Search results

The EU prudential regime for investment firms comprising the Directive (EU) 2019/2034 (IFD) and Regulation (EU) 2019/2033 (IFR) introduces a fit-for-purpose capital framework for investment firms. The capital impact on the practice of investment management can be material depending on firms’ specific business models and risk profiles, which may require them to take strategic decisions with respect to the services they provide. Despite the importance of this issue for the practice of investment management, there exists no study among the existing studies that focuses on this issue. This study aims to fill this gap in the literature.

This paper reviews the calibration approaches the European Banking Authority (EBA) has used by exploring the deficiencies of the regime with respect to the calibration of categorization thresholds and coefficients that are used by the EBA to calculate regulatory capital requirements.

This paper sets out that the choice of the relevant percentile for setting the firm categorization thresholds was not based on any theoretical rule. It also discusses that the calibration of the K-factors was subjective and lacked consistency. In addition, it criticizes the sample that the EBA used for business model coverage on the grounds that it was unbalanced, resulting in certain K-factors driving the overall capital impact.

Further research is needed on the calibration of thresholds as this will remain a crucial factor for the effectiveness of the new regime. In particular, a more data-driven and transparent approach would be necessary to ensure the accuracy and consistency of the thresholds.

This paper leads to the policy implication that, despite its merits that overweigh its shortcomings, potential market competition and financial stability issues that may stem from inconsistencies and a general lack of objectivity in certain aspects of the regime should not be underestimated by the EU policy makers.

The present paper contributes to the existing knowledge primarily by reviewing the EBA’s calibration approaches with respect to the K-factor coefficients and firm categorization thresholds, concluding that lack of objectivity and precision in the relevant methodologies could distort capital allocation decisions in the practice of investment management.

The study examines whether the Basel-III regulations impact the financial performance, operational efficiency and resilience of Indian banks. Further, the study tests whether there is a variance in the impact between private- and public-sector banks.

The study uses panel data regression on data from 16 private- and 12 public-sector banks from the years 2016–2022. Random-effect estimation is used, and robust standard errors are calculated.

The main findings indicate that the Basel-III regulations related to capital and leverage boost public-sector banks' financial performance and resilience. However, a similar impact is not detected in the case of private-sector banks.

The findings signify that the Basel-III framework does not address the differences between public and private-sector banks. Therefore, the policy implications are of practical importance and indicate that Basel-III regulations should not be considered a one-size-fits-all type of bank. Instead, policymakers should consider the structural differences between private and public-sector banks concerning Basel-III regulations.

The study addresses a significant limitation of the Basel-III regulations, which, in their current state, somehow fail to account for the differences between the public- and private-sector banks.

Motivated by recent financial liberalization policies in emerging markets, this study investigates whether bank competition and regulatory capital affect bank risk taking in an international banking context.

Bank competition is regressed, using GLS regression, on various measures of bank risk, to reflect regulatory, accounting and market-based risk-taking. The authors use a sample of publicly traded banks operating in Africa during 2004–2019.

Results show that higher level of bank competition increases bank risk taking and results in greater financial fragility in the absence of banking capital regulations. Furthermore, larger capital adequacy ratios control the risk-taking incentives of managers and guard banks against the risk of default. Further tests confirm the significance of market-based risk measures over accounting and regulatory measures.

Findings are relevant to bank managers and regulators in their sustained effort of finding an optimal balance between bank competition and financial stability. Increased competition should be balanced with capital regulations to curtail bank excessive risky behavior and derive the social benefits of greater competition in the market while sustaining overall economic growth.

This study provides novel evidence in an international context. First, it uses regulatory, accounting and market-based measures of bank risk taking to reflect regulators', management and market participants' emphasis. Another original contribution is the investigation of bank competition across African economies characterized by financial liberalization, stringent banking system and interesting socio-economic challenges.

The purpose of this paper is to discuss how the failed finance companies in Sri Lanka used fair value accounting practices as an opportunistic earnings management practice to launder money under weak corporate governance structures.

This paper uses a qualitative design under the philosophy of interpretivism. The case study research strategy is used inductively to investigate how fair value accounting had been used for money laundering.

The dishonest intention of major shareholders and board of directors had forced failed companies to misuse fair value accounting to manipulate performance and use them for personal benefits which were detrimental to the depositors and stability of the companies. The weak corporate governance structures which were developed because of regulatory forbearance were influential for manipulations. The concentrated ownership had reduced agency conflicts between shareholders and managers because major shareholders were the members of the board of directors. The appointed committees were not effective because of an inadequate number of independent directors with sufficient expertise. The reduced agency conflict between shareholders and managers has exaggerated the agency conflict with depositors. Therefore, it is recommended to dilute ownership concentration to establish good corporate governance structures and make stable institutions.

This study does not discuss the dishonest fair value accounting practices of all licensed finance companies because of the sensitivity of the matter for surviving companies.

This paper is an original work of the authors which discusses how fair value accounting practices had been used to launder money in failed finance companies in Sri Lanka as an emerging market context.

This study aims to investigate the effect of income and asset diversification on earnings management using discretionary loan loss provisions (LLP) in banks, and the role of risk level in mediating this effect.

A sample of banks operating in Middle East and North Africa countries was used to test the mediation model of Baron and Kenny (1986) with different measures of diversification and risk.

The results show that bank income and asset diversification have unique and combined effects on earnings management. The results also support the idea that a risk-mediating effect contributes to explaining this relationship among banks. Specifically, bank diversification strategies positively affect LLP-based earnings management by increasing bank risk. This result is relevant for conventional banks. However, only a direct and positive effect of diversification strategies on LLP-based earnings management can be observed in Islamic banks, and the indirect effect is not supported.

This study extends previous research by examining the unique and combined effects of income and asset diversification strategies on earnings management in the banking sector. Specifically, it provides new evidence that diversification strategies increase LLP-based earnings management, both directly and indirectly, through bank risk.

This chapter analyzes how the industry environment determines corporate dividend decisions. First, common participants in the product market are competitors, suppliers, and customers. These micro-stakeholders create competitive pressures on firms and thus affect their current and future performance. Competitors influence dividend decisions through three mechanisms, namely predation threat, corporate governance, and imitation. Predation threat reduces firms' incentives to pay dividends when facing high rivalry. Competition helps firms improve corporate governance. However, strong corporate governance may increase or decrease dividend payments since dividend policy may be the outcome of strong corporate governance or the substitute for weak corporate governance, respectively. Besides, firms tend to imitate their industry peers in dividend policy. Second, as a financial policy, dividend policy is also affected by participants in the financial market like investors, creditors, and auditors. These financial stakeholders' behaviors are important to stock prices. Due to the agency problem, creditors have high incentives to restrict firm's dividend payments in order to protect their benefits. On the other hand, creditors are effective external monitors who help firms improve their corporate governance. Outside investors affect corporate dividend policy through their valuation. Firms pay more dividends if investors prefer dividends to capital gains. Auditors play the role of a third-party monitor, and thus, they help firms reduce managers' expropriation of shareholders and improve the quality of accounting information. Furthermore, we also investigate dividend policy of regulated industries in both financial sector (banking, insurance, and real estate) and utilities sector (energy, telecommunications, and transportation).

The paper models the financial interconnectedness and systemic risk of shadow banks using Granger-causal network-based measures and takes the Indian shadow bank crisis of 2018–2019 as a systemic event.

The paper employs pairwise linear Granger-causality tests adjusted for heteroskedasticity and return autocorrelation on a rolling window of weekly returns data of 52 financial institutions from 2016 to 2019 to construct network-based measures and calculate network centrality. The Granger-causal network-based measure ranking of financial institutions in the pre-crisis period (explanatory variable) is rank-regressed with the ranking of financial institutions based on maximum percentage loss suffered by them during the crises period (dependent variable).

The empirical result demonstrated that the shadow bank complex network during the crisis is denser, more interconnected and more correlated than the tranquil period. The closeness, eigenvector, and PageRank centrality established the systemic risk transmitter and receiver roles of institutions. The financial institutions that are more central and hold prestigious positions due to their incoming links suffered maximum loss. The shadow bank network also showed small-world phenomena similar to social networks. Granger-causal network-based measures have out-of-sample predictive properties and can predict the systemic risk of financial institutions.

The study considers only the publicly listed financial institutions. Also, the proposed measures are susceptible to the size of the rolling window, frequency of return and significance level of Granger-causality tests.

Supervisors and financial regulators can use the proposed measures to monitor the development of systemic risk and swiftly identify and isolate contagious financial institutions in the event of a crisis. Also, it is helpful to policymakers and researchers of an emerging economy where bilateral exposures' data between financial institutions are often not present in the public domain, plus there is a gap or delay in financial reporting.

The paper is one of the first to study systemic risk of shadow banks using a financial network comprising of commercial banks and mutual funds. It is also the first one to study systemic risk of Indian shadow banks.

This study aims to demonstrate and measure the impact of liquidity shocks on a bank’s solvency, especially when the bank does not hold sufficient liquid assets.

The proposed model is an extension of Merton’s (1974) model. It assesses the bank’s probability of default over one or two (short) periods relative to liquidity shocks. The shock scenarios are materialised by different net demands for the withdrawal of funds (NDWF) and may lead the bank to sell illiquid assets at a depreciated value. We consider the possibility of second-round effects at the beginning of the second period by introducing the probability of their occurrence. This probability depends on the proportion of illiquid assets put up for sale following the initial shock in different dependency scenarios.

We observe a positive relationship between the initial NDWF and the bank’s probability of default (particularly over the second period, which is conditional on the second-round effects). However, this relationship is not linear, and a significant proportion of liquid assets makes it possible to attenuate or even eliminate the effects of shock scenarios on bank solvency.

The proposed model enables banks to determine the necessary level of liquid assets, allowing them to resist (i.e. remain solvent) different liquidity shock scenarios for both periods (including eventual second-round effects) under the assumptions considered. Therefore, it can contribute to complementing or improving current internal liquidity adequacy assessment processes (ILAAPs).

The proposed microprudential approach consists of measuring the impact of liquidity risk on a bank’s solvency, complementing the current prudential framework in which these two topics are treated separately. It also complements the existing literature, in which the impact of liquidity risk on solvency risk has not been sufficiently studied. Finally, our model allows banks to manage liquidity using a solvency approach.