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Book part
Publication date: 29 December 2016

Alberto Burchi and Duccio Martelli

The recent 2008–2009 financial crisis has led international financial authorities to review the existing regulation; the Basel Committee on Banking Supervision has been…

Abstract

The recent 2008–2009 financial crisis has led international financial authorities to review the existing regulation; the Basel Committee on Banking Supervision has been thus induced to review the pillars of the Basel Accord (Basel II) in order to strengthen the risk coverage of capital framework (Basel 2.5 and III). These reforms will help to raise capital requirements for the trading book, which represents a major source of losses for internationally financial institutions, especially during crisis periods. In particular, the Committee has introduced a Stressed Value-at-Risk (SVaR) capital requirement, as a new methodology to evaluate market risk.

This chapter aims to shed some lights on the issues major banks have to face when calculating SVaR in the context of emerging markets, pointing out the differences in adopting an estimation model with respect to another one. Our results show a considerable increase in capital requirements especially when new rules are applied to financial markets with high-risk parameters, such as emerging markets are. The increased cost due to higher capital requirements could be a disincentive to investment in markets with higher risk profiles than the developed markets, taking also into account that diversification benefits deriving from investing in emerging economies have shown a decrease over time. The reduction of institutional investors can thus represent a brake on the process of innovation and evolution of emerging markets.

Details

Risk Management in Emerging Markets
Type: Book
ISBN: 978-1-78635-451-8

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Book part
Publication date: 4 December 2018

Indranarain Ramlall

Abstract

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

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Article
Publication date: 8 July 2014

Lukasz Prorokowski and Hubert Prorokowski

This paper, based on case-studies with five universal banks from Europe and North America, aims to investigate which types of comprehensive risk measure (CRM) models are…

Abstract

Purpose

This paper, based on case-studies with five universal banks from Europe and North America, aims to investigate which types of comprehensive risk measure (CRM) models are being used in the industry, the challenges being faced in implementation and how they are being currently rectified. Undoubtedly, CRM remains the most challenging and ambiguous measure applied to the correlation trading book. The turmoil surrounding the new regulatory framework boils down to the Basel Committee implementing a range of capital charges for market risk to promote “safer” banking in times of financial crisis. This report discusses current issues faced by global banks when complying with the complex set of financial rules imposed by Basel 2.5.

Design/methodology/approach

The current research project is based on in-depth, semi-structured interviews with five universal banks to explore the strides major banks are taking to introduce CRM modelling while complying with the new regulatory requirements.

Findings

There are three measures introduced by the Basel Committee to serve as capital charges for market risk: incremental risk charge; stressed value at risk and CRM. All of these regulatory-driven measures have met with strong criticism for their cumbersome nature and extremely high capital charges. Furthermore, with banks facing imminent implementation deadlines, all challenges surrounding CRM must be rectified. This paper provides some practical insights into how banks are finalising the new methodologies to comply with Basel 2.5.

Originality/value

The introduction of CRM and regulatory approval of new internal market risk models under Basel 2.5 has exerted strong pressure on global banks. The issues and computational challenges surrounding the implementation of CRM methodologies are currently fiercely debated among the affected banks. With little guidance from regulators, it remains very unclear how to implement, calculate and validate CRM in practice. To this end, a need for a study that sheds some light on practices with developing and computing CRM emerged. On submitting this paper to the journal, we have received news that JP Morgan is to pay four regulators $920 million as a result of a CRM-related scandal.

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Journal of Financial Regulation and Compliance, vol. 22 no. 3
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 13 July 2015

Mika Veli-Pekka Viljanen

– The purpose of this paper is to aid understanding of the changes in Basel Committee on Banking Supervision (BCBS) regulatory strategies after the global financial crisis.

Abstract

Purpose

The purpose of this paper is to aid understanding of the changes in Basel Committee on Banking Supervision (BCBS) regulatory strategies after the global financial crisis.

Design/methodology/approach

The author uses the credit valuation adjustment (CVA) charge reform as a test case for inquiring whether BCBS has departed from its pre-crisis facilitative regulatory strategy path. The regulatory strategy of the CVA charge is discussed.

Findings

The charge exhibits a new regulatory strategy that BCBS has adopted. It seeks to manipulate market structures by imposing risk-insensitive capital charge methodologies.

Originality/value

The paper offers a new heuristic to analyse regulatory initiatives and their significance. The CVA charge has not been subject to a regulatory theory-based analysis in prior literature.

Details

Journal of Financial Regulation and Compliance, vol. 23 no. 3
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 9 May 2016

Silvio Tarca and Marek Rutkowski

This study aims to render a fundamental assessment of the Basel II internal ratings-based (IRB) approach by taking readings of the Australian banking sector since the…

Abstract

Purpose

This study aims to render a fundamental assessment of the Basel II internal ratings-based (IRB) approach by taking readings of the Australian banking sector since the implementation of Basel II and comparing them with signals from macroeconomic indicators, financial statistics and external credit ratings. The IRB approach to capital adequacy for credit risk, which implements an asymptotic single risk factor (ASRF) model, plays an important role in protecting the Australian banking sector against insolvency.

Design/methodology/approach

Realisations of the single systematic risk factor, interpreted as describing the prevailing state of the Australian economy, are recovered from the ASRF model and compared with macroeconomic indicators. Similarly, estimates of distance-to-default, reflecting the capacity of the Australian banking sector to absorb credit losses, are recovered from the ASRF model and compared with financial statistics and external credit ratings. With the implementation of Basel II preceding the time when the effect of the financial crisis of 2007-2009 was most acutely felt, the authors measure the impact of the crisis on the Australian banking sector.

Findings

Measurements from the ASRF model find general agreement with signals from macroeconomic indicators, financial statistics and external credit ratings. This leads to a favourable assessment of the ASRF model for the purposes of capital allocation, performance attribution and risk monitoring. The empirical analysis used in this paper reveals that the recent crisis imparted a mild stress on the Australian banking sector.

Research limitations/implications

Given the range of economic conditions, from mild contraction to moderate expansion, experienced in Australia since the implementation of Basel II, the authors cannot attest to the validity of the model specification of the IRB approach for its intended purpose of solvency assessment.

Originality/value

Access to internal bank data collected by the prudential regulator distinguishes this paper from other empirical studies on the IRB approach and financial crisis of 2007-2009. The authors are not the first to attempt to measure the effects of the recent crisis, but they believe that they are the first to do so using regulatory data.

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Article
Publication date: 4 November 2014

Lukasz Prorokowski and Hubert Prorokowski

The purpose of this paper is to outline how banks are coping with the new regulatory challenges posed by stressed value at risk (SVaR). The Basel Committee has introduced…

Abstract

Purpose

The purpose of this paper is to outline how banks are coping with the new regulatory challenges posed by stressed value at risk (SVaR). The Basel Committee has introduced three measures of capital charges for market risk: incremental risk charge (IRC), SVaR and comprehensive risk measure (CRM). This paper is designed to analyse the methodologies for SVaR deployed at different banks to highlight the SVaR-related challenges stemming from complying with Basel 2.5. This revised market risk framework comes into force in Europe in 2012. Among the wide range of changes is the requirement for banks to calculate SVaR at a 99 per cent confidence interval over a period of significant stress.

Design/methodology/approach

The current research project is based on in-depth, semi-structured interviews with nine universal banks and one financial services company to explore the strides major banks are taking to implement SVaR methodologies while complying with Basel 2.5.

Findings

This paper focuses on strengths and weaknesses of the SVaR approach while reviewing peer practices of implementing SVaR modelling. Interestingly, the surveyed banks have not indicated significant challenges associated with implementation of SVaR, and the reported problems boil down to dealing with the poor quality of market data and, as in cases of IRC and CRM, the lack of regulatory guidance. As far as peer practices of implementing SVaR modelling are concerned, the majority of the surveyed banks utilise historical simulations and apply both the absolute and relative measures of volatility for different risk factors.

Originality/value

The academic studies that explicitly analyse challenges associated with implementing the stressed version of VaR are scarce. Filling in the gap in the existing academic literature, this paper aims to shed some explanatory light on the issues major banks are facing when calculating SVaR. In doing so, this study adequately bridges theory and practice by contributing to the fierce debate on compliance with Basel 2.5.

Details

Journal of Financial Regulation and Compliance, vol. 22 no. 4
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 12 June 2019

Quang Thi Thieu Nguyen

This paper aims to propose the directions for potential reforms for the capital regulation. The focus is on the simplicity and comparability of the regulation, in addition…

Abstract

Purpose

This paper aims to propose the directions for potential reforms for the capital regulation. The focus is on the simplicity and comparability of the regulation, in addition to its risk sensitivity.

Design/methodology/approach

The author reviews the development of the Basel standards and identify the existing issues. On this basis, the recommendations are suggested.

Findings

The paper found that the capital regulation has become so complexed that it undermines its own efficiency in promoting the safety and soundness of the banking system. In addition, the current framework prevents a comparison of capital ratios across countries and over time. This discourages the market participants to supervise the bank’s operations. Therefore, there are still a need for the capital regulation reform.

Practical implications

By making the regulation simpler while ensuring the credit sensitivity, the market participants can play the most of their role and support the regulators in supervising banks.

Originality/value

The directions for the revised framework would be useful for the Basel Committee and central bank governors in designing an effective mechanism to supervise and discipline banks.

Details

Journal of Financial Economic Policy, vol. 11 no. 4
Type: Research Article
ISSN: 1757-6385

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Article
Publication date: 7 April 2015

Kimie Harada, Takeo Hoshi, Masami Imai, Satoshi Koibuchi and Ayako Yasuda

This paper aims to understand Japan’s financial regulatory responses after the global financial crisis and recession. Japan’s post-crisis reactions show two seemingly…

Abstract

Purpose

This paper aims to understand Japan’s financial regulatory responses after the global financial crisis and recession. Japan’s post-crisis reactions show two seemingly opposing trends: collaboration with international organizations to strengthen the regulation to maintain financial stability, and regulatory forbearance for the banks with troubled small and medium enterprise [SME] borrowers. The paper evaluates the responses by the Japanese financial regulators in five areas (Basel III, stress tests, over-the-counter [OTC] derivatives regulation, recovery and resolution planning and banking policy for SME lending) and concludes that the effectiveness of the new regulations for financial stability critically depends on the willingness of the regulators to use the new tools.

Design/methodology/approach

This report evaluates the post-crisis responses by the Japanese financial authorities in five dimensions (Basel III, stress tests, OTC derivatives regulations, recovery and resolution planning and bank supervision).

Findings

The effectiveness of the new regulations for financial stability critically depends on the willingness of the regulators to use the new tools.

Originality/value

The paper is the first attempt to evaluate the financial regulatory trends in Japan after the global financial crisis.

Details

Journal of Financial Economic Policy, vol. 7 no. 1
Type: Research Article
ISSN: 1757-6385

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Article
Publication date: 11 October 2019

Aysa Siddika and Razali Haron

This paper aims to examine the impact of capital regulation, ownership structure and the degree of ownership concentration on the risk of commercial banks.

Abstract

Purpose

This paper aims to examine the impact of capital regulation, ownership structure and the degree of ownership concentration on the risk of commercial banks.

Design/methodology/approach

This study uses a sample of 565 commercial banks from 52 countries over the period of 2011-2015. A dynamic panel data model estimation using the maximum likelihood with structural equation modelling (SEM) was followed considering the panel nature of this study.

Findings

The study found that the increase of capital ratio decreases bank risk and the regulatory pressure increases the risk-taking of the bank. No statistically significant relationship between banks’ ownership structure and risk-taking was found. The concentration of ownership was found negatively associated with bank risk. Finally, the study found that in the long term, bank increases the capital level that decreases the default risk.

Originality/value

This study presents an empirical analysis on the global banking system focusing on the Basel Committee member and non-member countries that reflect the implementation of Basel II and Basel III. Therefore, it helps fill the gap in the banking literature on the effect of recent changes in the capital regulation on bank risk. Maximum likelihood with SEM addresses the issue of endogeneity, efficiency and time-invariant variables. Moreover, this study measures the risk by different proxy variables that address total, default and liquidity risks of the banks. Examining from a different perspective of risk makes the study more robust.

Details

Journal of Financial Regulation and Compliance, vol. 28 no. 1
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 11 November 2013

Kersten Kellermann and Carsten Schlag

In September 2009, G20 representatives called for introducing a minimum leverage ratio as an instrument of financial regulation. It is supposed to assure a certain degree…

Abstract

Purpose

In September 2009, G20 representatives called for introducing a minimum leverage ratio as an instrument of financial regulation. It is supposed to assure a certain degree of core capital for banks, independent of the controversial procedures used to assess risk. The paper aims to discuss these issues.

Design/methodology/approach

This paper discusses the interaction and tensions between the leverage ratio and risk-based capital requirements, using financial data of the Swiss systemically important bank United Bank of Switzerland.

Findings

It can be shown that the leverage ratio potentially undermines risk weighting such that banks feel encouraged to take greater risks.

Originality/value

The paper proposes an alternative instrument that is conceived as a base risk weight and functions as a backstop. It ensures a minimum core capital ratio, based on unweighted total exposure by ensuring a minimum ratio of risk-weighted to total assets for all banks. The proposed measure is easy to compute like the leverage ratio, and also like the latter, it is independent of risk weighting. Yet, its primary advantage is that it does not supersede risk-based capital adequacy targets, but rather supplements them.

Details

Journal of Financial Regulation and Compliance, vol. 21 no. 4
Type: Research Article
ISSN: 1358-1988

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