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1 – 10 of over 4000Juhi Gupta and Smita Kashiramka
Systemic risk has been a cause of concern for the bank regulatory authorities worldwide since the global financial crisis. This study aims to identify systemically important banks…
Abstract
Purpose
Systemic risk has been a cause of concern for the bank regulatory authorities worldwide since the global financial crisis. This study aims to identify systemically important banks (SIBs) in India by using SRISK to measure the expected capital shortfall of banks in a systemic event. The sample size comprises a balanced data set of 31 listed Indian commercial banks from 2006 to 2019.
Design/methodology/approach
In this study, the authors have used SRISK to identify banks that have a maximum contribution to the systemic risk of the Indian banking sector. Leverage, size and long-run marginal expected shortfall (LRMES) are used to compute SRISK. Forward-looking LRMES is computed using the GJR-GARCH-dynamic conditional correlation methodology for early prediction of a bank’s contribution to systemic risk.
Findings
This study finds that public sector banks are more vulnerable to macroeconomic shocks owing to their capital inadequacy vis-à-vis the private sector banks. This study also emphasizes that size should not be used as a standalone factor to assess the systemic importance of a bank.
Originality/value
Systemic risk has attracted a lot of research interest; however, it is largely limited to the developed nations. This paper fills an important research gap in banking literature about the identification of SIBs in an emerging economy, India. As SRISK uses both balance sheet and market-based information, it can be used to complement the existing methodology used by the Reserve Bank of India to identify SIBs.
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Douglas Snow and Gerasimos Gianakis
This article summarizes findings of a survey designed to obtain perceptions of municipal finance officers in Massachusetts regarding stabilization fund management strategies…
Abstract
This article summarizes findings of a survey designed to obtain perceptions of municipal finance officers in Massachusetts regarding stabilization fund management strategies. Responses indicate that stabilization funds have become embedded components of municipal revenue management strategies, that municipalities are reluctant to tap stabilization fund balances, and that chief financial officers perceive these balances to be important to bond ratings. Some finance officers report active use of stabilization funds, generally because their communities either rely on the stabilization fund to finance capital projects or because they are currently vulnerable to revenue emergencies. A small number of communities report that they rely on voters to override statutory property tax levy limits, while maintaining stabilization fund balances above the statewide median.
Thomas Gehrig and Maria Chiara Iannino
This paper aims to analyze systemic risk in and the effect of capital regulation on the European insurance sector. In particular, the evolution of an exposure measure (SRISK) and…
Abstract
Purpose
This paper aims to analyze systemic risk in and the effect of capital regulation on the European insurance sector. In particular, the evolution of an exposure measure (SRISK) and a contribution measure (Delta CoVaR) are analyzed from 1985 to 2016.
Design/methodology/approach
With the help of multivariate regressions, the main drivers of systemic risk are identified.
Findings
The paper finds an increasing degree of interconnectedness between banks and insurance that correlates with systemic risk exposure. Interconnectedness peaks during periods of crisis but has a long-term influence also during normal times. Moreover, the paper finds that the insurance sector was greatly affected by spillovers from the process of capital regulation in banking. While European insurance companies initially at the start of the Basel process of capital regulation were well capitalized according to the SRISK measure, they started to become capital deficient after the implementation of the model-based approach in banking with increasing speed thereafter.
Practical implications
These findings are highly relevant for the ongoing global process of capital regulation in the insurance sector and potential reforms of Solvency II. Systemic risk is a leading threat to the stability of the global financial system and keeping it under control is a main challenge for policymakers and supervisors.
Originality/value
This paper provides novel tools for supervisors to monitor risk exposures in the insurance sector while taking into account systemic feedback from the financial system and the banking sector in particular. These tools also allow an evidence-based policy evaluation of regulatory measures such as Solvency II.
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Hato Schmeiser, Caroline Siegel and Joël Wagner
The purpose of this paper is to study the risk of misspecifying solvency models for insurance companies.
Abstract
Purpose
The purpose of this paper is to study the risk of misspecifying solvency models for insurance companies.
Design/methodology/approach
Based on a basic solvency model, the authors examine the sensitivity of different risk measures with respect to model misspecification. An analysis considers the effects of introducing stochastic jumps and linear, as well as non‐linear dependencies into the basic setting on the solvency capital requirements, shortfall probability and expected policyholder deficit. Additionally, the authors take a regulatory view and consider the degree to which the deviations in risk measures, due to the different model specifications, can be diminished by means of requiring interim financial reports.
Findings
The simulation results suggest that the sensitivity of solvency capital as a risk measure – as it is in regulatory practice – underestimates the actual misspecification risk that policyholders are exposed to. It is also found that semi‐annual mandatory interim reports can already reduce the model uncertainty faced by a regulator, significantly. This has important implications for the design of risk‐based capital standards and the implementation of internal solvency models.
Originality/value
The results from the Monte Carlo simulation show that changes in the specification of a solvency model have a much greater impact on shortfall probabilities and expected policyholder deficits than they have on capital requirements. The shortfall risk measures react much more sensitively to small changes in the model assumptions, than the capital requirements. This leads us to the conclusion that regulators should not solely rely on capital requirements to monitor the solvency situation of an insurer, but should additionally consider shortfall risk measures. More precisely, an analysis of model risk focusing on the sensitivity of capital requirements will typically underestimate the relevant risk of model misspecification from a policyholder's perspective. Finally, the simulation results suggest that mandatory interim reports on the solvency and financial situation of an insurance company are a powerful tool in order to reduce the model uncertainty faced by regulators.
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The authors provide a comprehensive study on systemic risk of the banking sectors in the ASEAN-6 countries. In particular, they investigate the systemic risk dynamics and…
Abstract
Purpose
The authors provide a comprehensive study on systemic risk of the banking sectors in the ASEAN-6 countries. In particular, they investigate the systemic risk dynamics and determinants of 49 listed banks in the region over the 2000–2018 period.
Design/methodology/approach
The authors employ the market-based SRISK measure of Brownlees and Engle (2017) to investigate the systemic risk of the ASEAN-6's banking sectors.
Findings
The authors find that the regional systemic risk fluctuates significantly and currently at par or higher level than that of the recent global financial crisis. Systemic risk is generally associated with banks that have bigger size, more traditional business models, lower quality in their loan portfolios, less profitable and with lower market-to-book values. However, these relationships vary significantly between ASEAN countries.
Research limitations/implications
The research focuses on the systemic risk of ASEAN-6 countries. Therefore, the research results may lack generalizability to other countries.
Practical implications
The authors’ empirical evidence advocates the use of capital surcharges on the systemically important financial institutions. Although the region has been pushing to higher financial integration in recent years, the authors encourage the regional regulators to account for the idiosyncratic characteristics of their banking sectors in designing effective macroprudential policy to contain systemic risk.
Originality/value
This paper provides the first study on the systemic risk of the ASEAN-6 region. The empirical evidence on the drivers of systemic risk would be of interest to the regional regulators.
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Shatha Qamhieh Hashem and Islam Abdeljawad
This chapter investigates the presence of a difference in the systemic risk level between Islamic and conventional banks in Bangladesh. The authors compare systemic resilience of…
Abstract
This chapter investigates the presence of a difference in the systemic risk level between Islamic and conventional banks in Bangladesh. The authors compare systemic resilience of three types of banks: fully fledged Islamic banks, purely conventional banks (CB), and CB with Islamic windows. The authors use the market-based systemic risk measures of marginal expected shortfall and systemic risk to identify which type is more vulnerable to a systemic event. The authors also use ΔCoVaR to identify which type contributes more to a systemic event. Using a sample of observations on 27 publicly traded banks operating over the 2005–2014 period, the authors find that CB is the least resilient sector to a systemic event, and is the one that has the highest contribution to systemic risk during crisis times.
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Mohamad Hassan and Evangelos Giouvris
The purpose of this paper is to examine the effects of bank mergers on systemic and systematic risks on the relative merits of product and market diversification strategies. It…
Abstract
Purpose
The purpose of this paper is to examine the effects of bank mergers on systemic and systematic risks on the relative merits of product and market diversification strategies. It also observes determinants of M&A deals criteria, product and market diversification positioning, crisis threshold and other regulatory and market factors.
Design/methodology/approach
This research examines the impact and association between merger announcements and regulatory reforms at bank and system levels by investigating the impact of various bank consolidation strategies on firms’ risks. We estimate beta(s) as an index of financial institutions’ systematic risk. We then develop an index of the estimated equity value loss as the long-rum marginal expected shortfall (LRMES). LRMES contributes to compute systemic risk (SRISK) contribution of these firms, which is the capital that a firm is expected to need if we have another financial crisis.
Findings
Large acquiring banks decrease systemic risk contribution in cross-border M&As with a non-bank financial institution, and witness profitability (ROA) gains, supporting geographic diversification stability. Capital requirements, activity restrictions and bank concentration increase systemic risk contribution in national mergers. Bank mergers with investment FIs targets enhance productivity but impair technical efficiency, contrary to bank-real estate deals where technical efficiency change accompanied lower systemic risk contribution.
Practical implications
Financial institutions are recommended to avoid trapped capital and liquidity by efficiently using local balance sheet and strengthening them via implementing models that clearly set diversification and netting benefits to determine capital reserves and to drive capital efficiency through the clarity on product–activity–geography diversification and focus. This contributes to successful ringfencing, decreases compliance costs and maximises returns and minimises several risks including systemic risk.
Social implications
Policy implications: the adversative properties of bank mergers in respect of systemic risk require strict and innovative monitoring of bank mergers from the bidding level by both acquirers and targets and regulators and competition supervisory bodies. Moreover, emphasis on regulators/governments intervention and role, as it provides a stabilising factor of the markets and consecutively lower systemic risk even if the systematic idiosyncratic risk contribution was significant. However, such roles have to be well planned and scaled to avoid providing motives for banks to seek too-big-too-fail or too-big-to-discipline status.
Originality/value
This research contributes to the renewing regulatory debate on banks sustainable structures by examining the risk effect of bank diversification versus focus. The authors aim to address the multidimensional impacts and risks inherent to M&A deals, by examining the extent of the interconnectedness of M&A and its implications within and beyond the banking sector.
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Financial institutions have been subject to minimum capital requirements for considerable time while other companies do not face any such regulation. This paper investigates the…
Abstract
Purpose
Financial institutions have been subject to minimum capital requirements for considerable time while other companies do not face any such regulation. This paper investigates the capital requirements of companies and how it should relate to the assets of a company.
Design/methodology/approach
The theoretical approach in this paper integrates aspects of liquidity, asset characteristics and capital requirements into a single setting to address the problem of capital requirements for non‐financial companies.
Findings
The paper develops a framework in which the impact losses have on the future performance of the company are used to develop three categories of capital and suggest a measure for each category. The paper then relates these categories to properties of the assets the capital should be invested in, which include aspects of liquidity as well as the source of this capital. It is finally pointed out how cost considerations can be used to obtain the optimal asset and capital structure of a company.
Research limitations/implications
This paper presents the conceptual basis for the determination of capital requirements of companies and future research is needed to formalize the ideas presented here more thoroughly and gain additional insights into the relationship to the asset structure.
Practical implications
The results of this paper can be used by companies as a first guide towards deciding on their capital requirements, taking into account the properties of the assets they invest their capital in and how to optimize their capital structure.
Originality/value
The paper provides a first insight into the relationship between capital requirements, asset structure, and risks for non‐financial companies.
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The world economy has experienced several economic downturns, and each phase emphasised that no industry is immune to inappropriate risk-management practices. Against the backdrop…
Abstract
Purpose
The world economy has experienced several economic downturns, and each phase emphasised that no industry is immune to inappropriate risk-management practices. Against the backdrop of the recent COVID-19 pandemic, which had far more effects than a financial crisis, the existing paper reviewed the state of current research in the realm of corporate governance and risk-management practices.
Design/methodology/approach
This study rigorously followed a systematic approach in identifying, selecting and critically synthesising the existing literature on corporate governance and risk management. The review was carried out on the Web of Science and Scopus database until December 31, 2022. In total, 72 research works were examined and reviewed.
Findings
This systematic literature review showed that companies with strong governance mechanisms are less exposed to corporate risks. Several attributes, such as higher institutional ownership stakes, concentrated family ownership structures, lower CEO compensation and duality, higher presence of females in the management, better board dynamics in terms of independent boards and gender diversity are all strong mechanisms for mitigating risk. Additionally, socially responsible companies are better positioned to mitigate corporate risks. Furthermore, several themes emphasising the governance risk link have been identified to understand this domain further.
Originality/value
By analysing and synthesising existing corporate governance and risk-management themes, this study ascertained various research gaps that can be addressed in future studies. Furthermore, drawing on this paper's essential cues, researchers can significantly differentiate their work from existing ones in the field.
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