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Article
Publication date: 15 January 2018

Ahmed Mohamed Dahir, Fauziah Binti Mahat and Noor Azman Bin Ali

The purpose of this paper is to examine the effects of funding liquidity risk and liquidity risk on the bank risk-taking.

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1343

Abstract

Purpose

The purpose of this paper is to examine the effects of funding liquidity risk and liquidity risk on the bank risk-taking.

Design/methodology/approach

This study employs a system generalized method of moments (GMM) estimation technique and a sample of 57 banks operating in BRICS countries over the period from 2006 to 2015.

Findings

The results reveal that liquidity risk has a significant and negative effect on the bank risk-taking, indicating that a decrease in liquidity risk contributes to higher bank risk-taking. The study also reveals that funding liquidity risk has the substantial impact on bank risk-taking, suggesting lower funding liquidity risk results in higher bank risk-taking. These results are consistent with prior assumptions.

Research limitations/implications

The implications of this study highlight the fact that liquidity risk is a risk factor which drives the potential bank default, of which banks tend to take more risks when higher funding liquidity exists.

Practical implications

This study offers a number of valuable implications for the policy makers as well as practitioners. The policy makers should take into account better liquidity risk management framework aimed at preventing banks from taking excessive risks. Bank executives must pay more attention on how banks could hold more liquid securities and cash. Less risk-taking reduces higher borrowing costs undermining earnings through imposing taxes on corporate.

Originality/value

This work uncovered that liquidity risk per se is an important and previously unidentified risk factor, specifically its effects on bank risk-taking and contributes to the view in support of holding more liquid securities than the past.

Details

International Journal of Emerging Markets, vol. 13 no. 1
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 3 August 2015

Lixin Wu and Chonhong Li

The purpose of this paper is to provide a framework of replication pricing of derivatives and identify funding valuation adjustment (FVA) and credit valuation adjustments…

Abstract

Purpose

The purpose of this paper is to provide a framework of replication pricing of derivatives and identify funding valuation adjustment (FVA) and credit valuation adjustments (CVA) as price components.

Design/methodology/approach

The authors propose the notion of bilateral replication pricing. In the absence of funding cost, it reduces to unilateral replication pricing. The absence of funding costs, it introduces bid–ask spreads.

Findings

The valuation of CVA can be separated from that of FVA, so-called split up. There may be interdependence between FVA and the derivatives value, which then requires a recursive procedure for their numerical solution.

Research limitations/implications

The authors have assume deterministic interest rates, constant CDS rates and loss rates for the CDS. The authors have also not dealt with re-hypothecation risks.

Practical implications

The results of this paper allow user to identify CVA and FVA, and mark to market their derivatives trades according to the recent market standards.

Originality/value

For the first time, a line between the risk-neutral pricing measure and the funding risk premiums is drawn. Also, the notion of bilateral replication pricing extends the unilateral replication pricing.

Details

Studies in Economics and Finance, vol. 32 no. 3
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 1 August 1997

Jeffrey A. Manzi and Richard J. Curcio

Pension theory suggests and empirical tests indicate that optimal funding levels for defined benefit plans are determined on the basis of risk, taxes, and capital…

Abstract

Pension theory suggests and empirical tests indicate that optimal funding levels for defined benefit plans are determined on the basis of risk, taxes, and capital availability. This study examines whether federal pension and tax legislation enacted in 1986 and 1987 significantly altered the role of risk, taxes, and capital availability as determinants of corporate pension funding policy. Regression tests relating funding levels to these variables were conducted on a sample of pension plans, separately, for each of the reporting years, 1985 (before enactment of the legislation) and 1989 (after enactment of the legislation). Pension risk and tax exposure variables, significant in explaining funding levels in 1985, were not significant in 1989. Pension risk and tax factors under this new regime play a significantly diminished role, if any, in determining funding level policy for defined benefit plans. Evidence is provided that current pension funding is dependent upon the variability of common equity returns, and thus indicate that the pension funding decision is made in the same context as any other capital allocation decision.

Details

Managerial Finance, vol. 23 no. 8
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 13 February 2017

Nevine Sobhy Abdel Megeid

This research aims to analyze and compare the effectiveness of liquidity risk management of Islamic and conventional banking in Egypt to ascertain which of the two banking…

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3813

Abstract

Purpose

This research aims to analyze and compare the effectiveness of liquidity risk management of Islamic and conventional banking in Egypt to ascertain which of the two banking systems are performing better.

Design/methodology/approach

A sample of six conventional banks (CBs) and two Islamic banks (IBs) in Egypt was selected. Using the liquidity ratios, the investigation involves analyzing the financial statements for the period of 2004-2011. The data were obtained from Bank scope database.

Findings

The research found that in Egypt, CBs perform better in terms of liquidity risk management than IBs. The liquidity risk management significant differences between IBs and CBs could be attributed more cash availability to CBs than to IBs, in addition, Egyptian Central Bank regulations on capital and liquidity requirements for IBs disconcert IBs’ performance.

Practical implications

This research facilitates the bankers, academician, scholars and bankers to have an alluded picture about Egyptian banking developments in liquidity risk management. The results can be used by bankers’ policy decision-makers to improve and enhance their consideration for liquidity risk management.

Originality/value

This research covers a period and a country that compares CBs’ and IBs’ liquidity risk management. Its value is attributed to the increasing differentiation between CBs and IBs.

Details

Journal of Islamic Accounting and Business Research, vol. 8 no. 1
Type: Research Article
ISSN: 1759-0817

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Abstract

Details

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

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Article
Publication date: 8 February 2016

Elias Bengtsson

This paper aims to consider the role of investment funds in the credit intermediation process and discuss various forms of systemic risk their involvement might give rise…

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2017

Abstract

Purpose

This paper aims to consider the role of investment funds in the credit intermediation process and discuss various forms of systemic risk their involvement might give rise to. It concludes by drawing some conclusions on the policy challenges facing authorities charged with regulating shadow banking.

Design/methodology/approach

The paper is based on findings from prior research and statistics.

Findings

On a general level, the paper shows that even though traditional investment funds and hedge funds may be very different in terms of their investment strategies and business models, some of them share several commonalities from a systemic risk perspective. More specifically, it discusses how instability in the funding profile of investment funds may threaten their ability to substitute banks’ maturity and liquidity transformation; that their potential funding liquidity shortages, asset reallocations and leverage may contribute to procyclicality in credit and market runs on the systemic money and short-term credit markets; and that insufficient risk separation may elude managerial and supervisory oversight, and force banks to reduce or interrupt credit intermediation.

Research limitations/implications

The paper points to the lack of timely and comprehensive data for uncovering the stages and entities involved in shadow banking. Without sufficient data, the task of policy bodies, regulators or macroprudential authorities to fully grasp shadow banking and its contribution to systemic risk is daunting.

Originality/value

The paper represents (to the author’ knowledge) the first analysis of the role of investments in shadow banking.

Details

Journal of Financial Regulation and Compliance, vol. 24 no. 1
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 1 March 2007

Yuhua Qiao

Public risk management is a relatively new but important element of public management and public budgeting. As research in this area is limited, this study attempts to…

Abstract

Public risk management is a relatively new but important element of public management and public budgeting. As research in this area is limited, this study attempts to advance knowledge on two specific elements of public risk management based on a survey sent to the Public Risk Management Association (PRIMA) members in 2002. 1) How do public entities use various risk funding techniques (e.g., purchasing insurance, self-insurance, and intergovernmental risk pools)? 2) Have public entities implemented integrated risk management in their risk management practices? The survey found evidence that integrated risk management is emerging in public risk management practice. As this is an exploratory study, the author also identifies a series of questions for future research.

Details

Journal of Public Budgeting, Accounting & Financial Management, vol. 19 no. 1
Type: Research Article
ISSN: 1096-3367

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Article
Publication date: 10 May 2018

Haroon Mahmood, Christopher Gan and Cuong Nguyen

Maturity transformation risk is one of the leading causes of the global financial crisis. While endorsing the new Basel III liquidity reforms, the Islamic Financial…

Abstract

Purpose

Maturity transformation risk is one of the leading causes of the global financial crisis. While endorsing the new Basel III liquidity reforms, the Islamic Financial Services Board has suggested a modified NSFR ratio as a structural measure for the maturity transformation function of Islamic banks, allowing for their unique balance sheet structure. The purpose of this paper is to analyze various firm-specific and macroeconomic factors that may significantly affect the maturity transformation risk of these banks.

Design/methodology/approach

Using an annual data set of 55 full-fledged Islamic banks from 11 different countries over a period from 2006-2015, this study utilizes a two-step system generalized method of moments estimation technique on an unbalanced panel data.

Findings

The empirical results reveal bank size, capital, less-risky liquid assets, risky liquid assets, external funding dependence and market power as significant bank-specific factors in determining maturity transformation risk. However, the authors find no evidence for the effect of bank credit risk on maturity transformation risk in Islamic banking system.

Originality/value

This is the first study that focuses on the measurement of maturity transformation risk and its determinants in Islamic banks in a cross-country context, with regards to new liquidity regulatory requirements as proposed by Islamic Financial Services Board (IFSB) in conjunction with Basel III.

Details

Managerial Finance, vol. 44 no. 6
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 10 October 2018

Muhammad Ali and Chin Hong Puah

The purpose of this study is to examine the internal determinants of bank profitability and stability in Pakistan banking sector. Because of specific research objectives…

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2490

Abstract

Purpose

The purpose of this study is to examine the internal determinants of bank profitability and stability in Pakistan banking sector. Because of specific research objectives, this study excludes the external factors of profitability and stability to find the role of bank internal determinants in achieving high performance.

Design/methodology/approach

A panel regression analysis is built on a balanced panel data using 24 commercial banks over the sample period of 2007-2015. The authors performed a separate analysis of bank profitability and stability. Both models used a comprehensive set of bank internal determinants.

Findings

The results that were obtained from profitability model indicated that bank size, credit risk, funding risk and stability have statistically significant impacts on profitability, while liquidity risk showed the statistically insignificant impact on profitability. Regression findings from stability model reveal that bank size, liquidity risk, funding risk and profitability have statistically significant impacts on stability, while credit risk had an insignificant effect on stability. However, the effect of the financial crisis is uniform and showed statistically insignificant impact in both models.

Practical implications

Overall, the authors’ findings bring some new but useful insights to the banking literature. Some recommendations may be functional for the sustainable performance of banks.

Originality/value

In view of study results, the authors provide interesting insights into the practices and characteristics of banks in Pakistan. This study also highlights significant bank internal determinants to improve understanding in the existing literature.

Details

Management Research Review, vol. 42 no. 1
Type: Research Article
ISSN: 2040-8269

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Article
Publication date: 1 March 2002

Robert Fiedler, Karl Brown and James Moloney

With the need to expel huge amounts of non‐performing loans from their balance sheets, their share prices sinking and their credit ratings lowered, Japan’s banks are…

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3481

Abstract

With the need to expel huge amounts of non‐performing loans from their balance sheets, their share prices sinking and their credit ratings lowered, Japan’s banks are struggling to raise new capital and may face collapse. But the current crisis could have been avoided. If they had implemented rigorous liquidity risk management structures, the banks would have a clear view of their true position and could have avoided spinning into the vicious circle of a funding crisis.

Details

Balance Sheet, vol. 10 no. 1
Type: Research Article
ISSN: 0965-7967

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