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Book part
Publication date: 1 October 2014

Guoxiang Song

To raise the quality of regulatory capital, Basel III capital rules recognize unrealized gains and losses on all available-for-sale (AFS) securities in Common Equity Tier…

Abstract

To raise the quality of regulatory capital, Basel III capital rules recognize unrealized gains and losses on all available-for-sale (AFS) securities in Common Equity Tier 1 Capital (CET1). However, by examining the correlations between U.S. GDP growth rate, interest rates and regulatory capital ratios computed using Basel III regulatory capital definition for six U.S. global systemically important banks (G-SIBs) since 2007, this chapter finds that Basel III regulatory capital will enhance the pro-cyclicality of Basel III leverage ratio and Tier 1 capital ratio and their sensitivity to long-term interest rates. Therefore, Basel III capital standards may have significant implications for bank supervision and bank capital risk management in the near future. As banks will hold more high-quality liquid assets (HQLAs) as required by Basel III Liquidity Coverage Ratio (LCR), the weight of unrealized gains and losses arising from fair value accounting will increase in Basel III Tier 1 capital base, the consequent increase of pro-cyclicality in a bank’s regulatory capital ratios may distort the true picture of bank capital adequacy. If an expected loss approach (EL) is used as the provisioning model, such capital risk may be increased further. Moreover, as U.S. monetary policy has started tapering quantitative easing, long-term interest rates will increase inevitably. This may increase the negative impact of unrealized gains and losses on AFS securities on bank capital. As a result, it may be difficult for banks to maintain appropriate capital ratios to meet regulatory requirements and support business activities.

Details

Risk Management Post Financial Crisis: A Period of Monetary Easing
Type: Book
ISBN: 978-1-78441-027-8

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Article
Publication date: 4 July 2016

Elisa Menicucci and Guido Paolucci

The aim of this paper is to review the main results of accounting research literature examining the role of fair value accounting (FVA) within financial crisis. This…

Abstract

Purpose

The aim of this paper is to review the main results of accounting research literature examining the role of fair value accounting (FVA) within financial crisis. This research analyzes theoretical and empirical studies on the controversial topic about FVA and its alleged pro-cyclicality in the context of the financial crisis to offer solid reflections for improving the fair value research agenda.

Design/methodology/approach

This paper consists of a descriptive literature review. Theoretical and empirical research studies were investigated and then systematized in a framework to guide a literature-based analysis and critique of the relevant literature published about this topic.

Findings

The review reveals that there has been only a limited amount of research into the role of FVA within the financial crisis. This topic has not been researched extensively, and there is no empirical evidence that FVA caused the financial crunch and the subsequent financial crisis.

Research limitations/implications

The restricted amount of literature that directly deals with FVA in the context of the financial crisis is the main limitation of this paper. The specificity of the theme narrows the coverage. However, the adopted research methodology enabled the main contributions concerning this issue to be collected, to realize a concise and comprehensive portrait of the debate surrounding FVA and the financial crisis.

Practical implications

This paper can be of use to both researchers and practitioners interested in investigating strengths and weaknesses of the fair value concept for accounting purposes. The paper sets out the main findings of the academic literature and identifies future avenues of theoretical and practical research which may support standard setters to draw up improved accounting regulation.

Originality/value

Few existing studies consist of a literature review that examines theoretical and empirical researches on the influence of FVA on the financial system. This review offers a comprehensive overview on research literature concerning the responsibility of FVA in causing the financial crisis. The main contribution of this paper relates to further understanding the role and effects of accounting matters concerning fair value in a broad sense within the context of the financial crisis.

Details

Journal of Financial Reporting and Accounting, vol. 14 no. 1
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 4 April 2016

Azira Abdul Adzis, David W.L. Tripe and Paul Dunmore

The purpose of this study is to investigate the impact of International Accounting Standard 39 (IAS 39) on income-smoothing activities and pro-cyclical behavior through…

Abstract

Purpose

The purpose of this study is to investigate the impact of International Accounting Standard 39 (IAS 39) on income-smoothing activities and pro-cyclical behavior through loan loss provisions using a sample of Hong Kong banks.

Design/methodology/approach

Fixed effects estimator is used, and the analysis covers the period from 2000 to 2009.

Findings

The results suggest that Hong Kong banks engage less in income-smoothing activity after they comply with the IAS 39. No evidence supports loan loss provisions of Hong Kong banks exhibiting more pro-cyclical behavior after IAS 39 adoption.

Research limitations/implications

Compliance with IAS 39 should improve the quality of bank financial reporting. The reduction in income-smoothing activities among Hong Kong banks after IAS 39 adoption fairly supports the effectiveness of International Financial Reporting Standard (IFRS) and countries that have yet to comply with IFRS may take action to apply the standards. Bank regulators should take pro-active action in addressing the issue of pro-cyclicality of loan loss provisions, as IAS 39 focuses more on improving the financial information quality, while pro-cyclicality is associated with the economic cycles.

Originality/value

Hong Kong banking industry is unique, as it was among the first IFRS adopters in the East Asia region and it has its own legal framework for developing accounting standards. The results of this study are expected to shed some light on the effects of IAS 39 adoption on income smoothing and pro-cyclicality of banks in the East Asia region, where the accounting cultural value dimensions and institutional structures are different than that of European countries.

Details

Journal of Financial Economic Policy, vol. 8 no. 1
Type: Research Article
ISSN: 1757-6385

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Book part
Publication date: 2 March 2011

Ali M. El-Agraa

The world has been gripped by the severest global financial (and economic) crisis since the Great Depression of the 1930s. How did it come about, what is being done to…

Abstract

The world has been gripped by the severest global financial (and economic) crisis since the Great Depression of the 1930s. How did it come about, what is being done to alleviate its consequences and, vitally, what measures should be undertaken to ensure against its recurrence are therefore questions that must be satisfactorily addressed. Preventing ‘financial crises’ from ever happening again is of course completely out of the question, they being inherent to the economic system as we understand it; rather that of those of the ‘severest’ kind. Fortunately, a vast literature has been accumulating on these issues, so the intention here is not to add to it and reinforce the perception that economists will offer more opinions on a single issue than the total membership of any assembled group thereof for the purpose. Hence, this is confined to a consideration of the most convincing explanations. Owing to space limitations, I shall not examine the recommendations for future action in all the mentioned areas but will do so for what is being offered to cater for the capital adequacy and pro-cyclicality since they are of the essence and involve many players.

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Article
Publication date: 7 October 2014

Domenico Curcio, Douglas Dyer, Angela Gallo and Igor Gianfrancesco

The purpose of this paper is to investigate the discretionary use of loan loss provisions in the Chinese banking sector during the global financial crisis. The objective…

Abstract

Purpose

The purpose of this paper is to investigate the discretionary use of loan loss provisions in the Chinese banking sector during the global financial crisis. The objective of this paper is twofold: to add new evidence to the scant literature dealing with a peculiar banking sector, such as the Chinese one, and to shed more light on banks’ provisioning behaviour during stressed financial markets conditions.

Design/methodology/approach

Using bank-level balance sheet and financial statements data, the authors test for income smoothing and capital management hypotheses, and detect differences in provisioning decisions of listed banks and unlisted financial intermediaries during turbulent financial markets conditions.

Findings

The authors find support for the income smoothing hypothesis, but not for the capital management one. Chinese listed banks appear to be less risky and less involved in income smoothing to shift their risk, when compared to unlisted credit institutions.

Social implications

The results obtained from this paper help to understand the functioning of bank provisioning regime in the Chinese banking system and how provisioning mechanisms can address the issues associated with the pro-cyclicality of bank capital requirements.

Originality/value

Though referred to a particular banking sector, such as the Chinese one, the results of this paper can provide a tremendous incentive to those national and international authorities that are bound to promote forward-looking provisioning practices. These practices would allow banks to build a buffer of reserves to face the downward pressure on earnings and capital associated with periods of worsening credit quality.

Details

Managerial Finance, vol. 40 no. 10
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 4 August 2020

Peterson K. Ozili

This study aims to investigate the relationship between financial inclusion and the business cycle.

Abstract

Purpose

This study aims to investigate the relationship between financial inclusion and the business cycle.

Design/methodology/approach

Regression methodology is used to analyze the association between financial inclusion and the business cycle.

Findings

Using regression estimation, the findings reveal that the level of savings and the number of active formal account ownership are pro-cyclical with fluctuations in the business cycle. Also, savings by adults particularly for women and poor people declines during recessionary periods while the number of active formal account ownership declines for the adult population especially for women during recessionary periods. The findings also reveal that not all indicators of financial inclusion are pro-cyclical with fluctuating business cycles.

Practical implications

The implication of this observed pro-cyclical effect is that individuals and households will exit the formal financial sector during a recession, as banks become unwilling to lend money to individuals and households during bad times and this will lead to financial exclusion and vice versa. Policymakers seeking to increase the level of financial inclusion in their countries should focus on the timing of financial inclusion policies along the business cycle as the findings suggest that it might be more difficult to achieve financial inclusion objectives during recessions or periods of economic downturns.

Originality/value

The current debate on financial inclusion pays little attention to whether financial inclusion is pro-cyclical with the fluctuating business cycle. This study explores the association between financial inclusion and the business cycle.

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Article
Publication date: 12 March 2018

Mohd Yaziz Mohd Isa and Md. Zabid Hj Abdul Rashid

This paper aims to investigate the adequacy of regulatory capital funds through loss provisioning policies because of worsening credit quality associated with distressed…

Abstract

Purpose

This paper aims to investigate the adequacy of regulatory capital funds through loss provisioning policies because of worsening credit quality associated with distressed financial conditions. A financial distress occurs when banks have difficulty in honoring financial commitments. This paper is expected to unveil how the provisioning mechanisms can address concerns associated with pro cyclicality of regulatory capital funds requirements, and how the banks behave in distressed financial conditions to share risks. The pro cyclicality of regulatory capital funds is the effect of various components of the financial system that aggravates the economic cycle such as during the expansion of the economy when banks are able to provide more loans and meet regulatory capital requirements with ease, while during the contraction of the economic cycle, can lead to deterioration of asset quality, and the resultant need to make loss provisions and recognize impairment. In turn, the situation puts further pressures on the capital requirements held by banks and their risk-sharing behavior. The paper analyzes a sample of Islamic banks in Malaysia.

Design/methodology/approach

By estimating credit risk-related information through loss provisioning policies, the paper uses an unbalanced panel data on all Islamic banks in the Association of Islamic Banking Institutions Malaysia from 2003 to 2014. The association consists of full-fledged Islamic banks and several foreign-owned entities.

Findings

The paper findings support that Islamic banks during observed period of distressed financial conditions were less discouraged to increase their regulatory capital funds to share risks. Intuitively, they were more encouraged to engage in risk-shifting behavior. Also, the risk-shifting behavior was found to have a significantly high potential in foreign-owned Islamic banks than in domestic Islamic banks.

Research limitations/implications

Although the study is based on a sample of Islamic banks in Malaysia, the findings suggest targeted interventions aimed at discouraging risk shifting or transfer of risks in an interest-free Islamic financing.

Practical implications

The outcome of this paper has practical implications for Islamic banks to build a buffer of capital funds to face downward pressures during heightened financial uncertainties while serving as protection to depositors. Moreover, this study has practical implications for shareholders to avail themselves the benefits of high investment accounts financing. The Islamic banks can continue to play their role in promoting inclusive growth, reducing inequality and accelerating poverty reduction.

Social implications

Although the current study is based on a sample of Islamic banks in Malaysia, the finding suggests that the extent of risk shifting was significantly more incentivized among the foreign-owned rather than the domestic Islamic banks. This information can be used to develop targeted interventions aimed at discouraging risk shifting or transfer of risks in an interest-free Islamic financing.

Originality/value

This paper is the first that investigates on adequacy of regulatory capital funds of Islamic banks through loss provisioning policies.

Details

Journal of Financial Reporting and Accounting, vol. 16 no. 1
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 3 December 2018

Jamal Abu-Serdaneh

The purpose of this paper is to investigate if Jordanian banks using provision accounts as a technique to smooth income, manage capital ratio, signal future earning and…

Abstract

Purpose

The purpose of this paper is to investigate if Jordanian banks using provision accounts as a technique to smooth income, manage capital ratio, signal future earning and test other determinants affecting provision accounts.

Design/methodology/approach

The study was conducted on all Jordanian listed banks, and it covers the period 2005-2014. Different models are applied to test the dependent variables (loan loss provision [LLP] accounts) and its effects on different explanatory variables by using several statistical techniques (e.g. multiple regression).

Findings

The results show that there is no conclusive evidence supports that Jordanian banks used provision to smooth income, manage capital ratio or engage in pro-cyclical behavior. However, a positive and significant effect between one year ahead change in earnings and loan loss allowance, indicating that banks may use provisions to signal future positive changes in earnings. In addition, the results show that loan-to-asset ratio and beginning loan loss allowance have positive effect on provision accounts.

Practical implications

The results of this study are useful in assisting the regulators (e.g. US Securities and Exchange Commission, central bank) in efforts toward improving the quality of the reported financial reporting in the banking industry and focus on LLP management motivations. This study gives shareholders further insight which enables them to better understand the actions of managers and thus increase their control over their investments. Additionally, auditors should be aware of different incentives for using LLP as a tool of earnings management to be able to detect eventual manipulation of accounting earnings.

Originality/value

Banking in is one of the most stringently regulated of sectors and, furthermore, has a major impact on other sectors and on economic growth in general. In view of such importance, this study focuses on the banking industry and contributes to the literature in several ways. First, it represents the first known study, to the best of author knowledge, which examines if Jordanian banks use LLP accounts as a tool to smooth income and/or to manage capital. Second, unlike most existing research, which usually studies one aspect of LLP, this study focuses on four main motivations influencing provision accounts in the banks of Jordan. Third, additional tests were carried out to check the robustness of results, for example, sensitivity analysis is used to examine the change of findings by repeating of tests after using different proxies. Fourth, as a difference from other studies, this study investigates the effects of global financial crisis of 2008 on income smoothing behavior of Jordanian banking sector. Fifth, this paper provides a timely contribution to the continuous debate of the effect of LLP on earnings management in a poorly exploited setting, emerging market context.

Details

Journal of Financial Reporting and Accounting, vol. 16 no. 4
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 15 November 2011

Alessandro Giustiniani and John Thornton

The purpose of this paper is to provide an overview of current progress in financial sector reform and outline some of the remaining challenges.

Abstract

Purpose

The purpose of this paper is to provide an overview of current progress in financial sector reform and outline some of the remaining challenges.

Design/methodology/approach

The paper presents an analytical survey of recent developments.

Findings

The reform agenda is broad, ranging from strengthening prudential regulation; to enhancing supervision; from mitigating pro‐cyclicality to integrating micro‐ and macro‐prudential oversight; from reducing the systemic risk associated with large and complex financial institutions to expanding resolution process and fortifying financial market structure. Reforms are proceeding slowly but important building blocks have been laid down, such as Basel III; other difficult reforms are in the making, such as the resolution framework for cross‐border financial institutions or how to deal with systemically important financial institutions.

Originality/value

The paper presents a concise, comprehensive, and timely survey of the myriad financial reform efforts.

Details

Journal of Financial Regulation and Compliance, vol. 19 no. 4
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 10 November 2020

Fatma Taşdemir

This paper investigates the main drivers of foreign direct investment (FDI) inflows for a balanced panel of 11 Middle East and North Africa (MENA) economies over the…

Abstract

Purpose

This paper investigates the main drivers of foreign direct investment (FDI) inflows for a balanced panel of 11 Middle East and North Africa (MENA) economies over the 1995–2017 annual period. The author postulates that the impacts of the main pull (growth) and push (global financial conditions, GFC) factors may not be invariant to endogenously estimated thresholds for structural domestic conditions (SDCs) including trade and capital account openness, financial development, human capital (HC) and natural resource endowments.

Design/methodology/approach

The author investigates whether the main SDC provide endogenous thresholds for the impacts of basic pull and push factors on FDI inflows for the MENA sample by employing panel fixed effects threshold procedure of Hansen (1999). As a robustness check, the author also present the results of the dynamic panel data two-step system generalized method of moments (GMM) estimation, which explicitly consider the potential endogeneity of SDC along with main pull factor for the evolution of FDI inflows.

Findings

Growth, GFC and SDC are important drivers of FDI inflows. The impacts of SDC tend to be higher in countries with higher financial depth, openness to international trade and finance and lower natural resource and HC endowments. The sensitivities of FDI inflows to GFC are substantially higher in the countries which are more open to international trade and capital flows and higher levels of financial depth. FDI inflows are found to be pro-cyclical and this pro-cyclicality tends to be much higher for the episodes exceeding the SDC thresholds.

Practical implications

Improving SDC including higher openness to international trade and finance and financial development may be effective in encouraging FDI inflows. The findings support an argument that, better SDC are crucially important not only for attracting FDI but also achieving the growth benefits of FDI inflows. Therefore, improving SDC appears to be an important growth-oriented policy agenda for emerging market and developing economies (EMDEs) including MENA.

Originality/value

The impacts of the main push and pull factors on FDI (and capital) inflows may be nonlinear. The literature often tackles the nonlinearity issue either by some interaction specifications or imposing exogenous thresholds. The literature, however, is yet to comprehensively investigate whether the main SDC provide endogenous thresholds for the impacts of basic pull and push factors. The author aims to contribute to the literature by estimating endogenous SDC threshold levels for the impacts of the main determinants of FDI flows for MENA.

Details

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

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