Article
To read the full-text of this research, you can request a copy directly from the authors.

Abstract

This paper discusses the economic impact of the Basel III reforms to banking regulation. We find that the long-term impact should be much less than many in the industry fear but the required accompanying changes to business models, business processes and governance, need to be carefully managed to avoid a severe shortage of funding. We agree with critics of Basel III that there is a real danger that reform will limit the availability of credit and reduce economic activity. But the problem is not higher capital and liquidity requirements per se but rather the difficulties of ensuring a coordinated adaption to the new rules across the entire financial services industry. The authorities must use the long period of Basel III implementation to engage both banks and investors in constructive dialogue about the required operational and business changes. If these are not forthcoming, then the cure will indeed turn out to have been worse than the disease.

No full-text available

Request Full-text Paper PDF

To read the full-text of this research,
you can request a copy directly from the authors.

... The Basel III rules are one of the most important sets of quantitative restrictions imposed on European banks and, therefore, knowledge about implementation and follow-up of outcomes is crucial for regulators and the business community. This is of particular importance as, according to Allen et al. (2012), approximately 60% of European banks from the sample analysed by those researchers did not (yet) fulfil the new Basel III liquidity requirements. ...
... Since the introduction of new capital and liquidity restrictions, a few studies which attempt to analyse the impact of the Basel III rules on banks have appeared, with mixed results being reported by scholars (Berger & Bouwman, 2009;Allen et al., 2012;Dietrich et al., 2014;Roulet, 2018). While the purpose of introducing the Basel III rules was to enhance more efficient and stable capital and liquidity structures in banking, these rules may potentially lead to the emergence of new problems. ...
... On the asset side, the definition of eligible liquid assets is likely to mean that banking liquidity will be heavily concentrated in government securities and other liabilities of the public sector, such as deposits in the central banks. Liquidity in the government securities market could deteriorate rapidly due to inelastic demand from banks locking up eligible liquid assets in the banks' portfolios (Allen et al., 2012). If a certain government nevertheless were to default, then its securities would suddenly become ineligible liquid assets on banks' balance sheets. ...
Article
Full-text available
Research Question: The study investigates the impact of liquidity on bank profitability following implementation of the Basel III regulations. Motivation: The theoretical framework of the paper draws upon previous research (Athanasoglou et al., 2008; Arif & Nauman Anees, 2012 and Dietrich et al., 2014) and assumes liquidity ratios to have a varying influence on bank profitability, depending upon a bank's specific and macroeconomic indicators. Idea: This study considers multiple proxies of bank liquidity, including Liquidity Coverage Ratio, a new measure inspired by the Basel III framework, and Loan-to-deposit and Financing gap ratio. Alongside traditionally-applied profitability measures, Earnings before Taxes, Depreciation and Amortisation are assumed to be alternative proxies. Data: In the study, a data set of 45 European banks with 180 observations during 2014-2017 and 37 observations for 2018 has been analysed. Tools: The study proposes a quantitative model based upon Ordinary Least Squires techniques complemented by Weighted Least Squares regressions analysis. Findings: The alternative liquidity risk measures have a significant and positive impact only on some profitability proxies, and an insignificant effect on others. The Basel III liquidity measure, LCR, was an insignificant contributor to all return proxies, which requires further investigation. The results also indicate that an increase in bank size and net provision for loan losses decreases profitability proxies. We also found mixed results concerning the effects of deposits and securities gains and losses on bank profits, and provided possible explanation.
... In doing so, they will increase their NSFRs. Allen et al. (2012) suggest that despite the long adjustment period for the new requirement, banks need to increase the liquidity of their assets and reduce the liquidity of their liabilities well ahead of the end of 2018. ...
... Gropp and Heider (2010) Several studies have examined the NSFR and evaluated its effect on the banking system. For instance, Allen, Milne and Thomas (2012) suggest that banks need to respond to changes in regulations by using some combination of loan asset reductions and/or equity, long-term funding and stable deposit increases. In doing so, banks will increase their NSFRs. ...
... In doing so, banks will increase their NSFRs. Allen et al. (2012) suggest that despite a long adjustment period for the new requirement, banks need to increase the liquidity of their assets and reduce the liquidity of their liabilities well ahead of the end of 2018. Dietrich et al. (2014) use data on Western European banks for the 1996-2010 period to show that historically most banks have not fulfilled the minimum NSFR requirements. ...
Article
Full-text available
This study examines loan loss provisions (LLPs) in Western European banks over the 2004–2015 period. In particular, this study examines the discretionary cyclical component of LLPs and the timeliness of loan loss provisioning. Moreover, this study investigates the cyclicality of impaired loans. Banks are divided into four groups according to bank ownership type. The groups are commercial banks, cooperative banks, private savings banks and publicly owned savings banks. We thus study the implications of bank ownership type on banks’ loan loss accounting. The regression results suggest that, in general, provisions have a component that is unexplained by discretionary factors and that decreases during economic expansions and increases during recessions. However, in cooperative banks, this component is significantly smaller, suggesting that they do not decrease provisions because of, for example, over-optimism. Furthermore, stakeholder banks allocate provisions for the near-future expected losses whereas commercial banks do not. Finally, the impaired loans of savings banks are less sensitive to changes in the business cycle than those of commercial banks and cooperative banks.
... Accordingly, scholars have identified various effects of liquidity on the bank outcomes such as risk-taking, performance, and money creation. For instance, the effect of funding liquidity (Acharya and Naqvi (2012), Dahir, Mahat, and Ali (2017), Drehmann and Nikolaou (2013), and Khan et al. (2017)), market liquidity and stock liquidity Umar and Sun (2016), liquidity buffer (Allen, Chan, Milne, and Thomas (2012), Bonner (2016), Hong, Huang, and Wu 2014), and King (2013)) on the bank risk-taking, liquidity creation, and performance. For example, Acharya and Naqvi (2012) and Khan et al. (2017) argued that high funding liquidity triggers bank risk-taking. ...
... Dahir et al. (2017) maintained that funding liquidity risk have significant effect on bank risk-taking. Allen et al. (2012), Bonner (2016), and King (2013) explained how liquidity buffer affect money creation and banks' performance. ...
... Consistent to Bouwman (2009), Delechat et al. (2012) used a sample of 100 banks from the Central American region and concluded that bank liquidity buffer and liquidity creation are related to bank size, capitalisation, and profitability. Similarly, Allen et al. (2012) maintained that to comply with the new liquidty standard, banks will be forced to maitain more liquid assets which will have an impact on the banks' liquidity management as well as their customers. Allen et al. (2012) further argued that the new requirements could dwindle the supply of credit to small business which are an important sector of the economy. ...
Article
Full-text available
Banks stability and sustainability are some of the key concern of banking regulators that had led to the introduction of new standards on liquidity. Scholars have expressed divergent view on the impacts of the new liquidity standards on banks. Studies have found that the new liquidity standards have significant effects on bank's performance, risk-taking behaviour, and liquidity creation. Accordingly, we found that most of these studies were carried out on the developed nations such as the US and Europe. As a result, this study conducts a systematic review of related literature on how liquidity affects banks' risk-taking, performance, and liquidity creation and discuss relevant issues on banks' liquidity, liquidity creation, and risk-taking behaviour in Nigeria then recommends arears for future studies.
... In doing so, they will increase their NSFRs. Allen et al. (2012) suggest that despite the long adjustment period for the new requirement, banks need to increase the liquidity of their assets and reduce the liquidity of their liabilities well ahead of the end of 2018. ...
... Gropp and Heider (2010) Several studies have examined the NSFR and evaluated its effect on the banking system. For instance, Allen, Milne and Thomas (2012) suggest that banks need to respond to changes in regulations by using some combination of loan asset reductions and/or equity, long-term funding and stable deposit increases. In doing so, banks will increase their NSFRs. ...
... In doing so, banks will increase their NSFRs. Allen et al. (2012) suggest that despite a long adjustment period for the new requirement, banks need to increase the liquidity of their assets and reduce the liquidity of their liabilities well ahead of the end of 2018. Dietrich et al. (2014) use data on Western European banks for the 1996-2010 period to show that historically most banks have not fulfilled the minimum NSFR requirements. ...
Thesis
Full-text available
This dissertation consists of four empirical essays. Each essay focuses on a distinct aspect of financial stability and cyclicality in the Western European banking sector. The first essay examines the role of bank ownership type in lending growth during the 2008–2009 financial crisis and the 2010–2013 sovereign debt crisis. The bank ownership types considered are commercial banks, cooperative banks, private savings banks and publicly owned savings banks. The regression results suggest that these two crises caused negative shocks to lending growth. These shocks were mitigated by stakeholder banks whose lending growth decreased significantly less than that of commercial banks or remained at pre-crisis levels during the crisis periods. The second essay considers the role of bank ownership type in the cyclicality of loan loss provisions (LLPs) and in the timeliness of provisioning. Additionally, this study examines the cyclicality of loan impairment. The results suggest that, in general, LLPs have a cyclical discretionary component that decreases during booms and increases during recessions. However, this cyclical component of LLPs is much smaller in cooperative banks than in other bank ownership types. This may be explained by the variable nature of their capital. Moreover, all the stakeholder banks allocate timelier LLPs than do commercial banks. Furthermore, loan impairment is less cyclical for savings banks than for commercial banks and cooperative banks. The third essay investigates Spain’s dynamic loan loss provisioning system. The system was introduced in 2000, and its primary objective is to reduce the cyclicality of LLPs. The results suggest that the Spanish system succeeded, to some extent, in reducing the cyclicality of provisions. However, the dynamic reserves were exhausted within the first crisis year. As a result, the system was ultimately unable to smooth the cyclical pattern of LLPs. Consequently, the system did not improve the solvency of Spanish financial institutions. Spanish savings banks in particular failed during the 2008–2013 crisis period. The fourth essay examines bank funding strategies. In particular, I examine customer deposits, long-term liabilities and equity, which are sources of stable funding according to the requirements of the net stable funding ratio (NSFR). Moreover, this study examines the funding profiles of Western European stakeholder banks. The results show that bank size is an important determinant of funding stability and that large banks have, on average, less stable funding profiles than do smaller banks. This result is mostly explained by the use of customer deposit funding, the source that is preferred by small banks. Moreover, the funding profiles of cooperative banks and private savings banks are more stable than those of commercial banks and publicly owned savings banks.
... This suggests that the higher the capital requirement is, the stricter the monitoring process employed by regulators and, consequently, the lower the level of risk-taking. Therefore, a higher capital ratio is expected to decrease banks' risk-taking behavior (Allen et al., 2012;Hellmann et al., 2000). ...
... The GDP growth rate is used to control for the effect of economic growth on banks' risk-taking behavior and to account for economic fluctuations. According to Fu et al. (2014), Uhde andHeimeshoff (2009), Beck et al. (2006), and Allen et al. (2012), a negative relationship exists between the GDP growth rate and banks' risk-taking behavior, implying that higher GDP growth results in less risk-taking behavior. The growth rate of GDP was calculated as the percentage of GDP over two periods. ...
... Ahmed et al. (2019),Allen et al. (2012),Hellmann et al. (2000), andZhou et al. (2019). However,Ahamed and Mallick (2017), and Mahdi and Abbes (2018) find a positive relationship between the capital ratio and overall bank risk. ...
Article
Full-text available
This study investigates the role of trustworthiness and governance quality in banks’ risk-taking behavior, along with other bank-specific and country-specific variables commonly studied. By employing a dataset comprising 202 banks in 16 countries in the Middle East and North Africa (MENA) from 2011 to 2017 and a two-step generalized method of moments methodology, trustworthiness was tested directly in relation to risk-taking and indirectly through the quality of the channel of governance. Our results indicate that trustworthiness reduces risk-taking, whereas governance quality exacerbates the risk-taking behavior of MENA banks. However, the effect of trustworthiness on risk-taking changes with good governance, indicating the substitution effect of trust on risk-taking because of the existence of weak formal institutions in MENA countries. The study recommends significant policies that can be implemented to promote public trust and bank stability.
... Accordingly, scholars have identified various effects of liquidity on the bank outcomes such as risk-taking, performance, and money creation. For instance, the effect of funding liquidity (Acharya and Naqvi (2012), Dahir, Mahat, and Ali (2017), Drehmann and Nikolaou (2013), and Khan et al. (2017)), market liquidity and stock liquidity Umar and Sun (2016), liquidity buffer (Allen, Chan, Milne, and Thomas (2012), Bonner (2016), Hong, Huang, and Wu 2014), and King (2013)) on the bank risk-taking, liquidity creation, and performance. For example, Acharya and Naqvi (2012) and Khan et al. (2017) argued that high funding liquidity triggers bank risk-taking. ...
... Dahir et al. (2017) maintained that funding liquidity risk have significant effect on bank risk-taking. Allen et al. (2012), Bonner (2016), and King (2013) explained how liquidity buffer affect money creation and banks' performance. ...
... Consistent to Bouwman (2009), Delechat et al. (2012) used a sample of 100 banks from the Central American region and concluded that bank liquidity buffer and liquidity creation are related to bank size, capitalisation, and profitability. Similarly, Allen et al. (2012) maintained that to comply with the new liquidty standard, banks will be forced to maitain more liquid assets which will have an impact on the banks' liquidity management as well as their customers. Allen et al. (2012) further argued that the new requirements could dwindle the supply of credit to small business which are an important sector of the economy. ...
Conference Paper
Full-text available
The ongoing banking regulations stressed on the need for banks to maintain more liquid assets on high-quality liquid assets as one of the measures to reduce risk-taking and ensure sustainability of the bank. However, the potential consequences on the bank's performance have not been given much attention in Nigeria, especially as the Nigerian government has pooled out its accounts from commercial banks due to the implementation of the TSA. Also, the potential effects which maintaining too much liquid assets to the banks and the other sectors of the economy remain an unanswered question in Nigeria. As a result, this study performs a systematic review of related literature on how liquidity affects banks' performance as well as liquidity creation. The review of existing literature revealed that bank's liquidity has significant influence on banking outcomes such as banks performance, liquidity creation, and risk-taking. However, we find that empirical evidence on all these is scanty in Nigeria. In line with these, we find it difficult to conclude or generalise the influence of liquidity on money creation, performance and risk-taking of the Nigerian banks. Therefore, we recommend further studies to provide additional insight for understanding of the relationship between liquidity and aforementioned factors in Nigeria. Thus, policy makers, banking regulators and other stakeholders will be properly guided on the potential impact of banks' liquidity and their performance, liquidity creation and risk-taking.
... Some analysts maintain that the assumed impact of the stringent Basel III capital requirements and indicators will be passed on from banks to their customers (in terms of reduced credit supply and rising interest spreads). Indeed, they hold that the banking system will be obliged to scale up its stocks of high quality liquid asset (HQLA) not only in an effort to meet the Basel III requirements, but also with the aim of addressing inevitable escalations in costs [1]. Similarly, Hyun and Rhee [12] argue that exacerbated solidity and liquidity requirements, combining with stringent control on banks, might be a prelude to a credit crunch [13]. ...
... Y [Aggregate loans] = α + β1 NSFR + β2 LCR + β3 capital requirement + β4leverage + β5 PD + β6 dimension + β7 VAR + β8 operational risk + ε (1) where: Aggregate loans = the total lending of a bank, expressed as a percentage of its total assets (Y 1 ); NSFR = Net Stable Funding Ratio. The NSFR is one of the measures that the Basel Committee expects to increase resilience within the banking sector. ...
... The international financial crisis was a consequence of the failures of Basel II, where observers frequently mentioned that the dependency it caused on the rating agencies and regulatory capital requirements were determined based on the use of internal models (Moosa 2010). Since the Basel II accord appeared to be one of the causes of the global crisis in 2008, on 12 September 2010, the oversight body of the BCBS, consisting of Heads of Supervision and the Group of Central Bank Governors gave a press release stating a significant strengthening of the capital requirements (Allen et al. 2012). On 26 July 2010, the full endorsement of the agreement to the suggested reorganizations to the Basel II framework was achieved. ...
... In addition, a 2.5% capital conservation buffer The international financial crisis was a consequence of the failures of Basel II, where observers frequently mentioned that the dependency it caused on the rating agencies and regulatory capital requirements were determined based on the use of internal models (Moosa 2010). Since the Basel II accord appeared to be one of the causes of the global crisis in 2008, on 12 September 2010, the oversight body of the BCBS, consisting of Heads of Supervision and the Group of Central Bank Governors gave a press release stating a significant strengthening of the capital requirements (Allen et al. 2012). On 26 July 2010, the full endorsement of the agreement to the suggested reorganizations to the Basel II framework was achieved. ...
Article
Full-text available
How has Basel III (Bank for International Settlements), regarding the computation, measurement, and management of the liquidity coverage ratio (LCR), vitalized the Islamic banking sector in emerging economies? Vice versa, what is the Islamic banking sector’s capacity to respond in embracing Basel III? This study aims to review the current issues faced by a bank as it discusses the current regulatory guidelines and operational challenges in implementing the system. Based on the implementation of LCR preliminary secondary data of Malaysian banks between 2010 and 2016, this study finds that the readiness of LCR system implementation in the Islamic banking industry is currently low because LCR is still relatively new for all financial institutions and vendors. There is a huge gap between the present system infrastructure of the banks and the LCR model requirements as defined by BNM (Bank Negara Malaysia) under Basel III. Nevertheless, this finding opens new horizons of understanding and practically offers further investigations for the whole banking sector in Malaysia. Thus, policy makers, regulators, and industry players should utilize a unique framework for Islamic banks when strategizing liquidity risk management.
... Closely linked to bank capital is bank liquidity, which has received significant attention post-Global Financial Crisis due to the critical role liquidity risk played in conceiving said crisis (Gambacorta & Marques-Ibanez, 2011;Cornett et al., 2011;Allen et al., 2012). Specifically, Allen et al. (2012) outline the originate-to-distribute banking business model, which generated heavy reliance on wholesale funding, which was a strong predictor of the Global Financial Crisis (Caprio Jr. et al., 2014). ...
... Closely linked to bank capital is bank liquidity, which has received significant attention post-Global Financial Crisis due to the critical role liquidity risk played in conceiving said crisis (Gambacorta & Marques-Ibanez, 2011;Cornett et al., 2011;Allen et al., 2012). Specifically, Allen et al. (2012) outline the originate-to-distribute banking business model, which generated heavy reliance on wholesale funding, which was a strong predictor of the Global Financial Crisis (Caprio Jr. et al., 2014). In fact, Dagher and Kazimov (2015) used US mortgage data between 2005 and 2008 to show that during the crisis, banks with more core deposits-to-assets displayed lower mortgage rejection rates. ...
Article
Since the introduction of the third Basel Accord (Basel III) in 2011, there have been debatable outcomes regarding the effects of increased regulatory capital on economic growth. We aim to add clarity to some of these debates by investigating one primary channel through which regulatory capital may affect economic growth, viz. credit extension to the private sector. We capture credit extension through four dimensions, namely: bank credit to the private sector, bank credit to households, bank credit to firms, and bank credit-to-deposit ratio. The latter we use as a metric to capture funding (in)stability. We use a panel vector autoregression (pVAR) model on a sample of 124 countries, across the period 1998–2015 and analyse impulse response functions and forecast error variance decompositions to investigate the interdependence of regulatory capital, credit extension, and GDP growth. Our results indicate that regulatory capital reduces unstable credit (credit that may induce economic distress) while improving GDP growth. Simultaneously, such unstable credit shows negative effects on GDP growth. From this evidence, we infer that regulatory capital can induce funding stability within banking sectors, which can encourage sustainable economic growth. This provides strong support for the Basel III changes which have put more emphasis on Tier 1 capital and stable funding.
... First, new legislation resulting from the global financial crisis of 2008 requires banks to revisit their strategy and operations. Two major examples of such legislation are the Payments Service Directive that aims to modernize cross-border EU-wide payments (Donnelly, 2016), and Basel III that aims to improve the banking sector's stability, risk management, and transparency (Allen et al., 2012). In response to this, banks have to re-assess their business model to remain profitable and adapt current processes in order to comply with these new regulations. ...
Article
Full-text available
Purpose Since the 2008 financial crisis, the financial industry is in need of innovation to increase stability and improve quality of services. The purpose of this paper is to explore internal barriers that influence the effectiveness of projects within large financial services firms focussing on potentially disruptive and radical innovations. While literature has generally focused on barriers within traditional technology and manufacturing firms, few researchers have identified barriers for these type of firms. Design/methodology/approach A framework of internal barriers was developed and validated by means of an explorative case study. Data were collected at a European bank by exploring how innovation is organized and what barriers influence effectiveness of eight innovation projects. Findings Six items were identified as key barrier for potentially disruptive and radical innovations (e.g. traditional risk-avoidance focus, and inertia caused by systems architecture). As such, in the sample these were more important than traditionally defined barriers such as sources of finance, and lacking exploration competences. Research limitations/implications Based on a small number of projects within one firm, the results highlight the need for more in-depth research on the effects of barriers and how barriers can be overcome within this industry. Originality/value The results show that there is a discrepancy between the societal demand for radical change within the financial industry and the ability of large financial services firms to innovate. The study identifies which unique internal barriers hamper potentially disruptive and radical innovation in large financial services firms.
... Bearing these caveats in mind, we suggest the implementation of a set of regulatory tools that we present and discuss in Section 3. As shown in Table 2, we focus mostly on lender-based measures, 8 which are already defined under Pillar I, by emphasizing the "green potential" they entail. Indeed, we point out that the existing capital requirements could make banks more hesitant in respect of green lending, and liquidity requirements could penalize long-term loans (Blundell-Wignall and Atkinson, 2010;Allen et al., 2012;Angelini et al., 2015). Thus, it is important to change their impact in order to achieve the objectives discussed above. ...
... Indeed, Furlong and Keeley (1989) and Rochet (1992) conclude that a higher capital adequacy ratio may also reduce the incentive of banks to take on excessive risk, thereby ameliorating moral hazard effects 1 . Not surprisingly, however, an over-capitalised banking system limits the bank financing and investment activities, which negatively impacts bank profitability and efficiency, as well as reducing economic growth (Barrell et al., 2009;Allen et al., 2012;Abou-El-Sood, 2016;Bitar et al., 2018). ...
The denominator of the capital adequacy ratio (CAR) for Islamic banks includes an adjustment factor, alpha, arising from the subsidisation of investment account holders’ returns using bank equity. The methodology established by the risk management standard-setting body for Islamic banks, the IFSB, estimates an alpha for each country using panel-data and normally distributed asset returns for its credit institutions. Consequently, the IFSB methodology precludes bank-specific alphas linked to the actual risk profile of underlying assets. There is also no discernible mapping between alpha and a bank's own propensity to subsidise cash returns. This paper instead develops a new theoretical model for bank-specific alpha that is estimated for 43 Islamic banks in 11 countries. Our alpha values broadly correspond with those of the IFSB. However, a form of regulatory arbitrage is shown to exist which favors banks with relatively high alphas. This finding also has policy implications for bank efficiency and systemic risk.
... Bearing these caveats in mind, we suggest the implementation of a set of regulatory tools that we present and discuss in Section 3. As shown in Table 2, we focus mostly on lender-based measures, 8 which are already defined under Pillar I, by emphasizing the "green potential" they entail. Indeed, we point out that the existing capital requirements could make banks more hesitant in respect of green lending, and liquidity requirements could penalize long-term loans (Blundell-Wignall and Atkinson, 2010;Allen et al., 2012;Angelini et al., 2015). Thus, it is important to change their impact in order to achieve the objectives discussed above. ...
... According to Schwerter (2011) the Basel III accord provides more effective regulations to greater financial stability. Allen et al., (2012) suggests that the adoption of Basel III will decrease the risk of banking industry. These practices have the potential to transform business models, processes and governance of international banks. ...
Article
Full-text available
This paper examines the effectiveness of Basel III framework by linking the Net Stable Funding Ratio (NSFR) with profitability and stability of Asian Islamic Banks. The formula for measuring NSFR was introduced in the Basel III accord. Data from 89 Islamic banks for the period of (2011-17), from 20 countries in the (southern, eastern and western) Asian regions where Islamic Banking System is applicable was collected. Two-step Generalized Method of Moments (GMM) model estimator is used in order to handle simultaneity bias and endogeniety problem. The result showed that the Islamic banks of Asian regions are stable. All the results validate Basel III NSFR as a significant safeguard regulatory step for stability and insignificant for profitability of the banks. It is proposed that Banking supervision committee must consider the different nature of Islamic banks and formulate a different criteria which will not affect their profitability as Islamic banks has one more layer of supervision in the form of Shariah Advisory board other than Central bank of any country.
... Since the Financial Crisis of 2007- 2008, liquidity has received quite a bit of attention by researchers as well as regulators. Allen et al. (2012) analyze Basel III's provisions in detail and argue that higher capital and liquidity buffers can be consistent with more financial stability. ...
... In the long run, however, having persistently positive or persistently negative l t − d t has implications for the build-up of liquidity risk, as measured by the relative "customer funding gap", L D L t t t . The latter is employed by policy-makers and researchers alike as an indicator of the systemic risk (BoE, 2010;Allen et al., 2012;Albertazzi and Bottero, 2014) and is related to the Net Stable Funding Ratio (NSFR), a core stability indicator adopted as a standard minimum requirement in the Basel III framework since January 2018, described in more detail in Appendix A. ...
Article
By adjusting lending, banks can smooth the macroeconomic impact of deposit fluctuations. This may, however, lead to extended periods of disproportionately high lending relative to deposit intake and, under certain conditions, to the accumulation of risk in the banking system. Using bank-level data for 8477 banks in 129 countries for the period from 1992 to 2015, we examine how banks' market power and other characteristics may contribute to smoothing or amplification of shocks and the accumulation of risk. We find that the higher their market power the lower is the growth rate of lending relative to deposits. As a result, in periods of falling deposits higher market power for the average bank is associated with a greater fall in lending, consistent with amplification of adverse effects during relatively bad times. Strikingly, at very high levels of market power, there is a threshold past which the effect of market power on the growth rate of lending relative to deposits turns positive so that “superpower” banks may contribute to the smoothing of adverse effects when deposits are falling. In periods of rising deposits, however, such banks are more likely to lead to amplification and accumulation of risk in the economy.
... Since the Financial Crisis of 2007- 2008, liquidity has received quite a bit of attention by researchers as well as regulators. Allen et al. (2012) analyze Basel III's provisions in detail and argue that higher capital and liquidity buffers can be consistent with more financial stability. ...
Article
Full-text available
Using international listed banks from the United States, Europe, Japan and China from 2004 to 2014, we analyze the effect on banks’ risk of some of the most relevant new elements of the prudential regulatory framework proposed after the Financial Crisis. We measure risk by a market measure, the volatility of banks’ stock returns. We also examine the effect of government support during the financial crisis and designation as a G-SIB. We find little support for an association with government support and none for a negative relationship. We find support for a positive effect of designation as a G-SIB on risk. We find a positive association with securities trading and a negative association with capital. Banks´ chosen liquidity is unimportant for this measure of risk.
... This significant marginal benefit suggests that UK banks need to increase their reliance on common equity in their capital base beyond the level required by Basel III as well as boosting customer deposits as a funding source. Allen, Chan, Milne, and Thomas (2012) find that the long-term economic impact of Basel III should be much less than many in the industry fear but the required accompanying changes to the business models, business processes and governance, need to be carefully managed to avoid a severe shortage of funding. The authors argue with critics of Basel III that there is a real danger that reform will limit the availability of credit and reduce economic activity. ...
Article
The recent international financial crisis exposed many of the frailties that exist within the European banking sector. One major decision taken by the European Commission was to transition the powers of the Committee of European Banking Supervisors to that of the European Banking Authority (EBA). Our analysis focuses primarily on the differing behaviour by each European country's banking sector to major shocks, namely that in the form of bank closures. It is then necessary to investigate and further understand the role that the European Banking Authority now possesses with regards to releasing sensitive announcements based on the underlying currents of the European Banking system as measured by domestic banking sector stock returns. Finally, we investigate the cultural characteristics that can be uncovered by analysing the responses of domestic banking sectors to uniform regulation. We present three key findings. First, European countries with more local banking networks in the form of credit unions, public banks or savings banks, generate greater levels of volatility when compared to that of their commercial counterparts, particularly in countries with more monopolistic sectors. Secondly, the announcements of the European Banking Authority generate significant volatility effects for the European banking sector at large, with particular emphasis on stress testing results, but also announcements based on recapitalisation, regulation and transparency. Finally, cultural distance effects are identified, indicating that peripheral states are experiencing more substantial volatility effects to European Banking Authority decisions. These results indicate that uniformity of regulation may in fact be hindering and restricting the growth of some domestic and more peripheral and locally designed banking sectors in the form of rules designed for commercial banking operations.
... As a very recent professional research claims, this is going to be especially challenging for banks to achieve these requirements; they come at a time and place where net interest margins are under a continuous downward stretch as a result of lower interest rates; a higher rate of non-performing loans; ever-increasing regulatory requirements that push up banks' financing costs; competitive pressures from existing banks, new entrant banks and non-banks [65] (such as FinTechs, for example). Others argue that this pressure is not what it currently seems to be in that as with any new regulation that reconstructs the system-wide regulatory foundations, short-term reactions are just noise relative to the long-term stabilising effects; they warn though that in order to have the intended results, considerable structural amendments are necessary, where failure to put into practice the required transformations may actually make the cure worse than the disease, thus increasing banking costs materially [66]. ...
Article
Full-text available
The purpose of this paper is to make a highly topical and practical contribution by investigating the interplay between capital and liquidity risk management and managerial decision making in banking, following the Basel III introduction for enhancing the safeguards against systemic risk. Specifically, we attempt to gauge the experience and assess the degree of tensions among banking practitioners’ perspectives on the reformed banking liquidity practice and risk-capital management in light of the newly introduced increased capital and liquidity requirements, which are to become fully and unilaterally effective as of 2019. As currently seen the liquidity provision requirement has become a distinct form of ‘sharing’ financial risks in the global economy, which includes the supply of capital from its issuers. This article reviews the issue from a European perspective attempting to gain insight into: (1) the suggestion that the new regulations lack internal consistency owed to their complexity, which creates the potential for both inter- and intra-company regulatory capital arbitrage and credit constriction; and (2) the suggestion that increased capital and liquidity requirements may have a significant impact on bank behaviour and/or certain business model segments. Both of the above can potentially distort managerial behaviour through altering managerial incentives and hence fail to adequately regulate bank behaviour. With regard to the liquidity requirements, whilst we do not attempt to quantifiably assess the degree to which liquidity regulations (the liquidity coverage ratio in particular—LCR henceforth) affect returns on equity/assets to banks, our interviews are used as a triangulating measure for complementing quantitative studies that can provide a further insight into the perception of affecting managerial incentives. We aim to add to, update, and enrich the studies around the vital research question of whether the new regulation and liquidity standards can achieve their ultimate objective of upholding financial soundness and stability. Therefore, this research is important to complete the extant literature on updated insiders’ perspectives that investigate the effectiveness of the new regulatory framework imminently to be fully applicable by 2019. Where the views of the professionals who have voiced their concerns, support, and/or proposals provide for a material contribution, these have also been provided.
... Moreover, by investigating the effects of banking market structure, governance, and changes in bank supervision, Chen and Liao (2011) find that the compliance of the host country to the Basel guidelines increases foreign bank operations and profitability. Further, Allen et al. (2012) assess the impact of the Basel III banking regulation reforms and find that in the long-term the structural implications might reduce the supply of credit, and disrupt the economy. Regarding the stringency of capital and liquidity requirements, they also find that operating a foreign subsidiary will be less likely in the short run. ...
Thesis
This thesis examines the determinants of foreign banks’ presence and their organizational strategies abroad and tests how such internationalization affects bank performance and systemic risk. The dissertation is comprises of three empirical essays on European banks. The first chapter analyzes whether differences in economic development of the host countries and the maturity of their financial system are relevant to explain how banking regulation affects the choice of the foreign location and the organizational strategy of an exclusive organizational network with only branches or subsidiaries or a mix model with both affiliates’ types. The findings indicate that over the 2011–2013 period, European banks prefer high-income countries with numerous activity restrictions and weaker supervision but less developed countries with less restrictions and stronger supervision. Regarding the choice of foreign organizational form, banks rather operate subsidiaries in high and middle-income countries with stringent entry requirements but prefer branches in developing countries with stringent capital requirements and greater supervisory power. However, banks always tend to avoid locations with stronger capital regulation than at home. Yet when they are present in such countries, they operate branches. The second chapter investigates how foreign organizational and geographic complexity affect the parent bank’s individual risk and profitability. Our results show that being present abroad is beneficial for bank stability as it contributes to lower default risk. Banks present abroad through both subsidiaries and branches appear to be more stable than banks present under one form only. Being present with branches only is the most effective way to reduce risk-taking. Nevertheless, higher geographic dispersion of affiliates around different world regions is associated with higher volatility of earnings and higher profitability. Chapter 3 considers the state and soundness of the banking system and examines whether the presence of banks abroad with subsidiaries affects bank systemic risk differently during calm period (2005–2007), distress times of the global financial crisis and the European Sovereign debt crisis (2008–2011), and years after (2012–2013). We show for European listed banks that operating subsidiaries abroad is associated with lower systemic risk in normal times. However, when the banking system is facing severe shocks, such internationalization produces on systemic risk reversed and negative effects that are long-lived and aggravated in the years after the crises. Our findings suggest that bank internationalization and foreign complexity are important for greater stability in normal times but turn out to increase instability during years of financial turmoil and in the aftermath.
... Moreover, by investigating the effects of banking market structure, governance, and changes in bank supervision, Chen and Liao (2011) find that the compliance of the host country to the Basel guidelines increases foreign bank operations and profitability. Further, Allen et al. (2012) assess the impact of the Basel III banking regulation reforms and find that in the long-term the structural implications might reduce the supply of credit, and disrupt the economy. Regarding the stringency of capital and liquidity requirements, they also find that operating a foreign subsidiary will be less likely in the short run. ...
... Bearing these caveats in mind, we suggest the implementation of a set of regulatory tools that we present and discuss in Section 3. As showed in Table 1, we focus mostly on lender-based measures 5 that are already defined under Pillar I 6 , by emphasizing the "green potential" they entail. Indeed, we point out that the existing capital requirements could make banks more hesitant towards green lending, and liquidity requirements could penalize long-term loans (Blundell-Wignall and Atkinson, 2010; Allen et al., 2012;Angelini et al., 2015). It is thus important to change their impact in order to achieve the above-discussed objectives. ...
Research
Full-text available
While there is a growing debate among researchers and practitioners on the possible role of central banks and financial regulators in supporting a smooth transition to a low-carbon economy, the information on which macroprudential instruments could be used for reaching the "green structural change" is still quite limited. Moreover, the achievement of climate goals is still affected by the so-called "green finance gap". The paper addresses these issues by proposing a critical review of existing and novel prudential approaches to incentivizing the decarbonization of banks' balance sheets and align finance with sustainable growth and development objectives. The analysis carried out in the paper allows understanding under which conditions macropruden-tial policy could tackle climate change and promote green lending, while containing climate-related financial risks.
... The current capital requirement framework is misaligned with the objectives of a green transition, in that it could make banks more hesitant towards financing green loans (D'Orazio and Popoyan 2019) and may result in longer-term loans (to mainly non-financial business) being penalised (Blundell-Wignall and Atkinson 2010; Allen et al. 2012;Angelini et al. 2015). It is within this context that a 'green supporting factor', reducing capital adequacy requirements (the ratio required by the regulator of a bank's capital over its risk-weighted assets), has gained popularity (D'Orazio and Popoyan 2019). ...
Preprint
Full-text available
Climate-related financial risks (CRFR) are now recognised by central banks and supervisors as material to their financial stability mandates. But while CRFR are considered to have some unique characteristics, the emerging policy agenda for dealing with them has largely focused on conventional market-based solutions. Current policy emphasises information gaps that prevent the accurate assessment of market risk. The assumption is that these gaps can be remedied via disclosure, transparency, scenario analysis and stress testing, which will enable markets to self-correct. We argue this approach is misguided as CRFR are characterised by radical uncertainty and hence ‘efficient’ price discovery is not possible. Instead, a ‘precautionary’ policy approach is proposed. Since climate change poses a severe and potentially irreversible threat, lack of scientific certainty as to its exact nature or timing should not prevent regulatory action to mitigate its impact. Such an approach justifies fully integrating CRFR into financial policy, including both prudential and monetary policy frameworks. Central banks and financial supervisors can and should actively steer market actors in a clear direction — towards a managed transition — to ensure a scenario that minimises harm to the financial system and the wider economy in the future.
... Basel 2 and 3 have also improved the internal and external operations of commercial banks. However, critics of Basel 3 point to the reduced availability of credit and curtailment of economic activity if they are to be implemented (Allen, Chan, Milne, & Thomas, 2012). ...
... Instead, the analysis on the lending concentration parameter is associated with the debate on the Second Pillar, about "Risk management and supervision," which also contains the topic of managing risk concentrations. In general, in recent years, numerous studies have analyzed in detail the various regulatory reforms (or reform proposals) and their impacts both on the economy and on profitability and management of banks, deriving from the strengthening of capital requirements [ Jokipii and Milne (2008), Hanson et al. (2010), King (2010), Al-Darwish et al. (2011), Carlson et al. (2011), Gambacorta (2011, Agenor and Pereira da Silva (2012), Allen et al. (2012), Francis and Osborne (2012), Mora and Logan (2012), Tutino et al. (2012), Vollmer and Wiese (2013), Zhou (2013)]. 8 However, as already said, an important aspect of our contribution is based on the use of the agent-based methodology that allows us to simulate the joint impact of more than a single regulatory rule on macroeconomic performance and financial stability. ...
Article
We explore the effects of banking regulation on financial stability and macroeconomic dynamics in an agent-based computational model. In particular, we study the minimum level of capital and the lending concentration towards a single counterpart. We show that an overly tight regulation is dangerous because it reduces credit availability. By contrast, overly loose constraints, associated with a high payout ratio, increase financial fragility that, in turn, damage the real economy. Simulation results support the introduction of regulatory rules aimed at assuring an adequate capitalization of banks, such as the Capital Conservation Buffer (Basel III reform).
... After the financial crisis of 2008, banks and other financial service providers (FSP) have been under severe pressures to increase their stability and enhance the quality of services (Das et al., 2018). New regulations like Payments Service Directive in digital markets (Donnelly, 2016) and Basel III (Allen et al., 2012) force banks to be more transparent and request access to billions of banks customer data. Meanwhile, disruptive technological innovations such as big data, blockchain and Internet of things have transformed market trajectories. ...
Article
Purpose Big data analytics (BDA) is recognized as a recent breakthrough technology with potential business impact, however, the roadmap for its successful implementation and the path to exploiting its essential value remains unclear. This study aims to provide a deeper understanding of the enablers facilitating BDA implementation in the banking and financial service sector from the perspective of interdependencies and interrelations. Design/methodology/approach We use an integrated approach that incorporates Delphi study, interpretive structural modelling (ISM) and fuzzy MICMAC methodology to identify the interactions among enablers that determine the success of BDA implementation. Our integrated approach utilizes experts' domain knowledge and gains a novel insight into the underlying causal relations associated with enablers, linguistic evaluation of the mutual impacts among variables and incorporating two innovative ways for visualizing the results. Findings Our findings highlight the key role of enabling factors, including technical and skilled workforce, financial support, infrastructure readiness and selecting appropriate big data technologies, that have significant driving impacts on other enablers in a hierarchical model. The results provide reliable, robust and easy to understand insights about the dynamics of BDA implementation in banking and financial service as a whole system while demonstrating potential influences of all interconnected influential factors. Originality/value This study explores the key enablers leading to successful BDA implementation in the banking and financial service sector. More importantly, it reveals the interrelationships of factors by calculating driving and dependence degrees. This exploration provides managers with a clear strategic path towards effective BDA implementation.
... The introduction of Basel III regulations on banking supervision across the world on a voluntary basis was of the immediate need to enhance supervision to strengthen regulations to better manage risk in the financial sector. New guidelines on capital requirements, leverage ratios, and liquidity ratios are the main components of the Basel III regulatory framework to enhance investors' confidence and strengthen the capability of financial institutions to handle any possible market hit (Allen et al., 2012). Implementation of Basel III requirements aims to diminish the systematic risk by increasing the capacity to absorb losses from potential failure that might occur in the future. ...
Article
Full-text available
Commercial banks' credit risk management is a function that focuses on events that may affect the achievement of objectives. Improper management will result in negative consequences or results. Therefore, banks usually pay more attention to events with a higher probability and impact of a direct loss of revenue and capital than events that may result in positive effects. This research adopts secondary data and seeks to analyze credit risk management of commercial banks in Kosovo through a developed DEA (Data Envelopment Analysis) model. The study covers seven commercial banks in Kosovo for the period 2008-2016 and uses Tobit regression to determine credit risk efficiency. The estimation results show a statistically significant positive relationship between bank efficiency, capital adequacy, and loans. Moreover, the study found that banks' efficiency factors, including profitability, deposits, costs, banks size, GDP growth, and inflation, are not statistically significant.
... For instance, for the full implementation of other capital standards (Tier 2 capital and Leverage ratio) and liquidity standards (LCR-liquidity coverage ratio and NSFR-net stable funding ratio) there is still more than 950 billion EUR missing. With reference to that, Allen et al. (2012) emphasize the existence of trade-off between high costs of adjustments to the new reforms and financial stability. Also, they highlight the negative consequences of the new reform on bank liquidity management and the necessity of changing the regulatory definition of liquid assets. ...
Article
Full-text available
We focus on 32 Croatian banks in the period 2002-2010 in order to investigate the solvency-liquidity nexus. Dynamic panel data analysis is applied on two basic models in which current liquidity ratio and equity to assets ratio are set as dependent variables, interchangeably, and other explanatory variables employed to capture the effect of bank size, profitability and asset quality as well as macroeconomic environment. We found two-way positive relationship between bank solvency and liquidity. However, bank size plays an important role in the capital and liquidity management, and trade-off between the solvency and liquidity level is found for the larger banks. Therefore, policymakers should take into consideration capital and liquidity interdependence, as well as the bank size effect when designing capital and liquidity requirements in order to downsize the regulatory burden for smaller banks, and increase them for larger banks. Namely, larger banks tend to minimize regulatory costs by avoiding simultaneous increase of liquidity and solvency. Small banks do exactly the opposite and stock both, capital and liquidity, what potentially makes their funds allocation sub-optimal, from their own as well as social point of view. Altogether, the paper contributes to scarce empirical evidence regarding bank solvency and liquidity interdependence, particularly when the post-transitional banking sectors are taken into consideration. It adds to knowledge on bank financial management in praxis, and bank managers and prudential authorities might find it relevant for their policies design and implementation.
... Just as Friedman emphasized for required reserve ratios (for example in Friedman 1959, p. 46), required liquidity cannot be used absent a decrease in the denominator of the required liquidity ratio. 4 Allen et al. (2012) analyze Basel III's provisions in detail and conclude that higher capital and liquidity buffers can be consistent with more financial stability. They also conjecture that there might be little or no decrease in economic activity eventually despite others' estimates of effects of one-quarter or onehalf percent per year decreases in real Gross Domestic Product growth. ...
Article
Using a sample of international listed banks from the United States, Europe, Japan and China, our paper analyzes the effect on risk of some of the most relevant new elements of the prudential regulatory framework following the Financial Crisis of 2007-2008. Our analysis also takes into consideration governments' financial support received by banks in crisis. We use the realized volatility of banks' stock returns as a measure of the market’s perception of banks' overall risk. In general we find that regulators' approach to safety and soundness seems consistent with the ex post market perception of banks' overall risks. Regulation aimed at reducing banks' leverage is consistent with prudential regulators' overall objective of limiting banks' idiosyncratic risks. The evidence is mixed regarding regulation aimed at imposing limits on securities trading (e.g. proprietary trading). Public support of banks is consistent with preserving financial stability; however, government capitalization of individual banks enhances risk perception since the market recognizes the capital injection as a revelation of partially unknown problems penalizing the bank.
... The current capital adequacy requirement framework (the ratio required by the regulator of a bank's capital over its risk-weighted assets) is misaligned with keeping the financial system resilient to CRFRs, failing both to price in the credit risks of financing of carbon-intensive economic activities whilst also prompting unfavorable conditions for green lending (Blundell-Wignall and Atkinson, 2010;Allen et al., 2012;Angelini et al., 2015;D'Orazio and Popoyan, 2019). In the face of the necessary rapid decarbonisation of the economy, a precautionary approach would be to increase capital adequacy requirements for 'dirty loans' -also known widely known as a 'brown penalising factor'. ...
Article
Full-text available
Climate-related financial risks (CRFR) are now recognised by central banks and supervisors as material to their financial stability mandates. But while CRFR are considered to have some unique characteristics, the emerging policy framework for dealing with them has largely focused on market-based solutions that seek to reduce perceived information gaps that prevent the accurate pricing of CRFR. These include disclosure, transparency, scenario analysis and stress testing. We argue this approach will be limited in impact because CRFR are characterised by radical uncertainty and hence ‘efficient’ price discovery is not possible. In addition, this approach tends to bias financial policy towards concern around avoiding short-term market disruption at the expense of longer-term, potentially catastrophic and irreversible climate risks. Instead, an alternative ‘precautionary’ financial policy approach is proposed that offers an intellectual framework for legitimizing more ambitious financial policy interventions in the present to better deal with these long-term risks. This framework draws on two existing concepts — the ‘precautionary principle’ and modern macroprudential policy — and justifies the full integration of CRFR into financial policy, including prudential, macroprudential and monetary policy frameworks.
... These strategies are likely to affect the liquidity management function of banks if a stronger emphasis is placed on the retention of assets, particularly government securities. Allen et al. (2012) in their study discussed, especially the restructuring of banks' balance sheets for more liquid assets and as a result of the impact on the availability of the loan. Covas and Driscoll (2014) developed a balance to examine the macroeconomic impact of introducing a minimum liquidity standard on existing capital adequacy requirements for banks. ...
... For example, achieving the new ratio by reducing dividends is unlikely to have the same impact on the credit cycle as reducing the loan portfolio. Banks can also issue equity or substitute riskier assets with safer ones, and they can also restructure their business models, reducing inefficiencies and compensation costs (Allen et al. 2012;MAG 2010a). 7 De Marco and Wieladek (2015) identify three conditions that need to be satisfied for higher capital requirements to affect loan supply: the cost of bank equity must exceed the cost of debt; capital requirements must be binding on a bank's choice of capital; and the sources of funding of borrowers must be limited. ...
... The Basel Committee on Banking Supervision introduced the Basel III reforms in 2010 to address the vulnerabilities in the financial system focusing on the liquidity requirements expressed through the Liquidity Coverage Ratio (LCR) and the Net Stable Finding Ratio (NSFR). Basel III stirred numerous arguments between the supporters of the reforms who argue that Basel III will increase the stability of the financial system and the opponents who claim that the reform will reduce credit availability and economic activity ( King (2013); ; ; Miles et al. (2013); Allen et al. (2012)) ...
Working Paper
Full-text available
Stability of the banking system and macro-prudential regulation are essential for healthy economicgrowth. In this paper we study the European bank network and its vulnerability to stressing differ-ent bank assets. The importance of macro-prudential policy is emphasized by the inherent vulnerabilityof the financial system, high level of leverage, interconnectivity of system’s entities, similar risk exposureof financial institutions, and susceptibility for systemic crisis propagation through the system. Currentstress tests conducted by the European Banking Authority do not take in consideration the connectivityof the banks and the potential of one bank vulnerability spilling over to the rest of the system. We createa bipartite network with bank nodes on one hand and asset nodes on the other with weighted linksbetween the two layers based on the level of different countries’ sovereign debt holdings by each bank.We propose a model for systemic risk propagation based on common bank exposures to specific assetclasses. We introduce the similarity in asset distribution among the banks as a measure of bank closeness.We link the closeness of asset distributions to the likelihood that banks will experience a similar leveland type of distress in a given adverse scenario. We analyze the dynamics of tier 1 capital ratio afterstressing the bank network and find that while the system is able to withstand shocks for a wide rangeof parameters, we identify a critical threshold for asset risk beyond which the system transitions fromstable to unstable.
... The Basel Committee on Banking Supervision introduced the Basel III reforms in 2010 to address the vulnerabilities in the financial system focusing on the liquidity requirements expressed through the Liquidity Coverage Ratio (LCR) and the Net Stable Finding Ratio (NSFR). Basel III stirred numerous arguments between supporters of the reforms who argue that Basel III will increase the stability of the financial system and opponents who claim that the reform will reduce credit availability and economic activity Allen et al., 2012;King, 2013;Miles et al., 2013). ...
Article
Full-text available
Stability of the banking system and macroprudential regulation are essential for healthy economic growth. In this paper we study the European bank network and its vulnerability to stressing different bank assets. The importance of macroprudential policy is emphasized by the inherent vulnerability of the financial system, high level of leverage, interconnectivity of system's entities, similar risk exposure of financial institutions, and susceptibility for systemic crisis propagation through the system. Current stress tests conducted by the European Banking Authority do not take in consideration the connectivity of the banks and the potential of one bank vulnerability spilling over to the rest of the system. We create a bipartite network with bank nodes on one hand and asset nodes on the other with weighted links between the two layers based on the level of different countries’ sovereign debt holdings by each bank. We propose a model for systemic risk propagation based on common bank exposures to specific asset classes. We introduce the similarity in asset distribution among the banks as a measure of bank closeness. We link the closeness of asset distributions to the likelihood that banks will experience a similar level and type of distress in a given adverse scenario. We analyze the dynamics of tier 1 capital ratio after stressing the bank network and find that while the system is able to withstand shocks for a wide range of parameters, we identify a critical threshold for both asset risk and bank response to a shock beyond which the system transitions from stable to unstable.
... Although the effects of bank capital and lending behaviour have been debated with the introduction to Basel I the macroeconomic consequences of capital requirements have not been analysed deeply [2]. In more recent studies, it was argued that banks' capital can affect the lending behaviour and future loan growth [5]; [6]. The amount of loans granted is contingent on the regulatory requirements [2]. ...
Chapter
Full-text available
The purpose of this study is to evaluate the impact of new capital requirements introduced under the Basel III regulations on banks' lending rates and loan growth. The research also explores if the Basel III Accord results in a substantial decrease in the loan growth of the banking sector. Little research, if any, has been done on the new capital requirements. A qualitative approach was followed, and 10 semi-structured interviews were conducted with credit managers and analyst using open ended questions to gather data on credit, interest rates and the cost of credit within the banking industry. Major findings of the research were that banks have become stricter with credit lending and the consequence was that the loan growth decreased over the past five years. The corresponding strategy for banks was to focus on the promotion of non-credit products to increase profitability.
... After the financial crisis of 2008, banks and other financial service providers (FSP) have been under severe pressures to increase their stability and enhance the quality of services (Das et al., 2018). New regulations like Payments Service Directive in digital markets (Donnelly, 2016) and Basel III (Allen et al., 2012) force banks to be more transparent and request access to billions of banks customer data. Meanwhile, disruptive technological innovations such as big data, blockchain and Internet of Things have transformed market trajectories. ...
Article
Full-text available
Purpose – In today’s networked business environment, a huge amount of data is being generated and processed in different industries, which banking is amongst the most important ones. The aim of this study is to understand and prioritize strategic applications, main drivers, and key challenges of implementing big data analytics in banks. Design/methodology/approach – To take advantage of experts’ viewpoints, the authors designed and implemented a four-round Delphi study. Totally, 25 eligible experts have contributed to this survey in collecting and analyzing the data. Findings – The results revealed that the most important applications of big data in banks are “fraud detection” and “credit risk analysis.” The main drivers to start big data endeavors are “decision-making enhancement” and “new product/service development,” and finally the focal challenge threatening the efforts and expected outputs is “information silos and unintegrated data.” Originality/value – In addition to stepping forward in the literature, the findings advance our understanding of the main managerial issues of big data in a dynamic business environment, by proposing effective further actions for both scholars and decision-makers. Keywords Big data analytics, Big data applications, Business value, Challenges, Banking industry
... The academic literature to date has examined various aspects of the Basel III reforms and (Angelini et al., 2011;Allen et al., 2012;Sayah, 2017;Rubio and Yaob, 2019 Quaglia 2020). However, there is very limited research on the potential impact of Basel IV due to technical complexity of the subject. ...
Article
Purpose Introducing radical changes to the methodologies for the determination of capital requirements, the final stage of the Basel III standards, which is referred to as “Basel IV” by the industry, will be a significant challenge for the global banking sector. This article reviews the main components of the new framework, analyses its ongoing implementation in the European Union and discusses its potential impact on banks, putting forward policy recommendations. Design/methodology/approach This article uses primary sources such as the publications by the Basel Committee for Banking Supervision and the European Commission. It also reviews the secondary sources, including both academic articles and analyses by various stakeholders. However, this article does not undertake any empirical analysis. Findings This article discusses that Basel IV will introduce strategic, operational and regulatory challenges for banks in scope. It also identifies a number of areas which are subject to further debate in the European Union such as the enhanced due diligence requirements under the new credit risk framework; governance, reporting and control rules under the operational risk framework; exemptions for certain derivative transactions under the credit valuation adjustment framework and the level of application of the capital floors within banking groups. This article concludes that the global implementation of the reforms by all jurisdictions and transposition into national banking laws concurrently with the European Union in line with the Basel Committee's implementation timeline is important from a financial stability standpoint. Originality/value The article presents an up-to-date and comprehensive review of the practical implications of Basel IV standards. It analyses the implementation of the standards in the case of the European Union, reviews the potential policy implications and presents recommendations for risk management practitioners.
... Nem tisztázott például, hogy milyen egyéb nem szándékolt következményei lehetnek a reformnak, például a finanszírozási formák átalakulása vagy a kockázatok innovatív módon történő kezelése vonatkozásában [Al-Darwish et al., 2011]. Kétségesnek bizonyult az is, hogy az előírt elveket egységesen adaptálja-e majd a pénzügyi szolgáltatói szektor mindenütt a világon [Allen et al., 2012]. ...
Article
Full-text available
A Gazdasági és Monetáris Unió kormányzási reformjának legnagyobb eredményeként felállt a több pilléren nyugvó bankunió. A tanulmány azt igyekszik megmutatni, hogy a bankunió intézményrendszerének és mechanizmusainak kiépülése egy olyan alkufolyamat eredményeként is értelmezhető, amelyben a tagállami preferenciák meghatározó mértékben alakították a szupranacionális szint megerősödését. Ez esetben sem feltétlenül a lehető legjobb megoldás született, a bankunió ugyanis kompromisszumok sorozataként állt elő. = Banking union has become the most spectacular result of the reform of European economic governance. The article demonstrates that the institutions and mechanisms of the European banking union can be interpreted as the outcome of a bargaining process amongst the member states of the union; that is, preferences of member states largely determined how the supranational level of the EU has been strengthened. It is most likely that the endresult is not a first-best solution as it was the outcome of a series of compromises.
... In principle there is no risk-adjusted cost difference between equity and debt financing for any firm, but the authors themselves recognise that subsidies, signalling effects, and "market imperfections" mean that meeting higher capital requirements is a costly endeavour for financial firms. Similarly, econometric studies undertaken by regulatory agencies and a variety of scholars indicate that even though the estimates of the bank lobby are exaggerated, higher capital requirements will indeed raise the cost of lending as banks pass on higher financing costs to their clients (Allen et al. 2012;BCBS 2010;Elliott 2009;Kashyap, Stein, and Hanson 2010). ...
Article
Full-text available
As a G20 member, China has been engaged in financial reform since the end of the global financial crisis. A core piece of this reform is Basel III, the new prudential standard issued by the Basel Committee. Rather than being merely compliant, China’s banking regulation is stricter than the global standard and being implemented ahead of the international timetable. Why is China voluntarily subjecting itself to tougher regulatory standards than the rest of the world? This article shows that low adjustment costs, factional politics, and, above all, an unusual alignment of domestic interests in the quest for international reputation are driving this phenomenon. The troubled institutional history of China’s financial system motivates all relevant stakeholders to seek external validation in order to address a credibility gap abroad, albeit for different reasons. The article examines the power of reputation as a driver of regulatory positioning in the context of China’s integration into international financial institutions.
Thesis
Full-text available
2007-2009 yıllarına dayanan küresel finans krizi, kredi risklerinin değerlendirilmesi analizlerine yönelik artan bir ilgiyi de beraberinde getirmiştir. Geri ödeme gücü zayıf çok sayıda hane halkına verilen konut kredilerini, bir diğer deyişle eşik altı kredileri ipoteğe dayalı türev ürünlere çevirerek başka yatırımcılara satan köklü ve büyük bankalar, birer sistemik risk kaynağı haline gelmiş ve maruz kaldıkları temerrüt risklerinin bütün finansal sisteme yayılmasına sebep olmuşlardır. Kredi talebinde bulunanlara ilişkin bilgi toplama ve değerlendirme yapmaya yönelik modern çalışmaların geçmişi 1940’lı yılları bulsa da istatistiksel yöntemlerin kullanımına ilişkin ilk örnekler 1960’ların sonuna doğru ortaya çıkmıştır. O zamanlardan günümüze kadar, hızla artan kredi miktarları ve kredi kullanan kişi sayısı ile paralel olarak borçlananlar ile ilgili daha fazla veri depolanmaya başlanmıştır. Bu verileri analiz edecek ve yoğun matematiksel hesaplamaya dayalı gelişmiş yöntemler de bilgisayar bilimi ile birlikte gelişme göstermiştir. İhtiyaçların ve çözümlerin bir sarmal şeklinde etkileşerek bugünlere gelmesiyle birlikte de kredi başvurularını değerlendirme yöntemlerine ilişkin geniş bir yazın ortaya çıkmıştır. Yazının çok büyük bir bölümünü istatistiksel ve makine öğrenme yöntemleri oluşturmaktadır. Bu yöntemlerin birçoğu, çok fazla değişken ve gözlem içeren karmaşık veri kümelerinden yorumlanabilir bilgi ve doğru tahmin ortaya çıkartmakta oldukça başarılı olmaktadır. Ancak yöntem başarılarında ortaya çıkan çok küçük farklılıklar şirket kar veya zararlarında ve hatta sistemin sürdürülebilirliği üzerinde çok büyük etkiler yaratabilecektir. Bu nedenle mevcut yöntem ve yaklaşımları iyileştirme ve geliştirme çabaları halen sürmektedir. Söz konusu çabaların bir parçası olarak bu çalışmada, performans kıyaslamasına imkân vermesi sebebiyle birçok çalışmada incelenmiş olan bir tüketici kredi veri kümesi hibrit bir yaklaşım ile analiz edilmiştir. Veri kümesinin öğrenimi ve tahminler, biyoloji ve tıp gibi alanlarda yapılan analiz çalışmalarında yoğun olarak kullanılmakla birlikte finans alanında kendine yeni yeni yer bulmaya başlayan bir makine öğrenme yöntemi olan Rastgele Ormanlar ile gerçekleştirilmiştir. Yöntemin iyileştirilmesi amacıyla da Genetik Algoritma ve Tavlama Benzetimi meta-sezgisel yaklaşımları ile değişken seçimi yapılmıştır. Böylelikle yöntemin eğitim sürecini olumsuz etkileyerek tahmin performansını düşüren değişkenlerin analizlerden elenmesi amaçlanmıştır. Tez ile önerilen bir dizayn ile birleştirilen meta-sezgisel yaklaşımların içerisinde Rastgele Ormanlar yöntemi gömülü olarak kullanılmıştır. Birleştirilmiş dizayn ile meta-sezgisel yaklaşımların güçlü yönleri kullanılarak zayıflıklarının bertaraf edilmesi sağlanmıştır. Kredi değerlendirme çalışmalarında, Genetik Algoritma sıklıkla kullanılmakla birlikte Tavlama Benzetimi uygulama örneği bulunmamaktadır. Sonuçlar Rastgele Ormanlar yönteminin hibritleştirilerek kullanımında, tek başına kullanımına göre tahmin performanslarında istatistiksel olarak anlamlı artışlar sağlandığını göstermektedir. Aynı veri kümesi ile analiz yapılan yazındaki diğer çalışmalar ile karşılaştırıldığında da önerilen hibrit yöntemin yüksek bir performans gösterdiği görülmektedir. Yöntem kredi başvuru değerlendirmelerinde karar vericilere büyük faydalar sağlayacaktır.
Preprint
Full-text available
The purpose of this study is to investigate if audited financial statements add value for firms in the private debt market. Using an instrumental variable method, we find that firms with audited financial statements, on average, save 0.47 percentage points on the cost of debt compared to firms with unaudited financial statements. We also find that using the big, well-known auditing firms does not yield any additional cost of debt benefits. Lastly, we investigate if there are industries where alternative sources of information make auditing less valuable in reducing the cost of debt. Here we find that auditing is less important in lowering cost in one industry, agriculture, where one lender has a 74% market share and a 100-year history of lending to firms within that industry. As such, it seems that lenders having high exposure to a certain industry might act as an alternative to auditing in reducing the information asymmetry between the firm and the lender.
Article
The expansion of European small and medium-sized enterprises (SMEs) into the healthcare innovation arena suggests that this should be an important EU policy priority that can significantly benefit the economy, society and citizens, including patients. Deepening and widening of Europe's SMEs' growth and activities is part of the EU objectives as set out by the European Commission in its Communications "Small Business Act" for Europe [ 1 ] and "Small Business, Big World" [ 2 ]. However, innovative healthcare SMEs have struggled to get traction despite the sector being worth more than EUR 250 billion. The 1991 Maastricht Treaty gave the Union new competences in public health and more scope for cross-border cooperation in this area [ 3 ]. Nevertheless, health initiatives here have tripped over each other, due to the fact that the delivery of healthcare is a national competence [ 4 ]. As such, EU healthcare-driven policy has never truly found its footing as a singular policy area despite the fact that a tenth of the EU's GDP is spent on healthcare and more than 17 million people are employed in Europe in this sector [ 5 ]. Taking into account the necessity of bringing innovation into healthcare, and the willingness of SMEs to undertake the risk to be at the forefront of it, there is a need for a renewed effort to support SMEs so as to provide solutions for citizens and patients throughout the bloc in different healthcare settings [ 6 ]. This policy paper brings together two separate strands of analysis: firstly, a policy review of the main challenges and opportunities; secondly, a proposal for policy recommendations.
Book
Full-text available
Prudential supervision of credit institutions in the European Union has for a long time been the responsibility of national bodies, even though this did not match the international character of the activities of many supervised banks. After the establishment of the banking union’s Single Supervisory Mechanism this has changed particularly for systemically important credit institutions, that now fall under the direct, coordinated supervision under the auspice of the European Central Bank. There was a great deal of speculation around what changes the banking union would bring to the financial sector in Europe, yet the net impact of the Single Supervisory Mechanism on financial stability and competitive position of the supervised credit institutions remains largely unknown. This monograph presents a holistic analysis of the impact that the reform of the EU’s financial safety net had on the banking sector. To make such evaluation possible, a dedicated synthetic indicator was designed to quantify the net impact of harmonized prudential supervision on the stability of credit institutions. The results signal that the establishment of the Single Supervisory Mechanism was a success and that the proposed synthetic indicator can serve as an early warning tool for authorities tasked with safeguarding financial stability.
Book
Full-text available
1. Introduction The Brazil, Russia, India, China and South Africa (BRICS) is an established socio-economic and political partnership among major emerging economies which originated from a top-down cooperation and moved towards one which recognises a bottom-up participation (of the grassroot) through developmental projects of potential positive economic impact. Amid the 2008/2009 global economic crisis the BRICS outperformed the leading economies thus giving hope to the populace of those member countries. China as the leading economy of the BRICS also played a major role in the financing and supporting of the National Development Bank (also known as the BRICS Bank) the aim of which is to fund capital intensive developmental projects in regions surrounding the BRICS (as opposed to only helping BRICS partners) [1]. So far, the BRICS have been doing well on trade and cooperation as they coped with the many challenges in and among them. However, the novel Coronavirus 2019 (COVID-19) adds to the challenges that were yet to be overcome in and among the BRICS countries, namely poverty, unemployment, human rights abuses (including environmental and linguistic rights infringements) and corruption. This editorial seeks to also bridge the gap created by papers barely addressing the impact of COVID-19 to the BRICS economy (of which Africa is concerned through South Africa, as a gateway to the continent). COVID-19 causes the BRICS States to discontinue efforts that meant regional integration. This could be accelerated as visa constraints are added and several travel restrictions beyond the partnership are imposed. The health crisis will slow the progress of seeing the BRICS projects realised in time and this is a matter of concern.
Article
Using a unique hand‐collected dataset of 1,251 European Union banks and 20,850 foreign affiliates hosted in 154 countries, this paper investigates how both host country and home country regulations affect the decision on where and how to go abroad in developing countries as opposed to developed countries. We find that banks prefer high‐income countries with numerous activity restrictions and weaker supervision but less developed countries with less restrictions and stronger supervision. In all cases, they avoid locations with stronger capital regulation than at home. Regarding the choice of foreign organizational form (branches versus subsidiaries), banks rather operate subsidiaries in both high and middle‐income countries with stringent entry requirements but prefer branches in developing countries with stringent capital requirements and greater supervisory power. Our findings contribute to the literature examining bank internationalization and have several policy implications for regulatory reforms in developing and developed countries.
Article
In this paper, we examine the relation between quantitative disclosure of CEO pay and the optimality of pay structure in terms of 1) level of pay, 2) pay-performance relationship, and 3) CEO-to-employee pay ratio. We use the new reporting regulation in, 2013, requiring large and medium-sized companies and groups in the UK to report a single figure of total pay, as an exogenous shock to pay disclosure. Our results are based on a hand-collected sample of FTSE 100 firms over the period of 2010–2017. The main findings are threefold: Firstly, we find that CEO total pay stays roughly the same before and after the new regulation. In addition, firms that voluntarily adopt the regulation early have higher pay increases than their counterparts that do not adopt early in univariate tests. Secondly, pay-performance sensitivity actually declines after the new regulation by more than 50%. This effect is particularly evident in firms with weak corporate governance. Thirdly, the effect of the reform on the CEO-to-employee pay ratio is minimal, whereby it declined slightly following the reform, but this is only significant in univariate tests. Our results suggest that the, 2013 regulation which increases the reporting transparency has limited impact on total pay and pay-performance in the UK.
Article
This paper examines the diffusion of the Basel II Capital Accord into emerging markets (EMs). The literature on the diffusion of financial standards reinforces determinism: carefully derived standards such as those around financial liberalization are assumed to be applicable to all markets in an effort to promote stability and international harmonization. Attempts to use financial liberalization and macroprudential toolkits such as Basel II, however well intentioned, can increase rather than mitigate financial instability, due in part to unevenness in the adoption of financial standards. We analyse rich, action research data on the response of banks in 19 EMs in Asia, the Middle East, and Eastern Europe to the advent of Basel II. We find heterogeneous rather than universalistic responses, captured as four types of behavioural variations leading to differences in the intensity of diffusion: Reformist, Instigative, Disobliging and Cosmetic. The variations reflect regulatory neoliberalism. The typology contributes to our understanding of the interaction between bank behaviour, regulator stance and institutional context as determinants of the diffusion of global financial standards.
Book
Full-text available
Kryzys finansowy z 2008 roku uwidocznił braki w strukturze zintegrowanego rynku Unii Europejskiej. Niedostateczny stopień integracji rynków finansowych stanowił słabość pozbawiającą strefę euro mechanizmów reakcji na szoki zewnętrzne. Niezbędnych usprawnień w tym zakresie dokonać miano w drodze utworzenia unii bankowej. W książce przedstawiono szczegółową analizę tego rozwiązania, od pierwotnego projektu do pierwszych lat funkcjonowania. W monografii przeprowadzono pierwszą kompleksową analizę ex-post wpływu wprowadzenia skoordynowanego nadzoru na instytucje kredytowe strefy euro. W tym celu utworzono autorskie narzędzie w postaci miernika syntetycznego, który ma umożliwić ocenę wypadkowego wpływu reform nadzoru na kondycję banków. Wyniki wskazują na korzystny wpływ reform na stabilność sektora bankowego. Książka może stanowić ciekawą lekturę dla naukowców zainteresowanych stabilnością finansową oraz dla pracowników instytucji nadzoru.
Chapter
This chapter discusses and analyses the incentives for banks to behave opportunistically in order to bypass liquidity constraints and even benefit from regulatory arbitrage. The chapter specifically focuses on the new liquidity constraints introduced by Basel III and provides a number of examples from both on- and off-balance sheet perspectives of how banks are transferring risk to other parts of the economy that might be less well equipped to handle these risks. The chapter concludes by discussing the potential implications of such behaviours for the role banks will play in a liquidity-constrained economy.
Article
Full-text available
The enormous increase in the United Kingdom’s national debt during the two world wars of the 20th century meant that government debt management, which had hitherto been regarded as a matter of ‘budgetary convenience’, acquired great macroeconomic significance. The paper examines and compares four episodes in the management of the national debt since 1919 and in each case explores the relationship between debt management and monetary policy. In some episodes, debt management and monetary policy were mutually supportive, but in 1932-38, they were not. In the past few years the macroeconomic significance of government debt management has increased again, and the paper discusses the current policy of quantitative easing from the perspective of the earlier episodes.Full publication: Threat of fiscal dominance? http://ssrn.com/abstract=2078895
Article
Full-text available
This paper reports estimates of the costs and benefits of banks having higher levels of loss-absorbing capital. Measuring those costs requires careful consideration of a wide range of issues about how shifts in funding affect required rates of return and on how costs are influenced by the tax system; it also requires a clear distinction to be drawn between costs to individual institutions (private costs) and overall economic (or social) costs. Without a calculation of the benefits from having banks holding more capital no estimate of costs — however accurate — can tell us what the optimal level of bank capital is. We use empirical evidence on UK banks to assess costs; we use data from shocks to incomes from a wide range of countries over a long period to assess risks to banks and how equity funding (or capital) protects against those risks. We find that the amount of equity capital that is likely to be desirable for banks to hold is very much larger than banks have held in recent years and also higher than targets agreed under the Basel III framework.
Article
Full-text available
This paper reports estimates of the long-run costs and benefits of banks funding more of their assets with loss-absorbing capital, or equity. Measuring those costs requires careful consideration of a wide range of issues about how shifts in funding affect required rates of return and on how costs are influenced by the tax system; it also requires a clear distinction to be drawn between costs to individual institutions (private costs) and overall economic (or social) costs. Without a calculation of the benefits from having banks use more equity no estimate of costs - however accurate - can tell us what the optimal level of bank capital is. We use empirical evidence on UK banks to assess costs; we use data from shocks to incomes from a wide range of countries over a long period to assess risks to banks and how equity funding (or capital) protects against those risks. We find that the amount of equity capital that is likely to be desirable for banks to use is very much larger than banks have used in recent years and also higher than targets agreed under the Basel III framework.
Article
Full-text available
In this paper we analyze the arbitrage gains from marketing structured debt securities at yields that reflect only the credit ratings of ratings agencies. The credit ratings considered include one that is based on default probabilities, corresponds to the credit ratings of Standard and Poor's, and one that is based on expected default losses, corresponds to the ratings of Moody's. For both rating systems, we find general conditions under which single and multiple tranche securitisations will yield an arbitrage gain. The conditions depend on the risk characteristics of the collateral relative to those of the typical firm for which the bond ratings apply. We then consider the gains both from choosing the collateral against which the debt securities are written, and from dividing the debt into tranches with different priority. We derive general results and characterize the gains for examples that are based on the CAPM and the Merton (1974) debt pricing model. We show that the arbitrage gains under both rating systems are highest when the systematic risk of the collateral is high and the total risk is low relative to that of the typical firm. In all cases we find significant additional gains to multi-tranching, which is consistent with the fact that there were 5.58 tranches in the average securitisation in the US in 2003. The arbitrage gains from multiple tranches are significantly higher when the securities are valued using S&P ratings than when they are valued using Moody's ratings. Our analysis highlights the limitations of current credit rating systems which reflect characteristics of the total risk of fixed income securities, neglecting portfolio considerations. If ratings are to be used for valuation then it is important that they reflect the systematic risk of the securities.
Article
Full-text available
This paper is structured in accordance with identified components which are considered to be essential to the successful implementation of the (two fold) topics of discussion of this paper, namely, monitoring and liquidity risk measurements. The importance of successfully communicating results obtained from monitoring and measuring such risks, and the role of corporate governance in ensuring such effective communication, constitutes a recurring theme throughout this paper. The identified components are as follows: i) Corporate governance (ii) Internal controls (iii) Disclosure (iv) Management of risk (v) Substance over form (vi) Transparency As well as highlighting the interdependence of these components, the paper also aims to accentuate the importance of individual components. Whilst no hierarchy of importance is assigned to these components, corporate governance and internal controls are two components which are analysed in greater depth (than other components). Furthermore, corporate governance could be accorded a status of greater importance than internal controls having regard to the fact that whilst internal controls relate to a very vital control aspect of an organisation, corporate governance relates to all processes – be it decision making, control, production, performance, within a company/bank. The paper will also attempt to demonstrate that it is possible to implement a system of regulation which combines increased formalised procedures and/or detailed rules - whilst giving due consideration to the substance of transactions.
Article
Full-text available
Raising capital adequacy standards and introducing binding liquidity requirements can have beneficial effects if they reduce the probability of a costly financial crisis, but may also reduce GDP by raising borrowing costs for households and companies. In this paper, we estimate both benefits and costs of raising capital and liquidity, with the benefits being in terms of reduction in the probability of banking crises, while the costs are defined in terms of the economic impact of higher spreads for bank customers. We note that both of these results are contrary to the Modigliani-Miller theorem of irrelevance of the debt-equity choice. The result shows a positive net benefit from regulatory tightening, for a range of 2-6 percentage points increase in capital and liquidity ratios, depending on underlying assumptions.
Book
Its focus on the prudential, global regulation of financial institutions drives this book's unique exploration of global policy principles. Integrating theory, history, and policy debates, it provides a high-level, strategic treatment of the regulation of global banking. With finely focused definitions and an intuitive scope, the authors pay particular attention to the international standards set by bodies such as the Basel Committe on Banking Supervision and the European Union. By beginning with the main justifications for the prudential regulation of banks and concluding in 2009, after regulators had proposed significant solutions to the crash, this lucid and engaging account of the principles, policies, and laws related to the regulation of international banking explains why and how governments work so hard on a convergence of rules and regulations. Defines the over-arching policy principles of capital regulation Explores main justifications for the prudent regulation of banks Discusses the 2007-2009 financial crisis and the next generation of international standards of financial institution regulation Examines tools for ensuring the adequate supervision of a firm that operates across all time zones.
Book
Modern mainstream economics is attracting an increasing number of critics of its high degree of abstraction and lack of relevance to economic reality. Economists are calling for a better reflection of the reality of imperfect information, the role of banks and credit markets, the mechanisms of economic growth, the role of institutions and the possibility that markets may not clear. While it is one thing to find flaws in current mainstream economics, it is another to offer an alternative paradigm which, can explain as much as the old, but can also account for the many ‘anomalies’. That is what this book attempts. Since one of the biggest empirical challenges to the ‘old’ paradigm has been raised by the second largest economy in the world - Japan - this book puts the proposed ʼnew paradigm’ to the severe test of the Japanese macroeconomic reality.
Article
We analyze shareholders’ incentives to change the leverage of a firm that has already borrowed substantially. As a result of debt overhang, shareholders have incentives to resist reductions in leverage that make the remaining debt safer. This resistance is present even without any government subsidies of debt, but it is exacerbated by such subsidies. Our analysis is relevant to the debate on bank capital regulation, and complements Admati et al. (2010). In that paper we argued that subsidies that favor debt over equity are the key reason that banks funding costs would be lower if they “economize” on equity. Subsidies come from public funds, and reducing them does not represent a social cost. It is thus irrelevant for assessing regulation. Other arguments made to support claims that “equity is expensive” are flawed.Like reduction in subsidies, the effects of leverage reduction on bank managers or shareholders do not represent a social cost. In fact, we show that debt overhang creates inefficiency, since shareholders would resist recapitalization even when this would increase the combined value of the firm to shareholders and creditors. Moreover, debt overhang creates an “addiction” to leverage through a ratchet effect. In the presence of government guarantees, the inefficiencies of excessive leverage are not fully reflected in banks’ borrowing costs. Since banks’ high leverage is a source of systemic risks and imposes costs on the public, resistance to leverage reduction leads to social inefficiencies. The main beneficiaries from high leverage may be bank managers. The majority of the banks’ shareholders, who hold diversified portfolios and who are part of the public, are likely to be net losers. Our analysis highlights the critical importance of effective capital regulation and high equity requirements, especially for large and “systemic” financial institutions. We analyze shareholders’ preferences when choosing among various ways leverage can be reduced. We show that, with homogeneous assets, if the firm’s security and asset trades have zero NPV, and the firm has a single class of debt outstanding, then shareholders find it equally undesirable to deleverage through asset sales, pure recapitalization, or asset expansion with new equity. When these conditions are not met, shareholders can have strong preferences for one approach over another. For example, if the firm can buy back junior debt, asset sales are the preferred way to reduce leverage. This preference for asset sales, or “deleveraging,” can persist even if such sales are inefficient and reduce the total value of the firm.
Article
There is a strong consensus that reform of the financial regulatory system must include significant increases in the capital requirements for banks. All else equal, this should make the banks safer by providing a greater cushion to survive the mistakes and accidents from which they inevitably suffer. Higher capital requirements should also discourage transactions of lower economic value by creating a
Article
Banks perform various roles in the economy. First, they ameliorate the information problems between investors and borrowers by monitoring the latter and ensuring a proper use of the depositors' funds. Second, they provide intertemporal smoothing of risk that cannot be diversified at a given point in time as well as insurance to depositors against unexpected consumption shocks. Because of the maturity mismatch between their assets and liabilities, however, banks are subject to the possibility of runs and systemic risk. Third, banks contribute to the growth of the economy. Fourth, they perform an important role in corporate governance. The relative importance of the different roles of banks varies substantially across countries and times but, banks are always critical to the financial system.
Article
In this paper we analyse the source and magnitude of marketing gains from selling structured debt securities at yields that reflect only their credit ratings, or specifically at yields on equivalently rated corporate bonds. We distinguish between credit ratings that are based on probabilities of default and ratings that are based on expected default losses. We show that subdividing a bond issued against given collateral into subordinated tranches can yield significant profits under the hypothesised pricing system. Increasing the systematic risk or reducing the total risk of the bond collateral increases the profits further. The marketing gain is generally increasing in the number of tranches and decreasing in the rating of the lowest rated tranche.
Article
This paper contributes in a quantitative manner to the debate on macroprudential policy in three ways. First, it illustrates how macroprudential surveillance could have been better undertaken with a highly stable crisis-prediction model for 14 OECD countries estimated over 1980-1997. Second, in terms of macroprudential regulation, it uses the related estimates to calibrate the increase in capital and liquidity needed to reduce average crisis probabilities to a desired level, as is being discussed in Basel. We show that an international consensus on regulatory changes will generate "winners" and "losers" in terms of capital and liquidity adjustments, and we suggest that raising capital and liquidity standards by 3.7 percentage points across the board will reduce the annual average probability of a financial crisis to around 1%. Finally, we show that countercyclical macroprudential policy is best calibrated on house prices and current accounts rather than GDP and credit, as are widely recommended at present. Credit growth, for example, has neither a direct nor an indirect statistical impact on crisis risk. Our results have important implications for the next generation of international banking regulations. (D Karim), iliadze@niesr.ac.uk, (I Liadze). We thank participants in the EUROFRAME conference in Amsterdam and at seminars at NIESR, the OECD, and the Bank of England for helpful comments. We have also had useful discussions with colleagues from the BIS in Basel and the FSA in London. The research was partly funded by the ESRC.
Article
We examine the pervasive view that “equity is expensive,” which leads to claims that high capital requirements are costly and would affect credit markets adversely. We find that arguments made to support this view are either fallacious, irrelevant, or very weak. For example, the return on equity contains a risk premium that must go down if banks have more equity. It is thus incorrect to assume that the required return on equity remains fixed as capital requirements increase. It is also incorrect to translate higher taxes paid by banks to a social cost. Policies that subsidize debt and indirectly penalize equity through taxes and implicit guarantees are distortive. Any desirable public subsidies to banks’ activities should be given directly and not in ways that encourage leverage. Finally, suggestions that high leverage serves a necessary disciplining role are based on inadequate theory lacking empirical support.We conclude that bank equity is not socially expensive, and that high leverage is not necessary for banks to perform all their socially valuable functions, including lending, taking deposits and issuing money-like securities. To the contrary, better capitalized banks suffer fewer distortions in lending decisions and would perform better. The fact that banks choose high leverage does not imply that this is socially optimal, and, except for government subsidies and viewed from an ex ante perspective, high leverage may not even be privately optimal for banks.Setting equity requirements significantly higher than the levels currently proposed would entail large social benefits and minimal, if any, social costs. Approaches based on equity dominate alternatives, including contingent capital. To achieve better capitalization quickly and efficiently and prevent disruption to lending, regulators must actively control equity payouts and issuance. If remaining challenges are addressed, capital regulation can be a powerful tool for enhancing the role of banks in the economy.First Draft August 27, 2010 This draft March 23, 2011
Article
Přeloženo z češtiny Jednotlivé sv. mají ISBN Popsáno podle: r. 2005
Despite the best efforts of regulators, banking crises throughout the world have been on the rise and proved costly both in terms of the burden on taxpayers and the effect on output. The revised Basel Accord establishes new procedures for measuring the risk of bank loans and for calculating the capital that needs to be held against these loans. But if these new rules are undoubtedly an improvement on the existing ones, their continued focus on the risk of individual loans suggests that bank regulation is heading down a cul-de-sac. Ideally, one would like to be able to view individual loans as parts of portfolios, with better diversified portfolios assigned lower risks and capital requirements. But because of the difficulty of measuring the risk of loan portfolios (which stems from their complicated covariance structure), the author suggests that the regulators and their constituencies would be better served by requiring more realistic valuations of loan portfolios and other bank assets. In this sense, the design of effective capital adequacy rules involves a trade-off between developing developing more precise measures of risk, on the one hand, and improving the frequency and accuracy of asset valuations, on the other. The author urges bank regulators to focus less on refinements of risk measurement and more on efforts to incorporate fair value accounting.
Article
We calibrate a simulation model of credit value-at-risk for mortgage lending to UK experience. Simulations to capture the skewness of returns that might arise in the context of a financial crisis suggest that the IRB calculations of the new Basel Accord can substantially understate prudential capital adequacy. The same model shows that raising capital requirements has only a small impact on bank funding costs. We conclude that Pillar 2 supervisory review should increase capital requirements above IRB levels for secured bank assets - those whose returns can potentially fall furthest, relative to other, normally riskier assets, in extreme outcomes.
An assessment of the long-term economic impact of stronger capital and liquidity requirements
  • Basel Committee on Banking Supervision (BCBS)
  • Basel Committee on Banking Supervision (BCBS)
Global I/O: Bank regulation
  • UBS
  • UBS
How could Basel III reshape the financial landscape?
UBS (2010a). How could Basel III reshape the financial landscape? UBS Investment Research 9 March 2010.
2012-this issue Richard A. Werner 2012
  • Werner
  • Werner
Basel III: International framework for liquidity risk measurement, standards and monitoring
  • Basel Committee on Banking Supervision (BCBS)
  • Basel Committee on Banking Supervision (BCBS)
Interim Report on the Cumulative Impact on the Global Economy of Proposed Changes in the Banking Regulatory Framework
  • Iif
IIF (2010). Interim Report on the Cumulative Impact on the Global Economy of Proposed Changes in the Banking Regulatory Framework. June, Institute for International Finance, Washington.
Global banks—Too big to fail: Running the numbers. J.P. Morgan Europe Equity Research
  • J.P. Morgan
  • J.P. Morgan
The theory of a lender of last resort in international banking markets
  • J.R. Shafer
  • J.R. Shafer
Group of Governors and Heads of Supervision announces higher global minimum capital standards
  • Basel Committee on Banking Supervision (BCBS)
  • Basel Committee on Banking Supervision (BCBS)
Basel II and UK banks: What are the costs and benefits of IRB qualification?
  • Tim Giles
  • Alistair Milne
  • Tim Giles
  • Alistair Milne
An assessment of the long-term economic impact of stronger capital and liquidity requirements. Bank for International Settlements
Basel Committee on Banking Supervision (BCBS) (2010a). An assessment of the long-term economic impact of stronger capital and liquidity requirements. Bank for International Settlements August.
-this issue) International Review of Financial Analysis
  • Richard A Werner
Werner, Richard A. (2012-this issue) International Review of Financial Analysis.
The theory of a lender of last resort in international banking markets. Bank for International settlements CB
  • J R Shafer
Shafer, J. R. (1982). The theory of a lender of last resort in international banking markets. Bank for International settlements CB (pp. 381).
Quantifying the effects on lending of increased capital requirements Brookings Institute An analysis of the impact of "substantially heightened" capital requirements on large financial institutions
  • Douglas Elliot
Elliot, Douglas (2009). Quantifying the effects on lending of increased capital requirements. Brookings Institute September, http://www.brookings.edu/papers/ 2009/0924_capital_elliott.aspx Kashyap, Anil K., Stein, Jeremy C., & Hanson, Samuel (2010). An analysis of the impact of "substantially heightened" capital requirements on large financial institutions. A working paper funded by The Clearing House Association L.L.C.
How could Basel III reshape the financial landscape? UBS Investment Research 9
UBS (2010a). How could Basel III reshape the financial landscape? UBS Investment Research 9 March 2010.
The role of banks in financial systems Financial stability report
  • F Allen
  • E Carletti
Allen, F., & Carletti, E. (2008). The role of banks in financial systems. http:// oldweb.econ.tu.ac.th/archan/wasin/EC431_1_51/Midterm_2_1_51/The_role_ of_banks_in_financial_systems.pdf Bank of England (2009). Financial stability report. June.
Group of Governors and Heads of Supervision announces higher global minimum capital standards. press release and annex
Basel Committee on Banking Supervision (BCBS) (2010b). Group of Governors and Heads of Supervision announces higher global minimum capital standards. press release and annex, September 12th.
Optimal bank capital. External MPC Unit Discussion Paper No. 31: revised and expanded version Global banks—Too big to fail: Running the numbers
  • David Miles
  • Yang
  • Jing
  • Gilberto Marcheggiano
Miles, David, Yang, Jing, & Marcheggiano, Gilberto (2011). Optimal bank capital. External MPC Unit Discussion Paper No. 31: revised and expanded version. April, http://www.bankofengland.co.uk/publications/Documents/externalmpcpapers/ extmpcpaper0031.pdf Morgan, J. P. (2010). Global banks—Too big to fail: Running the numbers. J.P. Morgan Europe Equity Research. 17 Feb 2010.
Small and Medium-sized Enterprise (SME) Statistics for the UK and Regions 2008
  • Innovation and Skills Department of Business
  • Innovation and Skills Department of Business
Department of Business, Innovation and Skills (2009). Small and Medium-sized Enterprise (SME) Statistics for the UK and Regions 2008. http://stats.bis.gov.uk/ed/sme/ Dimou, Paraskevi, Lawrence, Colin, & Milne, Alistair (2005). Skewness of returns, capital adequacy, and mortgage lending. Journal of Financial Services Research, 28(1/2/3), 135-161.
Basel II and UK banks: What are the costs and benefits of IRB qualification? Charles River Associates Financial Practice Papers no 1
  • Tim Giles
  • Alistair Milne
Giles, Tim, & Milne, Alistair (2004). Basel II and UK banks: What are the costs and benefits of IRB qualification? Charles River Associates Financial Practice Papers no 1.
Debt Overhang and Capital Regulation. Rock Center for Corporate Governance at Stanford University Working Paper No. 114
  • Anat R Admati
  • Demarzo
  • M Peter
  • Martin F Hellwig
  • Pfleiderer
  • C Paul
Admati, Anat R., DeMarzo, Peter M., Hellwig, Martin F., & Pfleiderer, Paul C. (2012, March 23). Debt Overhang and Capital Regulation. Rock Center for Corporate Governance at Stanford University Working Paper No. 114; MPI Collective Goods Preprint, No. 2012/5. Available at SSRN: http://ssrn.com/abstract=2031204
Fallacies, irrelevant facts, and myths in the discussion of capital regulation: Why bank equity is not expensive. Rock Center for Corporate Governance at Stanford University Working Paper No. 86 MPI Collective Goods Preprint
  • Anat R Admati
  • Demarzo
  • M Peter
  • Martin F Hellwig
  • Pfleiderer
  • C Paul
Admati, Anat R., DeMarzo, Peter M., Hellwig, Martin F., & Pfleiderer, Paul C. (2011). Fallacies, irrelevant facts, and myths in the discussion of capital regulation: Why bank equity is not expensive. Rock Center for Corporate Governance at Stanford University Working Paper No. 86 MPI Collective Goods Preprint, No. 2010/42. Available at SSRN: http://ssrn.com/abstract=1669704
Credit in the macroeconomy. Federal Reserve Bank of New York Quarterly Review Spring
  • B Bernanke
Bernanke, B. (1993). Credit in the macroeconomy. Federal Reserve Bank of New York Quarterly Review Spring 1992-93.
Debt Overhang and Capital Regulation. Rock Center for Corporate Governance at Stanford University Working Paper No. 114; MPI Collective Goods Preprint
  • Anat R Admati
  • Demarzo
  • M Peter
  • Martin F Hellwig
  • Pfleiderer
  • C Paul
Admati, Anat R., DeMarzo, Peter M., Hellwig, Martin F., & Pfleiderer, Paul C. (2012, March 23). Debt Overhang and Capital Regulation. Rock Center for Corporate Governance at Stanford University Working Paper No. 114; MPI Collective Goods Preprint, No. 2012/5. Available at SSRN: http://ssrn.com/abstract=2031204
Calibrating macroprudential policy. Working paper. Basel Committee on Banking Supervision (BCBS) (2010a). An assessment of the long-term economic impact of stronger capital and liquidity requirements. Bank for International Settlements
  • R Barrell
Barrell, R., et al. (2010). Calibrating macroprudential policy. Working paper. Basel Committee on Banking Supervision (BCBS) (2010a). An assessment of the long-term economic impact of stronger capital and liquidity requirements. Bank for International Settlements August.
UK Banks: Elephants in the room
  • Citigroup
Citigroup (2010). Bank Funding 2010-2012. 19 Feb 2010. Credit Suisse (2010): UK Banks: Elephants in the room. [09 March 2010].
An analysis of the impact of "substantially heightened" capital requirements on large financial institutions. A working paper funded by The Clearing House Association
  • Anil K Kashyap
  • Jeremy C Stein
  • Samuel Hanson
Kashyap, Anil K., Stein, Jeremy C., & Hanson, Samuel (2010). An analysis of the impact of "substantially heightened" capital requirements on large financial institutions. A working paper funded by The Clearing House Association L.L.C.
Global banks-Too big to fail: Running the numbers
  • J P Morgan
Morgan, J. P. (2010). Global banks-Too big to fail: Running the numbers. J.P. Morgan Europe Equity Research. 17 Feb 2010.