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This study develops a multi-period structural model to value bank subordinated debt (subdebt) under different regulatory policies. The model provides a complete framework for analyzing how various factors, such as credit and interest rate risks, bank characteristics, and regulatory policies, affect subdebt prices and yield spreads. It finds that the implementation of Prompt Corrective Action (PCA) will raise subdebt prices and lower subdebt spreads, while capital forbearance will have the opposite effects. Also, subdebt spreads are less sensitive to bank risk when PCA is imposed than when capital forbearance occurs. The results of the paper suggest that enhancing market discipline through giving subdebt investors more rights to force timely reorganization of weak banks will reduce the subdebt spreads required by investors.

This chapter studies banks’ loan pricing behavior in mainland China during 2003–2013 by applying panel regressions to firm-level loan data and the estimated default likelihood for listed companies. The authors find that with the progress of market-oriented financial reforms, banks generally require compensation for their exposure to borrowers’ default risks. It is even more so if the borrower is a non-state-owned enterprise (non-SOE), mainly due to the pricing behavior of the Big Four banks. Bank lending rates are shown to be less sensitive to the default risks of state-owned enterprises (SOEs). Our results also reveal that banks priced in firm default risks before 2008 financial crisis, but not necessarily so after the crisis. As for industries, we find that after the 2008 Global Financial Crisis, the real estate sector and other government-supported industries tended to enjoy better terms on loan pricing in terms of default risks. We believe the main reason is that the government stimulus policies tilted toward those industries that have played crucial roles in China’s economic growth.

This study investigates how this pandemic impacted the systemic risk in Indonesia’s Islamic commercial banks (ICBs) and conventional commercial banks (CCBs). The authors use quantitative methods, and systemic risk is measured using value at risk (VaR) and Conditional Value at Risk (CoVaR). This study provides empirical evidence regarding the estimation and determination of systemic risk. By using spillover measures, the authors find a significant increase in systemic risk among the sample banks. The novelty in this research is the measurement of the level of banking risk in the dual banking system in Indonesia. This study makes profound contributions to the literature and suggests various policy recommendations, including identifying essential institutions and testing the benefits of policy responses in containing systemic risk. These findings need to be considered by the government and financial authorities in making accurate regulations and policies.

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.

The Federal Reserve regulates U.S. commercial banks using a system of risk-based capital (RBC) regulations based on the Basel Accords. Unfortunately, the Fed’s mis-rating of several assets such as mortgage-backed securities encouraged the build-up of these assets in the banking system and was a major contributing factor to the 2008 financial crisis. The Basel system of RBC regulation is a prime example of a Hayekian knowledge problem. The contextual, tacit, and subjective knowledge required to properly assess asset risk cannot be aggregated and utilized by regulators. An effective system of banking regulation must acknowledge man’s limited knowledge and place greater value on individual decisions than on top-down planning.

This paper aims to investigate the determinants that contribute to the financial stability and banking sector of Palestinian banks listed on the Palestine Stock Exchange (PEX) by using yearly data for the years 2012–2022.

Pooled ordinary least squares (OLS) and two-stage least squares (2SLS) were used to identify the variables and factors affecting the financial stability and banking sector of Palestinian banks. The study’s data were collected from the banks listed on PEX and from the yearly reports posted on the Palestine Monetary Authority’s (PMA) webpage over the years from 2012–2022. According to this research’s analysis, SMEs loans and capital sufficiency have a statistically significant positive impact on the stability of Palestinian banks. Unobserved heterogeneity, simultaneity and dynamic endogeneity are taken into account when using the 2SLS regression approach to adjust for the study endogeneity factor.

The study’s findings show that some factors and determinants might have both good and negative effects on financial stability and banking sector. Loans to small and medium-sized businesses (SMEs) and enough capital are two characteristics that statistically have a major favourable impact on the stability of Palestinian banks since they help the banks withstand deficits. A further potential discovery relates to the favourable effects of financial inclusion (FI) and digital financial services (DFS) on the stability of banks.

This research has faced some limitations, such as the lack of a defined index from the regulatory organizations, this research is based on information from bank annual accounts. It has mostly relied on self-developed or World Bank indexes. Furthermore, the research solely used information from the supply side (banks); demand-side data were not taken into consideration.

This paper has managerial implications for stability of banking sector. The Palestine Monetary Authority, as the central bank, must increase the percentage of bank loans directed to small and medium-sized companies and oblige bank management to adhere to adequate capital standards, which contributes to strengthening the Palestinian banking sector and increasing its profits. The study findings advise banks that are enjoying financial stability to speed up the pace of FI and DFSs because most of these reliable banks have relatively low FI ratios. PMA is responsible for preserving the stability of the financial system. PMA, decision makers and banks management must retain adequate liquidity in their institutions and raise client collateral expectations to raise credit conditions.

This paper adds some contributions to the literature. To adjust for discrepancies between various types of banks, the authors concentrate on conventional and Islamic banks, which enables us to use a homogenous data set as opposed to depending on dichotomous variables. The authors used Z-scores, which have recently been used in research, to measure stability and FI at the level of specific institutions. This research contributes in some key aspects that no prior research has addressed. Conventional banks are different from Islamic banks, and a number of issues might impact their stability. To evaluate the connection between FI and DFSs, it is important to consider the actions of bank regulators.

This study aims to examine the relationship between bank capital and bank risk during COVID-19.

The study covers 20 countries during the period from Q4:2018 to Q4:2020, using different measurements of risk with consideration for the interrelationship between bank risk and bank capital and the impact of COVID-19.

The findings show that higher bank capital mitigates bank market risk and default risk; banks incur higher market risk during the COVID-19 period, and these risks are greater if banks have higher capital levels; and low-capitalized banks reduce risks more than well-capitalized banks, and moderately low-capitalized banks behave the most prudentially. These results are robust to different capital measures and model settings.

The research results are important in proving the motivation and practicality of capital regulation as well as the impact of COVID-19 as an exogenous shock to the bank’s operations.

To the best of the authors’ knowledge, this is the first study to investigate the influence of the COVID-19 pandemic on the relationship between bank capital and bank risk. In addition, while most of the studies on this nexus are based on the US data and the conclusions are inclusive; our results provide empirical cross-country evidences on the relationship between bank capital and bank risk.