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Abstract

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The Banking Sector Under Financial Stability
Type: Book
ISBN: 978-1-78769-681-5

Article
Publication date: 4 January 2011

Alex Fayman and Ling T. He

The purpose of this paper is to identify effects of prepayment risk on performance of commercial banks in the USA. Understanding how various risks impact banks'…

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Abstract

Purpose

The purpose of this paper is to identify effects of prepayment risk on performance of commercial banks in the USA. Understanding how various risks impact banks' performance can help to improve performance of financial institutions and better estimate risk premia charged by banks on the loans they extend to their customers.

Design/methodology/approach

The paper measures the prepayment risk premium and aims to gauge its effect on various ratios that measure bank performance. Since, risk management is an important goal of financial management, it is important to learn how prepayment risk pertains to bank performance.

Findings

The results of this paper suggest that prepayment risk may significantly impact return on loans, return on equity and real estate loans to total loans ratios of various commercial banks. The impacts, in terms of strength and direction, vary between the periods of pre‐ and post‐passage of the Financial Institutions Reform and Recovery Act. The results indicate that the addition of prepayment risk variable to regression models can generally increase their ability to explain bank performance metrics.

Originality/value

To the authors' knowledge, there is no existing literature that gauges the impact of prepayment risk on various components of bank performance. There is existing literature that shows that bank stocks move in response to prepayment risk.

Details

The Journal of Risk Finance, vol. 12 no. 1
Type: Research Article
ISSN: 1526-5943

Keywords

Article
Publication date: 3 August 2012

Omar Masood, Hasan Al Suwaidi and Priya Darshini Pun Thapa

The purpose of this paper is to identify any differences between the Islamic and non‐Islamic banks in the UAE on credit risk management.

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Abstract

Purpose

The purpose of this paper is to identify any differences between the Islamic and non‐Islamic banks in the UAE on credit risk management.

Design/methodology/approach

The study uses survey based methodology for data collection. The sample for the study consists of six commercial banks from UAE with three non‐Islamic and three Islamic banks and with 148 credit risk managers as respondents for the survey. The study aims to investigate factors which distinguish between Islamic and non‐Islamic banks in UAE. This is achieved by fitting a binary logistic regression model.

Findings

The study shows that the managers in Islamic banks now do not rely only on personal experiences and simple credit risk analysis. The Islamic banks appear also to be developing and practising the newer and robust techniques, in addition to traditional methods, to manage their credit risk in UAE compared to non‐Islamic banks, which indicates a possibility of further improvement in their credit risk management.

Originality/value

The paper uses questionnaire‐based methodology, which has not been used previously in the UAE financial sector, as well as in studies of credit risk management. Therefore, this research could become the cornerstone of further academic research in other developing countries using this methodology.

Abstract

Details

Journal of Financial Regulation and Compliance, vol. 13 no. 3
Type: Research Article
ISSN: 1358-1988

Keywords

Article
Publication date: 3 August 2012

Nafis Alam and Kin Boon Tang

The paper aims to gain an insight into behavioural characteristics of Islamic banks and how they influence the risk‐taking decisions of Islamic banks in financial markets…

1637

Abstract

Purpose

The paper aims to gain an insight into behavioural characteristics of Islamic banks and how they influence the risk‐taking decisions of Islamic banks in financial markets within the prospect theory context.

Design/methodology/approach

The study employs review and application of prospect theory in Islamic banking industry across the globe, making use of 99 Islamic banks across 14 countries.

Findings

Empirical evidence shows that Islamic banks located above target risk level tend to show risk‐adverse behaviour, while banks below target risk level inclined towards risk‐seeking attitude. Results also highlighted that banks which have higher loans to total asset ratio tend to take on lower risk.

Practical implications

Islamic bank regulators will be better prepared to monitor the Islamic banking system if they understand risk‐taking behaviour of Islamic bank managers. The findings will provide more effective bank regulatory oversight, thus preventing Islamic bank failures in future.

Originality/value

Since there are relatively few studies conducted in risk‐taking behaviour of Islamic banks, specifically global Islamic banking, this study will broaden the scope of the literature by providing novel empirical evidence on risk‐taking practice of Islamic banks worldwide.

Details

Qualitative Research in Financial Markets, vol. 4 no. 2/3
Type: Research Article
ISSN: 1755-4179

Keywords

Open Access
Article
Publication date: 10 July 2017

Muhammad Adeel Ashraf and Ahcene Lahsasna

Customers of Islamic banking industry continue to be skeptical on Sharīʿah compliance of Islamic banks despite receiving fatwa from the competent authorities. The purpose…

3234

Abstract

Purpose

Customers of Islamic banking industry continue to be skeptical on Sharīʿah compliance of Islamic banks despite receiving fatwa from the competent authorities. The purpose of this paper is to quantify the Sharīʿah risk taken by Islamic banks, so that customers are better informed on the level of Sharīʿah compliance that will help in removing the persistent level of skepticism toward Sharīʿah compliance.

Design/methodology/approach

This research has used the scorecard based modeling approach to build the Sharīʿah risk rating model, which consists of 14 factors that capture Sharīʿah risk and are grouped in 5 major areas revolving around regulatory support, quality of Sharīʿah supervision, business structure, product mix and treatment of capital adequacy ratio. The score calculated by applying the model is grouped into 4 tiers reflecting the level Sharīʿah compliance at bank as non-compliant, weak compliance, satisfactory compliance and high level of Sharīʿah compliance. Three case studies were conducted by applying the model to Islamic banks from Malaysia, Pakistan and Saudi Arabia.

Findings

The final Sharīʿah risk scores calculated by the model clearly differentiate the 3 banks on basis of their Sharīʿah risk. The underlying scores also highlighted the areas where banks need to improve to reduce their Sharīʿah risk.

Originality/value

This model can be applied by customers of Islamic banks who are interested in understanding Sharīʿah-related aspects of Islamic banking industry. This model can be applied on standalone basis or as an extension to the conventional counter party risk rating models. This model can benefit management of Islamic banks toward allocation of capital against Sharīʿah risk under Basel III, and regulators can apply the model to measure industry wide risk of Sharīʿah non-compliance.

Details

ISRA International Journal of Islamic Finance, vol. 9 no. 1
Type: Research Article
ISSN: 0128-1976

Keywords

Article
Publication date: 3 October 2016

Kenneth A. Tah and Oscar Martinez

The purpose of this paper is to examine the effect of specialization of the securitized assets portfolio on banks’ performance and securitization risk. In doing so, the…

764

Abstract

Purpose

The purpose of this paper is to examine the effect of specialization of the securitized assets portfolio on banks’ performance and securitization risk. In doing so, the paper addresses two important issues. First, whether the efficient risk–return trade-off for securitized asset portfolios is consistent with the principles of diversification. Second, whether the relationship between bank-level returns and securitized assets portfolio specialization is non-linear in securitization risk.

Design/methodology/approach

This paper used the fixed-effects panel regression model on US bank holding company data for the period 2001:Q2 to 2014:Q1.

Findings

The results show that securitized assets portfolio specialization increases returns and also reduces securitization default risk; banks’ return and securitized assets specialization are dependent in a non-linear manner on banks’ securitization risk. Additionally, it was also found that lower bank performance leads to higher securitization risk.

Originality/value

This paper is of value by demonstrating that diversification (specialization) of securitized assets portfolio would achieve better bank performance in low-risk (high-risk) scenarios.

Details

Studies in Economics and Finance, vol. 33 no. 4
Type: Research Article
ISSN: 1086-7376

Keywords

Book part
Publication date: 24 October 2018

E. A. Posnaya, E. V. Dobrolezha, I. G. Vorobyova and G. P. Chubarova

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…

Abstract

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.

Details

Contemporary Issues in Business and Financial Management in Eastern Europe
Type: Book
ISBN: 978-1-78756-449-7

Keywords

Article
Publication date: 1 January 1995

R. Boffey and G.N. Robson

Bank management, from a finance theory perspective, is generally acknowledged to involve the management of four major balance sheet risks: liquidity risk, interest rate…

3235

Abstract

Bank management, from a finance theory perspective, is generally acknowledged to involve the management of four major balance sheet risks: liquidity risk, interest rate risk, capital risk and credit risk (Hempel et al, 1989). Of these, credit risk has commonly been identified as the key risk in terms of its influence on bank performance (Sinkey, 1992, p.279) and bank failure (Spadaford, 1988).

Details

Managerial Finance, vol. 21 no. 1
Type: Research Article
ISSN: 0307-4358

Book part
Publication date: 2 September 2020

Ramona Rupeika-Apoga, Inna Romānova and Simon Grima

Introduction – Stability of commercial banks is on the back stone of a country’s economy and its development, making bank stability one of the main concerns of financial…

Abstract

Introduction – Stability of commercial banks is on the back stone of a country’s economy and its development, making bank stability one of the main concerns of financial regulators. The bank stability models for large and small economies differ significantly.

Purpose – In this chapter we examine the determinants of bank stability in a small post-transition economy, based on the case of Latvia. Latvia has a well-organized banking system, providing a wide range of services to local and international customers. Besides, the Latvian banking sector is quite unique in Europe as it comprises two sets of banks with radically different target groups of customers and sources of revenue.

Methodology – To carry out this study we analysed panel data of the quarterly financial statements of Latvian banks operating during the period 2012-2017.

Findings – We found evidence of a negative significant relationship between size and bank stability, negative significant impact of liquidity risk on bank stability, a positive significant relationship between capital adequacy and bank stability, as well as a positive significant relationship between credit risk and stability. These results increase the importance of a sufficient level of capital adequacy ratio and liquidity to maintain bank stability. In general, the results of the study confirm the results of other studies on bank stability of small economies, with some exceptions due to the unique situation in term bank business models applied by Latvian banks. The current study provides valuable policy implications to small post-transition economies and stakeholders in general.

Details

Contemporary Issues in Business Economics and Finance
Type: Book
ISBN: 978-1-83909-604-4

Keywords

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