Search results
1 – 10 of over 1000
– This paper aims to investigate the interaction between capital requirements and pricing constraints as measures for insurance regulation.
Abstract
Purpose
This paper aims to investigate the interaction between capital requirements and pricing constraints as measures for insurance regulation.
Design/methodology/approach
In a theoretical model framework, the author derives the insurer’s shareholder-value-maximizing response to capital regulation, price regulation and the unregulated strategy as a benchmark; all three strategies are presented in an analytical form.
Findings
The paper demonstrates that risk-based capital requirements exhibit an efficiency advantage over price regulation and allow for lower premiums. Moreover, the analysis identifies situations in which price floors make insurance more expensive, but have no positive impact on the safety level.
Practical implications
The comparison between capital regulation and price floors provides policymakers with a methodology to evaluate which regulatory tool is more appropriate. Also, the article discusses that maximum discount rates for European life insurers could be ineffective when the new regulatory framework Solvency II is in place.
Originality/value
In all, the article obtains analytical and informative results with relevant implications for insurance regulation.
Details
Keywords
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 of core…
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
Keywords
The purpose of this paper is not only seek to trace developments that have contributed to the importance of risk in regulation, but also to justify why risk has become so…
Abstract
Purpose
The purpose of this paper is not only seek to trace developments that have contributed to the importance of risk in regulation, but also to justify why risk has become so significant within regulatory and governmental circles.
Design/methodology/approach
This task will be facilitated through a consideration of theories associated with risk, and by reference to two forms of risk regulation, namely risk‐based regulation and meta regulation. As well as a consideration of the application of both in jurisdictions such as the UK, the paper adopts a comparative approach through references to the their application in jurisdictions such as Germany, Italy, and the USA, and also through a comparison between meta‐regulatory strategies and risk‐based regulation.
Findings
This paper concludes that all regulatory strategies should take into consideration the importance of management responsibilities – both on individual and corporate levels. Meta‐risk regulation has not only assumed such a prominent position in regulation through its application in Basel II, but also is preferred to risk‐based regulation – not only because of the element of ambiguity which risk‐based regulation introduces into its assessment (through a consideration of the external environment of the firm), but also because of its impact of the use of external auditors in regulation and supervision.
Practical implications
The practical implications of a move towards risk‐based regulatory strategies, and meta‐regulatory strategies in particular, is that courts are simply not adequately equipped to deal with the pace with which some financial instruments, such as derivatives, operate.
Originality/value
This paper not only introduces originality through its comparative approach and the choice of jurisdictions involved, but also through the attention it draws to the need for more innovative techniques such as meta regulation. Meta regulation can be considered to be the most evolved and collaborative form of regulation, which is best suited for such an ever‐evolving and changing regulatory environment that currently exists.
Details
Keywords
This paper aims to study the design of bank capital regulation and points out a conceptual downside of risk-sensitive regulation. The author argues that when a bank is better…
Abstract
Purpose
This paper aims to study the design of bank capital regulation and points out a conceptual downside of risk-sensitive regulation. The author argues that when a bank is better informed about its risk than the regulator, designing regulation is subject to the Lucas critique. The second-best regulation could be risk-insensitive, which provides an explanation for the leverage ratio as a backstop to risk-based capital requirements. This paper offers empirical predictions and implications for policy.
Design/methodology/approach
The argument in the paper is based on analytical results from mechanism design.
Findings
Optimal bank regulation could be risk-insensitive, as is observed in practice in the form of the leverage ratio rule.
Originality/value
Counter to conventional wisdom, the paper argues and provides a new explanation for why bank regulation should not be sensitive to the risk of the bank. The paper then offers empirical predictions and implications for policy.
Details
Keywords
The Basel Committee has proposed a new capital framework to respond to the deficiencies of the 1988 Capital Accord (Basel I). The 1988 Accord has been criticised for its crude…
Abstract
The Basel Committee has proposed a new capital framework to respond to the deficiencies of the 1988 Capital Accord (Basel I). The 1988 Accord has been criticised for its crude assessment of risk and for creating opportunities for regulatory arbitrage. In principle, the new approach, often referred to as Basel II, is not intended to raise or lower the overall level of regulatory capital currently held by banks, but to make it more risk sensitive. The spirit of the new Accord is to encourage the use of internal systems for measuring risks and allocating capital (the Accord extends the use of internal models from market risk to credit risk). A number of issues have been raised, however, with regard to its complexity, its cost, its impact on procyclicality, the possibility that it can lead to competitive distortions if some countries do not apply it (some big emerging economies) or apply it differently to small and big institutions (the USA) and others. Banks in Europe will also be obliged to comply with the new Capital Directive, often referred to as CAD III, which is the means by which the EU will implement the new Basel Capital Accord. CAD III will apply to all credit institutions and investment firms and not only to internationally active banks, as Basel does. This paper presents a critical approach to these developments and examines their impact upon the banking industry.
Details
Keywords
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…
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
Keywords
Mario Jordi Maura-Pérez and Herminio Romero-Perez
This study aims to analyze the factors related to the failure of 535 Federal Deposit Insurance Corporation (FDIC)-Insured United States banks in conjunction with the 2008…
Abstract
Purpose
This study aims to analyze the factors related to the failure of 535 Federal Deposit Insurance Corporation (FDIC)-Insured United States banks in conjunction with the 2008 financial crisis.
Design/methodology/approach
The research consists of an analysis of the following three five-year partitions: pre-crisis (2002–2006), crisis (2007–2011) and post-crisis (2012–2016). The main hypothesis is that the factors explaining bank failures vary by period. Using logistic regression analysis, the authors identify the desirable models by period based on three model selection strategies.
Findings
Liquidity and non-risk-based capital ratios are important explanatory factors in all three periods. As the authors can see from the results, when comparing the full period (2002–2016) and the three five-year period partitions (2002–2006, 2007–2011 and 2012–2016), the ratios change from period to period, but they measure the same financial areas of concern in different contexts as follows: liquidity, leverage/risk exposure and capital adequacy. Risk-based capital ratios are not effective predictors of bank failures.
Originality/value
Recent academic studies have analyzed bank failures during periods that cover the years before, during and after the crisis, but most of these studies discuss bank failures in the forecasting context only. This study includes an analysis of failure determinants during pre-crisis, crisis and post-crisis subperiods based on the FDIC monitoring system of bank failures and identifies what ratios are more relevant during each period and how they change from period to period.
Details
Keywords
Ali Awdeh and Chawki EL-Moussawi
The introduction of Basel capital adequacy standards (I, II and III) has provoked a large body of empirical and theoretical literature that aimed to detect the consequences of…
Abstract
Purpose
The introduction of Basel capital adequacy standards (I, II and III) has provoked a large body of empirical and theoretical literature that aimed to detect the consequences of risk-based capital rules on bank lending behaviour and credit availability (and the possible emergence of the credit crunch phenomenon), and came up with divergent conclusions. This study aims at participating in this continuous debate but detecting the applicability of the credit crunch theory in the MENA region, taking into consideration the impact of the institutional environment, which may play a role in mitigating the supply-side credit crunch.
Design/methodology/approach
This study exploits the Fixed Effects method on a dataset of 210 banks from 14 MENA countries over the period 1999–2016. The paper exploits the percentage change in bank credit as a dependent variable, capital requirements and three institutional quality variables as explanatory variables, in addition to a set of micro- and macro-economic variables.
Findings
The study finds that the implementation of higher capitalisation ratios does participate in a significant decline in bank credit supply. Additionally, by testing the impact of institutional factors on bank lending, it reveals that good governance and political stability encourage banks to extend credit and soften the credit crunch, while higher level of financial freedom discourages banks from expanding loan supply and even magnifies the decline of credit following tightening capital requirements.
Practical implications
This paper provides very important insight for MENA policymakers and bank regulators by highlighting the importance of the institutional environment factors in amplifying or softening the effect of higher capital requirements in their economies.
Originality/value
In addition to examining an understudied sample of countries, this paper's originality and value added are represented mainly by testing the impact of institutional environment and governance level on bank lending behaviour.
Details
Keywords
This article outlines a procedure for quantifying risk‐adjusted capital reserves that may be used for both performance evaluation and capital allocation. The author identifies and…
Abstract
This article outlines a procedure for quantifying risk‐adjusted capital reserves that may be used for both performance evaluation and capital allocation. The author identifies and quantifies the sources of risk capital that must be addressed, to cover current investment and withstand market shocks, for any business line that exhibits earnings volatility. The author classifies risk capital into two types: market‐risk capital and earnings volatility‐related capital. Market risk capital may be divided into two categories; risks due to “normal” or “diffusion” type price movements and catastrophic moves or “stress” events. In contrast, earnings volatility‐related capital is directly related to the firm's equity‐at‐risk, in the event that market shocks lead to sustained earnings volatility. The author suggests that these risk‐adjusted capital measures may be used as a benchmark, in conjunction with net earnings, to evaluate performance, or to allocate equity capital across different operations within a firm.