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FINANCIAL RISKS ANALYSIS FOR A COMMERCIAL BANK IN THE ROMANIAN BANKING SYSTEM
Abstract
The main goal of every bank is managing the risks arising from bankingtransactions in order to have a profitable activity. Bank managers must identify and manageall risks associated with each business they enter into, since exposure to significant risksreduces the present value of expected future cash flow. The main financial risks associatedwith the activities of a bank arise as a result of the bank's operations in the financial sector.Financial risks a bank is confronted consist of credit risk, liquidity risk, market risks (interestrate risk and currency risk). Because an inefficient management of financial risks causes themajority of bankruptcies in the banking system, this category of risks has a significantposition in the managerial process of any bank. Our paper focuses on assessing the exposureof a commercial bank from the Romanian banking system to financial risks.
... Commercial Banks (CBs) are profit-making organizations acting as intermediaries between borrowers and lenders attracting temporarily available resources from business and individual customers as well as granting loans for those in need of financial support (Drigă, 2012). ...
... Commercial banks are exposed to credit risk through their trading, financing and investing activities and in cases where they acts as an intermediary on behalf of customers or other third parties or it issues guarantees (Drigă, 2012). Based to Committee of Basel on Banking Supervision, credit risks is viewed as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed conditions (Safakli, 2007). ...
... Increases in credit risk will raise the marginal cost of debt and equity, which will accordingly increase the cost of funds for the bank (Basel, 2000). The amount of credit risk exposure in this regard is represented by the carrying amounts of the loans and advances on the balance sheet (Drigă, 2012). This risk is determined by factor extraneous to the bank such as general levels of unemployment, fluctuating social and economic conditions, debtors' attitudes and political concerns. ...
This empirical study examines the impact of commercial bank's credit risk management on enhancing liquidity performance. The results of the study are based on the analysis of financial statements for a sample of eight Egyptian commercial banks for the period 2004-2010, the data is obtained from the Bank scope database. A Panel data analysis is utilized to investigate the association between liquidity performance and effective credit risk management. In addition, this study tackles the Egyptian banking performance indicators trend regarding asset quality (credit risk) and liquidity, during the period 2008-2011. Findings show that there is a significant positive relationship between effective credit risk management and improving liquidity levels in Egyptian commercial banks. Credit risks remain a major threat to Egyptian banks. It influences the health of the bank's loan portfolio, which might adversely affect bank liquidity. The more the commercial banks are exposed to high credit risk, the higher the accumulation of default loans and consequently, the lower the bank liquidity. On the other side, the results show that the higher value of liquidity ratio makes bank liquid and less sensitive to failure. Thus, commercial banks need to analyze the relationship between liquidity-sensitive exposures and the default risk of the borrower as a critical component of credit risk management essential for long-term success of the Egyptian banking system.
... For instance, inherent risks are associated with banks' role in providing credit to consumers, such as the possibility of a loan default or credit risk. Imola (2017) thinks that banks should only take on financial risk when it is absolutely necessary for them to be able to make a significant amount of money. Given the foregoing, taking risks is a crucial part of how bankers make money. ...
... By engaging in this unethical action, these banks were unable to retrieve the loans and advances they had provided to these stakeholder groups, which resulted in a string of bad debts brought on by insufficient recovery procedures and added to financial distress. Imola (2017) highlighted further the fact that bank management's disregard and ignorance of the regulatory frameworks and standards necessary to reduce these risks leads to risk. Some management groups, including some bank employees in Nigeria, either are not aware of the dangers involved in conducting banking activities or completely disregard the regulations put in place to prevent potential losses. ...
... The capital adequacy ratio (CAR) is one financial indicator that is generated and disclosed in a bank's financial statements and is directly associated with the risk that the bank has assumed. Banks pay close attention to ongoing monitoring indicators that reflect the effectiveness of banking activities and analyze their effectiveness in close relationship with the bank's exposure to risks because the effectiveness of banking activities is closely correlated with the bank's exposure to risks or potential risks that can jeopardize the activity (Imola, 2017). Academics have, however, developed numerous definitions of financial performance. ...
The study examined the risk and stability of the Nigerian deposit money institutions. The study, which
is a quasi-experimental one, examines how an independent variable that participants already had before
the study's start influences a dependent variable, hence the ex post facto design was adopted. As of
December 31, 2019, the population will consist of all Deposit Money Banks that have been listed on the
Nigerian Stock Exchange throughout the last ten years (2010-2019). Ten Deposit Money Banks that were
listed on the Nigerian Stock Exchange as of December 31, 2019, make up the sample size for this study,
which was chosen at random and comprised of those ten institutions. Panel data with statistical
information were employed in the study (STATA, 17). The proposed analysis was carried out utilizing
STATA as it is the best system-based tool for evaluating panel data (version 17). Panel data regression
analysis was also used in the study to evaluate the research hypotheses. According to the study, credit
risk and liquidity risk have a substantial impact on the financial performance (ROE) of Nigeria's deposit
money institutions. The results of the study indicate that financial risk adversely affects the financial
performance of Nigerian deposit money institutions.
... Liquidity1risk (LR) was found to have an1insignifi cant1impact on both1profi tability1measures. (Driga 2012) 2 focuses on measuring the performance of Romanian banking systems of a commercial bank to fi nancial risks. ) examined that, the OBS activities includes contingent indentures which produce income to a bank but are considered neither as sources of fund nor application of funds as per conventional accounting method. ...
... IRR: The maturity gap is proxy for IRR, which is derived by the ratioof the difference between the rupee value of assets and liabilities which is repriced within a year to total capital (Driga 2012). ...
The Indian banking sector is exposed to various types of risks which arise from both the external and internal environments. Banks long-term sustainability and financial feasibility are vulnerable financial risk. Credit risk, operationalrisk, marketrisk, and liquidity risk stances a major challenge, despite growth in the banking system. This study examines the relationship between profitability and financial risks of 43 Indian commercial banks for the period of 11 years, (2008 to 2018). The quantitative research design was adopted in this study and the profitability measures that have been used in this study are the Return on Assets (ROA) and Return on Equity (ROE) while the financial risks are Interest Rate Risk (IRR) and Foreign Exchange Risk (FER). In this study, Time- Series Cross-Sectional secondary balanced panel data regression analysis of fixed effect and random effect model have been implemented. The findings of the study indicated that the relationship between ROE and IRR were found to be weakly significant, and on ROA the effect of IRR is significant for all the commercial banks. On both profitability measures, the FER was found to have an insignificant impact. The study concludes that there exists an inverse relationship between banks profitability and financial risk. Hence, the commercial banks in India together with the bank supervisors should make a trade-off between profitability and financial risk.
... Banks are forprofit companies that act as intermediaries between borrowers and lenders. Deposit money banks mobilize resources from enterprises, people, and other customers and make these resources available to those needing financial assistance in the form of loans (Drigă, 2012;Uwuigbe, 2013). The study contributes to the existing body of literature on shareholders' wealth in Nigeria, owing to the fact that there is a dearth of studies that assess the impact of firm attributes on shareholders' wealth in Nigeria, most especially in the financial sector. ...
This study investigated the effect of firm attributes on shareholders’ wealth of listed deposit money banks in Nigeria. This paper examined the effect of firm attributes on the shareholders’ wealth of listed deposit money banks in Nigeria. The study population consists of Fifteen (15) listed deposit money banks in Nigeria as at 31st December 2022, filtered to 13 Listed Deposit Money Banks whose data were extracted and studied between 2010 to 2022. Multiple regression techniques using robust ordinary least square (OLS) due to the pooled nature of the data used, and estimation was employed in analyzing the data obtained from the audited annual reports and accounts of sampled firms. The study found that all the independent variables, namely, capital adequacy ratio, credit risk, return on equity, and cost efficiency, have a positive significant effect on the share prices of listed deposit money banks in Nigeria, In view of the findings, this study recommend that management and other stakeholders in Nigerian Banking should ensure that the optimum level of capital adequacy is maintained, maintain an optimal level of credit risk while avoiding excessive risk-taking, maximize the bank’s profitability and cost efficiency, to enable deposit money bank continue to discharge their function effectively to the society while protecting the interest of, and maximizing the wealth of the shareholders at the same time. I certified. This paper is my work and the combination of variables used is not copied from any source.
... According to Kagoyire and Shukla (2016), one of the most important requirements for good credit management is the ability to handle customer credit lines sensibly and efficiently. Credit administration is thus the monitoring of all activities related to a bank's credit process, safeguarding the value of the bank's greatest balance sheet asset, the loan portfolio (Drigă, 2012). ...
The study empirically investigated Credit Administration and performance of selected microfinance banks in Cross River State. Expo-facto research design was adopted with historical data extracted from annual reports and accounts of these selected banks for the period 2015-2019. A population of 5 microfinance banks operates in Cross River State and the same was selected for study because of data quality and availability. Data were analyzed using descriptive statistics and multiple regression technique. Panel regression was used to examine the impact of the ratios of loan loss provision to non-performing loans (LLP/NPL), performing loans to total deposit (PL/TD) and ratio of non-performing loans to loans & advances (NPL/LA) on Return on asset (ROA). The findings revealed that loan loss provisioning and non-performing loan ratios had a significant negative impact on the profitability of MFBs in Cross River State, implying a significant decrease in the performance of MFB banks in Cross River State. However, performing loans ratio had a significant positive impact on MFBs profitability. Conclusively, credit administration had a significant impact on performance of selected microfinance banks in Cross River State. So, it is recommended among other things that proper loan appraisal and follow-up, including very careful loan screening procedure and timely disbursement of approved loan should be undertaken by credit officers to reduce delinquencies and default.
... Credit risk, however, could arise from activities both on and off balance sheet. The credit risk exposure amount is normally explained by the carrying amounts for loans granted and receivables on the balance sheet (Drigă, 2012). We have considered as proxies of credit risk exposures the ratio of Non-Performing Loan (NPL) 2 to Total loan which identifies the fitness of a bank's credit risk management, ratio of Total loan to Total deposit and the real growth rate of bank loans3. ...
This study empirically investigates the impact of credit- risk exposure management on bank profitability of the major commercial banks in Sweden with special emphasis on the financial crisis of 2008. We empirically test whether risk managing in ways to substantially reducing the probability that defaulting loans and how the Swedish bank may keep out credit crisis with their credit activities. The purpose of the study was to find out the main issues arising from the bank lending activities that have had a serious impact on the banking industry and the financial instability. Furthermore, the paper explores whether credit exposure manage procedures are changed during financial crisis. We find that successful practices of credit risk management in Swedish banks are likely to improve the availability of bank credit
The study investigated the effect of net interest margin on financial performance of deposit money banks in Nigeria. The researcher developed four specific objectives, four research questions and four hypotheses that guided the study. The research design employed was ex post facto. This design is selected and implemented due to the researcher's lack of control over the various elements of the design. The data for this study is preexisting, therefore it is utilized for a secondary data analysis. The study's population comprised twenty-two (22) designated deposit money banks in Nigeria. This study employed the judgmental sampling technique. The sample size is made up of two (2) DMBs which includes United Bank for Africa Plc, Fidelity. The data for this study were obtained from the published financial statements of the chosen publicly traded deposit money banks in Nigeria. This study employed an estimated technique that involved the use of descriptive statistics and Ordinary Least Squares (OLS) regression analysis. The E-view-9 software was utilized to carry out the analysis. The study established that net interest margin is statistically significant and has a positive effect on operating income (OI). The researchers suggested that Banks should monitor and manage the duration gap between assets and liabilities, considering potential interest rate changes and the bank's risk appetite. Banks should explore opportunities to diversify income sources by offering a broader range of financial products and services, such as wealth management, insurance, and asset management.
This study investigated the effect of credit risk management on market performance of deposit money banks in Nigeria. Market performance was used as dependent variable proxy as net assets per share while management quality ratio, capital adequacy ratio, sensitivity to market ratio, credit to deposit ratio and asset quality ratio were used as independent variables. A sample of 12 deposit money banks were used for the period of ten years spanning 2012 to 2021. The study employed ex-post facto and longitudinal research design. The secondary sources of data were collected from annual reports of the selected deposit money banks and five (5) specific objectives and hypotheses were subjected to some preliminary data tests like descriptive statistics, Pearson correlation analysis and Variance Inflation factor (VIF) were analyzed using panel regression analysis. Using a sample of 120 banks-year observations, the result revealed that management quality ratio, credit to deposit ratio and asset quality ratio have negative and statistically significant effect on market performance proxy as net assets per share of deposit money banks in Nigeria which was statistically significant at 5% level of significance. Conversely, Capital adequacy ratio and sensitivity to market ratio was found to have positive but non-significant effect on market performance of deposit money banks in Nigeria. Based on the findings above, the study recommends among others, that managers of Banks in Nigeria should enhance their management quality and capacity in credit analysis to reduce the risk of default in repayment as this will stem the cyclical nature of net assets per share and increase their market performance. Moreover, adequate provision against loan loss should be made and Nigeria banks should adopt an aggressive deposit mobilization to increase credit availability and develop a reliable credit risk management strategy with adequate punishment for loan payment defaults. The st
Purpose: The purpose of the research is to reveal the role of deposit insurance systems with their requirements (capital adequacy, deposit size) in assessing the effectiveness risk management (risk identification, risk analysis, risk assessment, risk monitoring and follow-up) among employees of the Iraqi General Insurance CompanyTheoretical framework: problem of study revolved around an important question: Can deposit insurance systems be used to assess the effectiveness risk managementDesign/methodology/approach: this was measured by a sample of (133) factors, which is the result of the total number of questionnaires distributed by (150) , from which 146Findings: In order to achieve the best results, the research used statistical description, stability factor, equinox test, correlation coefficient, and structural modeling)Research, Practical & Social implications: The research came out with a set of results, foremost of which was the interest of employees in the Iraqi General Insurance Company to improve the mechanisms of the deposit insurance system by reducing the degree of risks associated with customers' deposits to the lowest levelOriginality/value: this contributed to reducing the risk of borrowing and financing with the insurance agency.
This study analyzed the financial risks management in Saudi commercial banks as a comparative analysis using CAMEL model during the period 2015-2017. The study sample included six commercial banks selected on the basis of the largest and lowest banks by asset size in 2015 as the basis year. We applied Capital Risk Adequacy Ratio and Advances to assets ratio for analyze of capital adequacy risk. Gross NPA ratio and Net NPA ratio for analyze of credit risk .Total Advances to Total Deposits Ratio and Business per Employee Ratio for analyze of manage risks. Dividend Pay – out Ratio and Return on Assets Ratio for analyze of Earnings and Profitability risks. And Liquidity to Demand Deposits Ratio, Total Deposits to Total Assets Ratio for analyze of Liquidity Management risks. The results of study indicate that two sample banks, Samba Bank and Al-Enma Bank, have a composite rating of “1” that is 33.33% of the total sample and majority of banks that are four in numbers (NCB Bank, Al Rajhi Bank, Al-Jazira Bank and Al-Bilad Bank) have achieved composite rating “2” that is 66.67% of the whole sample. This reflects that Saudi commercial banks have safe and sound operations through satisfactory performance in risk management practices. Generally, study showed that Saudi commercial banks reflected stability of their banking risks, through policies and procedures set by SAMA. Accordingly, the study recommended that risk departments in Saudi commercial banks should rely on the CAMEL model to analyze and assess their financial risks, to measure these risks and to take measures to address them or reduce their impact on the activities of these banks.
The study examined financial risk management and bank profitability in Nigeria. With the aid of a well-structured questionnaire data were drawn from a convenient sampling technique; a sample size of 56 management staff of Access Bank of Nigeria Plc. Simple linear regression was used for the test of hypotheses using statistical package for social science software version 20. The study revealed that; there exist a significant positive effect of liquidity risk, credit risk, interest risk and inflation risk on return on assets of Access Bank Nigeria Plc. Based on the findings, it was recommended among others that banks should take proactive measures aimed at curbing financial risks as this will have a positive effect on their profit.
In banking operations globally, granting of loans and advances remains the primary business of every bank and for this reason; loan quality is considered a primary indicator of financial soundness and health of banks. However, banks are exceeding CBN 5% threshold on non-performing loans that exposed them to huge unpaid loans due to borrower’s defaults in honouring debt obligations and this may be attributed to poor adherence to regulatory requirements (credit
creation, reserve requirements, statutory reserves, asset quality, and prime lending rates). The study adopted the ex-post facto research design. The study population was 10 deposit money banks quoted on the Nigerian Stock Exchange as at 31st December 2018. Validated data were collected from the selected banks for 12 years (2007-2018), giving 120 firm years of observations. The reliability of the data was premised on the certification of the financial statements by the external auditors and data were subjected to pre-tests using descriptive statistics, correlation, unit root tests and cointegration test. Data were analysed using descriptive and inferential statistics. The result show that regulatory requirements significantly effects non-performing loan (Adj.R2 = 0.286, F (9, 96) = 5.974, p < 0.05) with ρ-value of Fstatistics of 0.00, which is significant as it is less than the chosen significant level of 5%. The study recommended the creation of a special court that will be adjudicating on loan default and recovery matters expeditiously to discourage the accumulation of bad credit which is hindering bank performance in Nigeria.
Liquidity risk is one of the major risks of banks that can affect the development of the financial system, while; identifying the determinants of this risk is crucial for the soundness of the financial sector. The main objective of this study is to find out determinants of liquidity risk in Ethiopian private commercial banks covering fifteen years (2003-2017) on six sample private commercial banks using a quantitative research approach. This study directly objectively examined indicators of liquidity risk from a wide range of variables. Bank specific and macroeconomic variables were tested for the liquidity risk models by using the balanced panel fixed effect regression model. The findings of the study for liquidity risk model revealed that the Real GDP growth rate has a significant positive impact on liquidity risk whereas the Average Nominal lending interest rate has a significant negative impact on liquidity risk and capital adequacy ratio and bank size have negative but insignificant influence on liquidity risk. Finally, the result indicates that return on asset, Tangibility and bank age has a negative but insignificant relationship with liquidity risk of Ethiopian private banks during the test period.
The aim of this study the effect of liquidity risk on financial performance of OCBC Bank Singapore. This study to investigate which model is affected by liquidity risk. Sample data of OCBC Bank Singapore undertaken within period 2013-2017. The study reviews the concepts, theories, method and standards which related to this study and analyses shows that bank-specific factors and macroeconomic factors influence the liquidity risk of the bank.
Risk is a key factor for businesses, because you cannot get profit from any activity without risk. Since banking risks are a source of unpredicted expenses, their proper management might stabilize revenues, having the role of shock absorber. At the same time, strengthening the value of banking shares can only be achieved through real communication with the financial markets and the implementation of adequate programmes of banking risk management. The paper analyzes, for the beginning, a series of general aspects regarding risk and banking risk management. Then, we present the conclusions resulting from the quantitative research descriptive type which had as objective the analysis of knowing the measures that have to be taken in the banking management for a better management of risks that might cause bankruptcy and opinions about the NBR responsibilities to monitor and control the banks in the system.
A number of financial institutions have collapsed or experienced financial problems due to inefficient credit risk management systems. The study seeks to evaluate the extent to which failure to effectively manage credit risk led to Zimbabwe’s banks’ demise in 2003/2004 bank crisis. It also seeks to establish other factors that led to the banking crisis and to outline the components of an effective credit risk management system. The study found that the failure to effectively manage credit risk contributed to a greater extent to the banking crisis. The research also identified poor corporate governance, inadequate risk management systems, ill planned expansion drives, chronic liquidity challenges, foreign currency shortages and diversion from core business to speculative non-banking activities as other factors that caused the crisis. There is also need for banks to develop and implement credit scoring and assessment methodologies, review and update the insider lending policies and adopt prudential corporate governance practices.
Now in its third edition, this seminal work by Joël Bessis has been comprehensively revised and updated to take into account the changing face of risk management. Fully restructured, featuring new material and discussions on new financial products, derivatives, Basel II, credit models based on time intensity models, implementing risk systems and intensity models of default, it also includes a section on Subprime that discusses the crisis mechanisms and makes numerous references throughout to the recent stressed financial conditions. The book postulates that risk management practices and techniques remain of major importance, if implemented in a sound economic way with proper governance. Risk Management in Banking, Third Edition considers all aspects of risk management emphasizing the need to understand conceptual and implementation issues of risk management and examining the latest techniques and practical issues, including: Asset-Liability Management Risk regulations and accounting standards Market risk models Credit risk models Dependencies modeling Credit portfolio models Capital Allocation Risk-adjusted performance Credit portfolio management Building on the considerable success of this classic work, the third edition is an indispensable text for MBA students, practitioners in banking and financial services, bank regulators and auditors alike.
The objective of this paper is to provide a global perspective of the liquidity risk from a banking societies‘ viewpoint. Our paper belongs to the technical studies that analyze the concrete way in measuring the liquidity risk at the level of the banking societies from Romania. The study is structured on chapters that present the theoretical background in liquidity risk management and new trends in measuring, monitoring and controlling liquidity risk. Also, the paper contains a study cases part, which presents the actual stage and the challenges of the measuring the liquidity risk. We try to underline the importance of a flexible banking system, which should be able to measure and forecast its prospective cash flows for assets, liabilities, off-balance sheet commitments and derivatives over a variety of time horizons, under normal conditions and a range of stress scenarios, including scenarios of severe stress.
Credit risk represents the possibility that the bank will suffer a loss of income because some borrowers cannot exactly follow the lender’s repayment terms from different kind of reasons. In such cases, the account of the customer inevitably becomes overdue, the granted loan turns into a non-performing credit and the lending bank registers a decline of its profit. In order to prevent such situations, commercial banks must take certain measures of reducing credit risk.
Current research on financial risk management applications of econometrics centers on the accurate assessment of individual market and credit risks with relatively little theoretical or applied econometric research on other types of risk, aggregation risk, data incompleteness, and optimal risk control. We argue that consideration of the model risk arising from crude aggregation rules and inadequate data could lead to a new class of reduced-form Bayesian risk assessment models. Logically, these models should be set within a common factor framework that allows proper risk aggregation methods to be developed. We explain how such a framework could also provide the essential links between risk control, risk assessments, and the optimal allocation of resources. Copyright 2005, Oxford University Press.
Value-at-Risk (VaR) is increasingly used in portfolio risk measurement, risk capital allocation and performance attribution. Financial risk managers are therefore rightfully concerned with the precision of typical VaR techniques. The purpose of this paper is to assess the precision of common dynamic models and to quantify the magnitude of the estimation error by constructing confidence intervals around the point VaR and expected shortfall (ES) forecasts. A key challenge in constructing proper confidence intervals arises from the conditional variance dynamics typi-cally found in speculative returns. Our paper suggests a resampling technique which accounts for parameter estimation error in dynamic models of portfolio variance. JEL Number: G12.
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