lending on economic growth.

The author follows several previous studies such as Shrieves and Dahl (1992), Beck and Levine (2002), Altunbas et al. (2007), Saeed et al. (2020) and Stewart et al. (2021) to identify a system of three equations, regarding economic growth, capital and banking financing growth, respectively. The author estimates the parameters of all equations simultaneously using the seemingly unrelated regression method (Zellner, 1962) for a sample of 46 Islamic banks and 113 conventional banks during 2002–2022. These banks operate in 13 Muslim countries from Middle East and North Africa and Southeast Asia.

The author’s findings demonstrate that in the case of Islamic banking, an increase in loan growth stimulates economic growth, while an increasing capital ratio positively influences economic growth but is accompanied by a reduction in loan growth. This result corroborates the findings of Stewart et al. (2021), which indicate that regulatory capital reduces unstable credit while improving gross domestic product growth. However, in the case of conventional banks, the response to an increase in loan growth on Gross Domestic Product Per Capita Growth (GDPCG) is ambiguous, while the capital ratio improves GDPCG and promotes LOANG, which, in turn, increases risk.

The Islamic banks can continue to significantly contribute to economic growth by effectively directing their available capital toward viable investment opportunities and supporting sustainable financial practices, even in the presence of potential constraints on loan growth. As for conventional banks, they are invited to increase their capital levels to ensure a strong and resilient financial system that can support lending and facilitate economic growth.

To the best of the author’s knowledge, this paper is the first to explore the triple relationship between capital requirements, Islamic bank lending and economic growth.