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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

Keywords

Article
Publication date: 30 April 2021

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…

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

Journal of Accounting in Emerging Economies, vol. 11 no. 4
Type: Research Article
ISSN: 2042-1168

Keywords

Article
Publication date: 4 November 2020

Zulkifli Rangkuti

This paper aims to examine the effects of Tier-1 capital toward risk management and profitability on the performance of Indonesian Commercial Banks.

Abstract

Purpose

This paper aims to examine the effects of Tier-1 capital toward risk management and profitability on the performance of Indonesian Commercial Banks.

Design/methodology/approach

The research population consisted of all commercial banks listed on the Indonesia Stock Exchange. The data were in the form of financial statements of commercial banks for the periods of 2012 to 2016 with a total of 42 companies (bank). From a total of 42 commercial banks listed in the Indonesia Stock Exchange, not all of them met the criteria. Commercial banks that meet these criteria are as many as 28 banks are sampled research.

Findings

Tier-1 capital has a positive direct effect on risk management, Tier-1 capital has a positive indirect effect on profitability with risk management as a mediation variable, risk management has a positive direct effect on profitability, Tier-1 capital has a positive indirect effect on performance with risk management and profitability as mediation variables, risk management has a positive indirect effect on performance with as mediation variable and profitability has a positive impact on performance.

Originality/value

The originality of this research can be seen from the causal relationship between the effects of Tier-1 capital, risk management and profitability on the performance of commercial banks in the context of stock performance among Indonesia commercial banks. Also, the analysis tools using multiple fixed effect panel data models in this research as a novelty in this research. In addition, previous research findings remain inconsistent with one another. By conducting this research, it is expected that more consistent research findings than the previous ones can be generated. Sluggish global economic conditions, which result in declined bank performance are an interesting topic to investigate. The paper uses an original sample, 28 Indonesian banks in 2012-2016. Also, it links Tier 1 capital with risk management and performance in a novel theoretical framework.

Details

Measuring Business Excellence, vol. 25 no. 2
Type: Research Article
ISSN: 1368-3047

Keywords

Abstract

Details

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

Abstract

Details

Tools and Techniques for Financial Stability Analysis
Type: Book
ISBN: 978-1-78756-846-4

Article
Publication date: 28 April 2022

Alaa Salhani and Sulaiman Mouselli

The choice between different financing sources is governed by a number of finance theories, particularly, trade-off theory and pecking order theory. However, the special…

Abstract

Purpose

The choice between different financing sources is governed by a number of finance theories, particularly, trade-off theory and pecking order theory. However, the special characteristics of Islamic finance, which forces the exclusion of conventional bonds, leave Islamic banks with limited number of alternatives. Tier 1 sukuk are distinguished type of sukuk that combines the features of conventional bonds and stocks. This paper aims to answer the following question: Does the issuance of Tier 1 sukuk positively affect Islamic banks’ profitability or is their impact concentrated on enhancing Islamic banks’ capital adequacy ratios?

Design/methodology/approach

The data set used in this study consists of all United Arab Emirates (UAE) Islamic banks that issued Tier 1 sukuk over the period 2010–2020. Pooled and fixed effects panel regressions of Tier 1 sukuk and other control variables on three proxies of Islamic banks’ profitability were run. The selection of fixed-effect model is based on Hausman test, redundant fixed effects and likelihood ratio test.

Findings

This study reveals novel findings. Tier 1 sukuk increases both earnings per share (EPS) and capital adequacy ratios. That is, this study finds that there is a positive significant impact of Tier 1 sukuk on EPS, which indicates that issuing more Tier 1 sukuk will generate more return to shareholders in terms of higher EPS because of the lower cost of Tier 1 sukuk compared to equity. However, this study finds that there is an insignificant impact of Tier on sukuk on both return on assets and return on equity. Hence, it is concluded that Tier 1 sukuk does not increase the risk appetite of UAE Islamic banks.

Research limitations/implications

Tier 1 sukuk is a niche instrument that has been recently used by Islamic banks. Hence, there are a limited number of Islamic banks that have issued this type of sukuk and consequently limited number of observations. Therefore, with the increased use of this instrument, a larger set of data will be available for examination. In addition, future research could examine the relationship between issuing Tier 1 sukuk and profitability in other countries where such sukuk have loss absorption feature. The impact of other types of sukuk, such as liability sukuk, on Islamic banks’ profitability could also be an interesting field of study.

Practical implications

This study recommends Islamic banks to issue more Tier 1 sukuk to enhance their profitability indicators while meeting Basel III accord. This study also recommends investors to purchase the stocks of Islamic banks that issue Tier 1 sukuk because they are able to offer them higher EPS. The authors advise the UAE regulators to allow Islamic banks to issue Tier 1 sukuk with loss absorption feature to enable Islamic banks engage in more risky activities that usually provide larger profits. This study also suggests that the Islamic Financial Services Board (IFSB) reclassifies Tier 1 sukuk, with loss absorption feature, within the highest quality of capital, common equity Tier 1, to encourage Islamic banks to issue this type of sukuk, especially Basel III accord and IFSB 15 require higher ratios of common equity Tier 1 to risk-weighted assets.

Originality/value

This research contributes to the existing literature in two ways. First, it adds to the existing literature on the impact of sukuk on Islamic banks profitability. That is, contrary to prior studies that merely investigate the impact of issuing ordinary sukuk on profitability, this study explores a distinguished type of sukuk, that is Tier 1 sukuk, that has been surprisingly ignored so far. Second, this study shows that it is not only capital adequacy ratios that have improved as a result of issuing Tier 1 sukuk but also Tier 1 sukuk reduce the cost of capital of UAE Islamic banks which has been reflected in a higher profitability proxied by EPS. Hence, these sukuk serve a dual function for Islamic banks by improving both capital adequacy and profitability ratios.

Details

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

Keywords

Book part
Publication date: 4 December 2018

Indranarain Ramlall

Abstract

Details

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

Article
Publication date: 10 September 2018

Erna Sari, Suhadak, Sri Mangesti Rahayu and Solimun

This research aims to examine the effect of Tier-1 capital, risk management, and profitability on performance of Indonesia commercial banks.

1234

Abstract

Purpose

This research aims to examine the effect of Tier-1 capital, risk management, and profitability on performance of Indonesia commercial banks.

Design/methodology/approach

The research population consisted of all commercial banks listed in the Indonesia Stock Exchange periods of 2010 to 2014 with a total of 42 companies. The statistical analysis for testing the hypothesis using structural equation modeling (SEM) covariance based using WarpPLS.

Findings

Research result shows that Tier-1 capital has a positive effect on capital on risk management; risk management has a positive effect on performance, but risk management does not have an effect to profitability; profitability has a positive effect on performance; and Tier-1 capital has a negative effect on profitability. On the other hand, profitability has a negative effect on Tier-1 capital and performance has a positive effect on Tier-1 capital, whereas Tier-1 capital does not have an effect on performance.

Originality/value

The originality of this research can be seen from the causal relationship between the effects of Tier-1 capital, risk management and profitability on performance of commercial banks in the context of stock performance among Indonesia commercial banks. In addition, previous research findings remain inconsistent between one another. By conducting this research, it is expected that more consistent research findings than the previous ones can be generated. Sluggish global economic conditions which result in declined bank performance are an interesting topic to investigate.

Details

International Journal of Law and Management, vol. 60 no. 5
Type: Research Article
ISSN: 1754-243X

Keywords

Article
Publication date: 1 December 1996

Rifaat Ahmed Abdel Karim

Reports that, unlike Western commercial banks, Islamic banks are prohibited by Islamic precepts to receive or pay interest, inter alia, in all their transactions. Argues…

4638

Abstract

Reports that, unlike Western commercial banks, Islamic banks are prohibited by Islamic precepts to receive or pay interest, inter alia, in all their transactions. Argues that the Basle capital adequacy ratio (CAR), which was implemented in 1992 by regulatory authorities in many countries, is irrelevant to Islamic banks because it does not accommodate, among other things, one of the major instruments ‐ investment accounts ‐ through which Islamic banks mobilize funds on the basis of profit sharing. Develops four possible scenarios for the treatment of these accounts in the calculation of CAR and examines their impact on the financial and marketing strategies of Islamic banks in the light of the risk‐return relationship between the funds contributors of these banks.

Details

International Journal of Bank Marketing, vol. 14 no. 7
Type: Research Article
ISSN: 0265-2323

Keywords

Article
Publication date: 20 November 2020

Huifeng Bai, Julie McColl, Christopher Moore, Weijing He and Jin Shi

This empirical study, from the international retailing perspective, examines the direction of retailers' further expansion after initial entry into overseas host market in…

1091

Abstract

Purpose

This empirical study, from the international retailing perspective, examines the direction of retailers' further expansion after initial entry into overseas host market in the context of the luxury fashion retail market in China.

Design/methodology/approach

The research adopts qualitative multiple case studies.

Findings

After initial entry into China, luxury fashion retailers further expand their retail operations through three directional patterns: cautious, regional and countrywide expansions. The stepwise expansion from tier-1 to tier-2 and tier-3 cities remains popular; however, the importance of the tier system of Chinese cities has been weakened because tier-3 cities in affluent regions are perceived to have more potential than some tier-2 cities in less developed regions. The retailers assess a potential local market through interrelated criteria, including location and strategic importance, economic development, available store locations and staff, a high degree of urbanisation and tourism, debatable favourable policies and offers, and popularity of e- and m-commerce. There is a positive relationship between popularity of e- and m-commerce in a city and the potential of that city to run brick-and-mortar stores.

Originality/value

The paper offers an insight into the current international retailing literature by examining the direction of luxury fashion retailers' further expansion after their initial market entry. Particularly, the research considers a set of criteria which can be used to assess a potential local market, and the impact of e- and m-commerce on local market choices for brick-and-mortar stores.

Details

International Journal of Retail & Distribution Management, vol. 49 no. 2
Type: Research Article
ISSN: 0959-0552

Keywords

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