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1 – 10 of 277
Open Access
Article
Publication date: 25 September 2023

Wassim Ben Ayed and Rim Ben Hassen

This research aims to evaluate the accuracy of several Value-at-Risk (VaR) approaches for determining the Minimum Capital Requirement (MCR) for Islamic stock markets during the…

Abstract

Purpose

This research aims to evaluate the accuracy of several Value-at-Risk (VaR) approaches for determining the Minimum Capital Requirement (MCR) for Islamic stock markets during the pandemic health crisis.

Design/methodology/approach

This research evaluates the performance of numerous VaR models for computing the MCR for market risk in compliance with the Basel II and Basel II.5 guidelines for ten Islamic indices. Five models were applied—namely the RiskMetrics, Generalized Autoregressive Conditional Heteroskedasticity, denoted (GARCH), fractional integrated GARCH, denoted (FIGARCH), and SPLINE-GARCH approaches—under three innovations (normal (N), Student (St) and skewed-Student (Sk-t) and the extreme value theory (EVT).

Findings

The main findings of this empirical study reveal that (1) extreme value theory performs better for most indices during the market crisis and (2) VaR models under a normal distribution provide quite poor performance than models with fat-tailed innovations in terms of risk estimation.

Research limitations/implications

Since the world is now undergoing the third wave of the COVID-19 pandemic, this study will not be able to assess performance of VaR models during the fourth wave of COVID-19.

Practical implications

The results suggest that the Islamic Financial Services Board (IFSB) should enhance market discipline mechanisms, while central banks and national authorities should harmonize their regulatory frameworks in line with Basel/IFSB reform agenda.

Originality/value

Previous studies focused on evaluating market risk models using non-Islamic indexes. However, this research uses the Islamic indexes to analyze the VaR forecasting models. Besides, they tested the accuracy of VaR models based on traditional GARCH models, whereas the authors introduce the Spline GARCH developed by Engle and Rangel (2008). Finally, most studies have focus on the period of 2007–2008 financial crisis, while the authors investigate the issue of market risk quantification for several Islamic market equity during the sanitary crisis of COVID-19.

Details

PSU Research Review, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2399-1747

Keywords

Open Access
Article
Publication date: 27 April 2023

Carlos Alexander Grajales and Santiago Medina Hurtado

This paper measures different market risk impacts on options portfolios under the new Fundamental Review of the Trading Book (FRTB) regulation, issued in Basel and coming into…

1496

Abstract

Purpose

This paper measures different market risk impacts on options portfolios under the new Fundamental Review of the Trading Book (FRTB) regulation, issued in Basel and coming into effect in 2023.

Design/methodology/approach

This paper first suggests an algorithm for implementing the FRTB standardised approach via the sensitivities-based method to estimate a portfolio's risk capital and presents an illustration applied to an option position. Second, it proposes a methodology to estimate the expected shortfall in options portfolios from the FRTB internal models approach. In this regard, an application is developed to measure expected shortfall (ES) and value at risk (VaR) impacts under FRTB versus conventional VaR in a currency option position by considering stress scenarios from the 2007–9 and 2020–1 crises and back-testing procedures.

Findings

The suggested algorithm satisfactorily captures impacts via the sensitivities-based method, and higher risk capital demands are expected for emerging economies. Also, the planned FRTB methodology to measure ES and VaR is appropriate; in particular, historical metrics perform well. Astonishingly, their revealed impacts are more significant under the 2020–1 pandemic crisis than the 2007–9 financial crisis.

Originality/value

The proposals developed weave a communication bridge between the standardised and internal approaches of FRTB regulation, which can be scaled up technologically and institutionally.

Details

Journal of Economics, Finance and Administrative Science, vol. 28 no. 55
Type: Research Article
ISSN: 2218-0648

Keywords

Open Access
Article
Publication date: 14 July 2020

Mete Feridun and Alper Özün

Introducing radical changes to the methodologies for the determination of capital requirements, the final stage of the Basel III standards, which is referred to as “Basel IV” by…

12309

Abstract

Purpose

Introducing radical changes to the methodologies for the determination of capital requirements, the final stage of the Basel III standards, which is referred to as “Basel IV” by the industry, will be a significant challenge for the global banking sector. This article reviews the main components of the new framework, analyses its ongoing implementation in the European Union and discusses its potential impact on banks, putting forward policy recommendations.

Design/methodology/approach

This article uses primary sources such as the publications by the Basel Committee for Banking Supervision and the European Commission. It also reviews the secondary sources, including both academic articles and analyses by various stakeholders. However, this article does not undertake any empirical analysis.

Findings

This article discusses that Basel IV will introduce strategic, operational and regulatory challenges for banks in scope. It also identifies a number of areas which are subject to further debate in the European Union such as the enhanced due diligence requirements under the new credit risk framework; governance, reporting and control rules under the operational risk framework; exemptions for certain derivative transactions under the credit valuation adjustment framework and the level of application of the capital floors within banking groups. This article concludes that the global implementation of the reforms by all jurisdictions and transposition into national banking laws concurrently with the European Union in line with the Basel Committee's implementation timeline is important from a financial stability standpoint.

Originality/value

The article presents an up-to-date and comprehensive review of the practical implications of Basel IV standards. It analyses the implementation of the standards in the case of the European Union, reviews the potential policy implications and presents recommendations for risk management practitioners.

Details

Journal of Capital Markets Studies, vol. 4 no. 1
Type: Research Article
ISSN: 2514-4774

Keywords

Open Access
Article
Publication date: 18 October 2022

MD. Rasel Mia

This study aims to examine the impact of market competition, and capital regulation on the cost of financial intermediation of banks of the Bangladesh banking industry.

1156

Abstract

Purpose

This study aims to examine the impact of market competition, and capital regulation on the cost of financial intermediation of banks of the Bangladesh banking industry.

Design/methodology/approach

This study has used a balanced panel dataset comprised of 340 firm-year observations for 34 commercial banks in the Bangladesh banking industry from 2011 to 2020. The Prais Winsten panel estimator has been used to assess the impact of market competition and capital regulation on the cost of financial intermediation of banks.

Findings

Based on the regression results, this study has documented that greater market competition results in a lower cost of financial intermediation for banks. Similarly, an increase in the regulatory capital of banks increases the cost of financial intermediation of banks. The main findings of this study are found robust by using alternative proxies for the cost of financial intermediation, market competition and capital regulation. The regression results also suggest that private commercial banks tend to have a higher cost of financial intermediation than state-owned commercial banks.

Research limitations/implications

The regulatory reforms should aim to foster sustainable and optimal market competition for the Bangladesh banking industry to regulate the market power of banks to reduce the cost of financial intermediation. The regulatory authority of Bangladesh should find the optimal policy measures for implementing the capital regulation in the banking industry which would reduce the cost of financial intermediation margin of banks.

Originality/value

Unlike previous studies which have used structural market competition measures, this study has used non-structural market competition measures to assess the relationship between market competition and cost of financial intermediation in the Bangladesh banking industry.

Details

Asian Journal of Economics and Banking, vol. 7 no. 2
Type: Research Article
ISSN: 2615-9821

Keywords

Open Access
Article
Publication date: 10 February 2022

Graça Azevedo, Jonas Oliveira, Luiza Sousa and Maria Fátima Ribeiro Borges

The purpose of this paper to analyze the risk reporting practices and its determinants of commercial banks during the period of the adoption of the Basel II Accord in Portugal.

1187

Abstract

Purpose

The purpose of this paper to analyze the risk reporting practices and its determinants of commercial banks during the period of the adoption of the Basel II Accord in Portugal.

Design/methodology/approach

The paper conducts a content analysis of the risk and risk management sections included in the management reports and the notes of the annual reports of Portuguese commercial banks, for the years 2007, 2010 and 2013.

Findings

Findings show that theoretical frameworks underpinned in agency and legitimacy theories continue to provide valid explanations for risk reporting by Portuguese banks. More specifically, findings indicate that agency costs, public visibility and reputation are crucial drivers of risk reporting. Findings also indicate that younger banks with lower risk management skills use risk reporting either as an informational process or as a channel to manage organizational legitimacy.

Research limitations/implications

The content analysis does not allow readily for in-depth qualitative inquiry. The coding instrument is subject to coder bias. Information about risk can be provided in sources other than annual reports. Additionally, not all banks disclose information on corporate governance-related variables that could also influence risk reporting.

Originality/value

The current research setting has never been studied hitherto. In this sense, this study seems to be of great relevance given the scarcity of literature on the subject in Portugal.

Details

Asian Review of Accounting, vol. 30 no. 2
Type: Research Article
ISSN: 1321-7348

Keywords

Open Access
Article
Publication date: 23 January 2020

Kevin Nooree Kim and Ani L. Katchova

Following the recent global financial crisis, US regulatory agencies issued laws to implement the Basel III accords to ensure the resiliency of the US banking sector. Theories…

2401

Abstract

Purpose

Following the recent global financial crisis, US regulatory agencies issued laws to implement the Basel III accords to ensure the resiliency of the US banking sector. Theories predict that enhanced regulations may alter credit issuance of the regulated banks due to increased capital requirements, but the direction of changes might not be straightforward especially with respect to the agricultural loans. A decrease in credit availability from banks might pose a serious problem for farmers who rely on bank credit especially during economic recessions. The paper aims to discuss these issues.

Design/methodology/approach

In this study, the impact of Basel III regulatory framework implementation on agricultural lending in the USA is examined. Using panel data of FDIC-insured banks from 2008 to 2017, the agricultural loan volume and growth rates are examined for agricultural banks and all US banks.

Findings

The results show that agricultural loan growth rates have slowed down, but the amount of agricultural loan volume issuance still remained positive. More detailed examination finds that regulated agricultural banks have decreased both the agricultural loan volume and their loan exposure to the agricultural sector, showing a possible sign of credit crunch.

Originality/value

This study examines whether the implementation of the Basel III regulation has resulted in changes in agricultural loan issuance by US banks as predicted by the lending channel theory.

Details

Agricultural Finance Review, vol. 80 no. 3
Type: Research Article
ISSN: 0002-1466

Keywords

Open Access
Article
Publication date: 2 November 2018

Md. Tofael Hossain Majumder and Xiaojing Li

This study aims to investigate the impacts of bank capital requirements on the performance and risk of the emerging economy, i.e. Bangladeshi banking sector.

5269

Abstract

Purpose

This study aims to investigate the impacts of bank capital requirements on the performance and risk of the emerging economy, i.e. Bangladeshi banking sector.

Design/methodology/approach

The study applies an unbalanced panel data which comprises 30 banks yielding a total of 413 bank-year observations over the period 2000 to 2015.

Findings

Using generalized methods of moments, the empirical results of this research reveal that bank capital is positively and significantly impressive on bank performance, whereas negatively and significantly impact on risk. The study also finds the inverse relationship between risk and performance in both the performance and risk equations. The results also indicate that there is a persistence of performance and risk from one year to the next year.

Originality/value

This is the unique investigation on Bangladeshi bank industry that considers the simultaneous effect of bank capital requirements on risk and performance. Therefore, it is predicted that the empirical evidence of this research shows policy implications to the regulatory authority of Bangladeshi banking industry to determine relevant policies.

Details

Journal of Economics, Finance and Administrative Science, vol. 23 no. 46
Type: Research Article
ISSN: 2077-1886

Keywords

Open Access
Article
Publication date: 20 June 2022

Sopani Gondwe, Tendai Gwatidzo and Nyasha Mahonye

In a bid to enhance the stability of banks, supervisory authorities in sub-Sahara Africa (SSA) have also adopted international bank regulatory standards based on the Basel core…

1160

Abstract

Purpose

In a bid to enhance the stability of banks, supervisory authorities in sub-Sahara Africa (SSA) have also adopted international bank regulatory standards based on the Basel core principles. This paper aims to investigate the effectiveness of these regulations in mitigating Bank risk (instability) in SSA. The focus of empirical analysis is on examining the implications of four regulations (capital, activity restrictions, supervisory power and market discipline) on risk-taking behaviour of banks.

Design/methodology/approach

This paper uses two dimensions of financial stability in relation to two different sources of bank risk: solvency risk and liquidity risk. This paper uses information from the World Bank Regulatory Survey database to construct regulation indices on activity restrictions and the three regulations pertaining to the three pillars of Basel II, i.e. capital, supervisory power and market discipline. The paper then uses a two-step system generalised method of moments estimator to estimate the impact of each regulation on solvency and liquidity risk.

Findings

The overall results show that: regulations pertaining to capital (Pillar 1) and market discipline (Pillar 3) are effective in reducing solvency risk; and regulations pertaining to supervisory power (Pillar 2) and activity restrictions increase liquidity risk (i.e. reduce bank stability).

Research limitations/implications

Given some evidence from other studies which show that market power (competition) tends to condition the effect of regulations on bank stability, it would have been more informative to examine whether this is really the case in SSA, given the low levels of competition in some countries. This study is limited in this regard.

Practical implications

The key policy implications from the study findings are three-fold: bank supervisory agencies in SSA should prioritise the adoption of Pillars 1 and 3 of the Basel II framework as an effective policy response to enhance the stability of the banking system; a universal banking model is more stability enhancing; and there is a trade-off between stronger supervisory power and liquidity stability that needs to be properly managed every time regulatory agencies increase their supervisory mandate.

Originality/value

This paper provides new evidence on which Pillars of the Basel II regulatory framework are more effective in reducing bank risk in SSA. This paper also shows that the way regulations affect solvency risk is different from that of liquidity risk – an approach that allows for case specific policy interventions based on the type of bank risk under consideration. Ignoring this dual dimension of bank stability can thus lead to erroneous policy inferences.

Details

Journal of Financial Regulation and Compliance, vol. 31 no. 2
Type: Research Article
ISSN: 1358-1988

Keywords

Open Access
Article
Publication date: 31 May 2019

Jakob Thomä and Kyra Gibhardt

The European Parliament and Commission are considering introducing a green supporting factor (GSF) or brown penalty (BP) for capital reserve requirements. This paper aims to…

6322

Abstract

Purpose

The European Parliament and Commission are considering introducing a green supporting factor (GSF) or brown penalty (BP) for capital reserve requirements. This paper aims to estimate the potential impact such a policy intervention may have on both capital reserves of European banks and the cost and availability of capital to “green” and “brown” investments.

Design/methodology/approach

The paper draws on the existing empirical and theoretical literature on the impacts of changes to capital reserve requirements on the real economy. It applies these estimates on the particular policy intervention currently being discussed at EU level to estimate the potential range of impacts on the cost of capital – measured in basis points – and the availability of capital – measured in per cent changes to lending.

Findings

A GSF would have a limited effect on overall capital requirements of banks compared to a BP – given the larger universe of assets on which such a penalty would be applied. The estimated effect is a reduction in capital requirements associated with a GSF of around €3-4bn based on baseline “green” definitions. In terms of cost of capital, the paper estimates a reduction of 5 to 26 basis points for green projects (with inverse expected effects for a BP). In terms of availability of capital, analysing a BP suggests a potential reduction in lending to brown assets of up to 8 per cent.

Originality/value

The paper provides direct evidence, with the first quantitative analysis of the potential impact of the current policy proposition discussed at EU-level.

Details

Journal of Financial Regulation and Compliance, vol. 27 no. 3
Type: Research Article
ISSN: 1358-1988

Keywords

Open Access
Article
Publication date: 1 June 2021

Sarah Korein, Ahmed Abotalib, Mariusz Trojak and Heba Abou-El-Sood

This paper is motivated by the heated debates preceding the introduction of additional regulatory requirements of Basel III on capital conservation buffer (CCB) and regulatory…

1341

Abstract

Purpose

This paper is motivated by the heated debates preceding the introduction of additional regulatory requirements of Basel III on capital conservation buffer (CCB) and regulatory leverage (RLEV) in banks of emerging markets. The paper aims to examine which policy ratio can improve bank efficiency (BE), in one of the most resilient banking settings in the Middle East and North Africa (MENA) region.

Design/methodology/approach

The analysis is performed on a sample of 13 banks for the period 2010–2018 in Egypt and proceeds in two steps. In the first step, the data envelopment analysis model is used to derive bank-specific efficiency scores. In the second step, BE scores are regressed on the two types of regulatory capital and a set of control variables.

Findings

The paper is motivated by regulatory debates on the viability of RLEV and CCB in enhancing BE. The results show that higher RLEV and CCB are associated with a reduction in BE and that RLEV is highly associated with BE compared to CCB. Hence, results are relevant to policymakers in designing measures for improving BE in emerging markets.

Originality/value

The findings contribute to a small but growing stream of research on capital adequacy in emerging markets. This study provides results on the viability of risk-based vs non-risk-based capital requirements. The findings are also relevant to bank regulators in similar emerging market settings in their efforts to introduce and phase in minimum leverage requirements according to Basel III.

Details

Journal of Humanities and Applied Social Sciences, vol. 4 no. 4
Type: Research Article
ISSN:

Keywords

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