Search results
1 – 10 of over 3000To 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…
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
Keywords
Muhammad Fuad Farooqi and John O’Brien
This paper aims to provide a comparative study of the Islamic versus conventional banking sector risk by using market data generated from the sample of publicly listed Islamic and…
Abstract
Purpose
This paper aims to provide a comparative study of the Islamic versus conventional banking sector risk by using market data generated from the sample of publicly listed Islamic and conventional banks in the Gulf Cooperation Council (GCC) region.
Design/methodology/approach
The authors introduce a market-based measure of bank stress and test this indicator against the Tier 1 Capital Ratio using Granger causality tests.
Findings
The authors find that the market-based measure is a leading indicator of banking stress when compared to the accounting-based Tier 1 ratio and thus is relevant to the Basel regulation’s Pillar 3.
Research limitations/implications
This paper only looks at Islamic vs conventional banks in the Gulf region, and the authors would like to extend this analysis to a broader range of financial institutions, especially in the European and North American markets.
Social implications
Developing a measure that signals bank stress ahead of typically used measures can help regulators, bank management and investors identify oncoming problems and issues before these become too big to manage.
Originality/value
The results from this analysis provides insight into the offsetting impact from two drivers (beta and book-to-market ratio) of the cost of equity capital for the conventional vs Islamic banking sectors.
Details
Keywords
Li Chen, David Emanuel, Lina Z. Li and Mu Yang
The authors examine whether Chinese banks use loan loss provisions (LLPs) for capital management, income smoothing and signaling purposes, and assess the effect of the recent…
Abstract
Purpose
The authors examine whether Chinese banks use loan loss provisions (LLPs) for capital management, income smoothing and signaling purposes, and assess the effect of the recent regulatory changes following the implementation of Chinese Basel III on such behavior.
Design/methodology/approach
The authors use a unique set of hand-collected data on bank capital combined with financial data downloaded from the China Stock Market and Accounting Research (CSMAR) database. Multivariate regression models are used to test our hypotheses.
Findings
The authors find that while there is no evidence to suggest capital management practice before the Chinese Basel III, the implementation of the new regulations induced listed banks to manage tier-1 capital via LLPs. The authors also find strong support that Chinese banks engage in income smoothing via LLPs management, and there is no change in such tendency following the issuance of Chinese Basel III. Lastly, the authors do not find support for the signaling behavior by Chinese banks using LLPs.
Practical implications
The authors’ evidence suggests that elevated tier-1 capital and provisioning requirements may induce capital management by banks, which indicates a potential unintended effect brought forth by the new Basel regulations.
Originality/value
To the best of authors’ knowledge, this study is the first to examine Chinese banks' behavior relating to LLPs in terms of capital management, income smoothing and signaling. In particular, the authors use a sample containing a large number of Chinese commercial banks – previously a major data issue in other studies.
Details
Keywords
Leese L. Mendy, Sheng-Yung Yang and Wei-Zhong Shi
This chapter examines the impact of economic policy uncertainty (EPU) on bank profitability, using a sample of US banks from 2001 to 2016. We find a robust negative relationship…
Abstract
This chapter examines the impact of economic policy uncertainty (EPU) on bank profitability, using a sample of US banks from 2001 to 2016. We find a robust negative relationship between the aggregate level of policy uncertainty and bank profitability. The channel analysis shows that policy uncertainty can significantly reduce loan growth and increase the nonperforming loan ratio. More importantly, we find critical evidence that bank capital can improve the impact of policy uncertainty on the bank's economic performance and operation. Overall, this chapter has an important policy implication: policymakers can reduce the adverse effect of policy uncertainty on the banking industry through measures to stabilize bank capital adequacy.
Details
Keywords
This study aims to examine the effect of corporate social responsibility (CSR) on banks’ capital, value and risk by investigating its impact on capital inflows and asset quality…
Abstract
Purpose
This study aims to examine the effect of corporate social responsibility (CSR) on banks’ capital, value and risk by investigating its impact on capital inflows and asset quality. The authors aim to investigate the value-protective characteristics of socially responsible performance.
Design/methodology/approach
This study uses a two-stage least squares approach with instrumental variables, with bank and year fixed effects to address concerns regarding endogeneity, specifically reverse causality and unobservable factors.
Findings
The results confirm a positive association of CSR with capital adequacy, including higher quality Tier 1 Capital. The authors find strong evidence that banks with higher CSR scores are associated with greater bank value and lower risk. The extended analyses find that the improvement in capital is from annual growth in capital and lower risky assets.
Originality/value
The research advances the field by providing new empirical evidence of a positive association between CSR and capital, including high-quality Tier 1 Capital. This study complements the prior research by simultaneously examining the dynamic links between CSR and capital, bank risk and bank value. The findings are consistent with the view that there is a dynamic link in which CSR affects the operations of banks.
Details
Keywords
Abd. Ghafar Ismail and Adelina Tan Be Lay
This study develops a model for loan loss provision which follows the accounting practice in Malaysia. Banks are subject to generally accepted accounting principles (GAAP) in…
Abstract
This study develops a model for loan loss provision which follows the accounting practice in Malaysia. Banks are subject to generally accepted accounting principles (GAAP) in disclosing the loan loss provision. However, the expected loan losses factor should also be taken into account to counter unexpected situations. Prior studies show that banks tend to manipulate the loan loss provision through discretionary accruals for income smoothing purposes. Since the loan loss provision is important to banks' income, this study will determine factors that influence the provision. Empirical evidence state that the loan loss provision is positively related to non‐performing loans, loan loss allowance and write‐offs. Estimation results using ordinary least squares regression prove that the banks follow GAAP guidelines, whereby the loan loss provision depends on the beginning balance and the current write‐offs. In addition, the banks should also consider the expected non‐performing loans in providing loan loss provisions. In determining loan losses, the performance of each economic sector should also be considered due to different default risks.
Xiao Ling Ding, Razali Haron and Aznan Hasan
This study aims to determine how Basel III capital requirements affect the stability of Islamic banks globally during the global financial crisis and the COVID-19 pandemic.
Abstract
Purpose
This study aims to determine how Basel III capital requirements affect the stability of Islamic banks globally during the global financial crisis and the COVID-19 pandemic.
Design/methodology/approach
The secondary data for all Islamic banks worldwide from 2004 to 2021 is obtained from the FitchConnect database. The main technique was a two-step generalized method of moment (GMM) system, and the data were tested using pooled ordinary least squares, fixed effects and difference GMM models for robustness checks.
Findings
Regression results support the moral hazard hypothesis based on evidence that both the total capital ratio and the Tier 1 capital ratio have a statistically significant positive impact on the stability of Islamic banks globally. Furthermore, neither the global financial crisis of 2008–2009 nor COVID-19 (2020–2021) significantly impacted the stability of Islamic banks worldwide. The results are robust across alternative measures of stability, capital buffers, dummy variables and estimation techniques. According to the descriptive statistics, the number of Islamic banks that disclose their regulatory capital ratios to the public has increased over the study period, and the mean of total capital and Tier 1 ratios are considerably greater than what is required by Basel II and Basel III.
Research limitations/implications
Bankers, regulators and policymakers should benefit from the evidence on capital and risk management in Islamic banking according to Basel Committee on Banking Supervision (BCBS) and Islamic financial services board (IFSB) international standards in various jurisdictions.
Originality/value
This research builds on earlier studies that were both beneficial and instructive by exploring the relationship between BCBS and IFSB capital guidelines and the trustworthiness of Islamic banks in greater depth. This study uses numerous capital ratios, buffers and stability measures to provide an international context for research on Islamic banking. In addition, the database is up-to-date to include information about the COVID-19 pandemic aftereffects in the year 2021. This study also introduces the Basel membership of Islamic banks to provide context for countries still at the Basel II stage or are yet to begin implementing the Basel III international standard.
Details