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The behaviour of the risk based capital adequacy ratio in Iran’s banking system
Abstract
This study was carried out to identify the determinants of the behaviour of public and private banks in determining their risk and capital over 2001–2016 period by considering the banks’ risk and capital simultaneously. The model was estimated using 2SLS-RE and GMM methods. According to the results, the endogeneity of two variables of risk and capital in equations cannot be rejected. It should be noted that this study does not reject a significant relationship between the risk and thecapital to risk (weighted) assets ratio (CRAR) over the study period.
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This paper is an attempt to empirically examine the impact of Basel Accord regulatory guidelines on the risk-based capital adequacy regulation and bank risk management of Vietnamese commercial banks. Our research aims to assess how Vietnamese commercial banks manage their capital ratio and bank risk under the latest Basel Accord capital adequacy ratio requirements. Building on previous studies, this research uses a simultaneous equation modeling (SiEM) with three-stage least squares regression (3SLS) to analyze the endogenous relationship between risk-based capital adequacy standards and bank risk management. A year dummy variable (dy2013) is included in the model to take account of changes in the regulation of the Vietnamese banking system. Furthermore, we add a value-at-risk variable developed by as an independent variable into equations of the empirical models. The results reveal a significant impact of Basel capital adequacy regulatory pressure on the risk-based capital adequacy standards and bank risk management of Vietnamese commercial banks. Moreover, banks under the latest Basel capital adequacy regulations are induced to reduce risks and increase banks’ financial performance.
Purpose – This paper aims to examine the association between regulatory capital and risk of Indian commercial banks and the impacts of other relevant variables on them.
Design/methodology/approach – The study is based on a secondary data set on Indian commercial banks collected from “Capitaline Plus” corporate database and annual reports of the respective banks. Total 41 major Indian banks (21 public and 20 private sector banks) are considered in this study. Here absolute values of capital and risk are used as dependent variables along with some relevant bank specific explanatory variables in a system of a two-equation model. Based on the nature of interrelationship and identifiability of the equations, three-stage least squares (3SLS) technique is used to estimate the relationship.
Findings – Risk and capital of Indian commercial banks are inversely associated. The influence of profitability on both capital and risk is significantly positive. Moreover, human capital efficiency is negatively associated with the undertaking of risk by the banks. In this respect, Indian private sector banks are found to be more efficient in utilizing human capital for reducing credit risk.
Originality/value – It is the first comparative study in India examining the relationship between capital and risk of Indian public and private sector commercial banks covering both Basel I and II periods. Further, the role of human resource in managing risk is considered as a relevant variable in this study.
This paper studies the capital regulation implementation by commercial banks. Specifically, the authors examine how commercial banks achieve the required capital regulation requirements in the context of the Basel regulation frameworks and whether this compliance promotes banks’ efficiency. The authors use partial adjustment models to analyse the banks’ quarterly financial statement releases in both pre-and post-regulation periods. On average, the empirical evidence shows that the commercial banks pursued credit growth at a higher priority than capital regulation requirements. Retained earnings and risk-weighted assets are permutations to account for the bulk of both higher risk-weighted capital ratio and capital-to-total-assets ratio, while the shares’ issuance played a lesser role. In the post-regulation period, the banks adjusted to the risk-weighted capital target faster than in the pre-regulation period. Adjustment to the capital-on-total-assets ratio was slower. The authors find that the manner of the adjustment by these commercial banks to the capital target led to a loss in efficiency. The result implies the need to tighten the capital regulation implementation and improve risk-weighted assets management.
In response to the global financial crisis of 2007–2009, risk-based capital requirements have been reinforced in the new Basel III Accord to counter excessive bank risk-taking behavior. However, prior theoretical as well as empirical literature that studies the impact of risk-based capital requirements on bank risk-taking behavior is inconclusive. The primary purpose of this paper is to examine the impact of risk-based capital requirements on bank risk-taking behavior, using a panel dataset of 21 listed commercial banks of Pakistan over the period 2005–2012. Purely regulatory measures of bank capital, capital adequacy ratio, and bank assets portfolio risk, risk-weighted assets to total assets ratio, are used for the main analysis. Recently developed small N panel methods (bias corrected least squares dummy variable (LSDVC) method and system GMM method with instruments collapse option) are used to control for panel fixed effects, dynamic dependent variables, and endogenous independent variables. Overall, the results suggest that commercial banks have reduced assets portfolio risk in response to stringent risk-based capital requirements. Results also confirm that all banks having risk-based capital ratios either lower or higher than the regulatory required limits, have decreased portfolio risk in response to stringent risk-based capital requirements. The results are robust to alternative proxies of bank risk-taking, alternative estimation methods, and alternative samples.
We develop a dynamic model of bank capital structure in an acquisitions context which predicts: (i) total bank value and the bank's equity capital are positively correlated in the cross-section, and (ii) the various components of bank value are also positively cross-sectionally related to bank capital. Our empirical tests provide strong support for these predictions. The results are robust to a variety of alternative explanations--growth prospects, desire to acquire toe-hold positions, desire of capital-starved acquirers to buy capital-rich targets, market timing, pecking order, the effect of banks with binding capital requirements, Too Big To Fail, target profitability, risk, and mechanical effects. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.
Although the modern theory of financial intermediation portrays liquidity creation as an essential role of banks, comprehensive
measures of bank liquidity creation do not exist. We construct four measures and apply them to data on virtually all U.S.
banks from 1993 to 2003. We find that bank liquidity creation increased every year and exceeded $2.8 trillion in 2003. Large
banks, multibank holding company members, retail banks, and recently merged banks created the most liquidity. Bank liquidity
creation is positively correlated with bank value. Testing recent theories of the relationship between capital and liquidity
creation, we find that the relationship is positive for large banks and negative for small banks.
This paper focuses on the switching behaviour of enrolees in the Swiss basic health insurance system. Even though the new Federal Law on Social Health Insurance (LAMal) was implemented in 1996 to promote competition among health insurers in basic insurance, there is limited evidence of premium convergence within cantons. This indicates that competition has not been effective so far, and reveals some inertia among consumers who seem reluctant to switch to less expensive funds. We investigate one possible barrier to switching behaviour, namely the influence of supplementary insurance. We use survey data on health plan choice (a sample of 1943 individuals whose switching behaviours were observed between 1997 and 2000) as well as administrative data relative to all insurance companies that operated in the 26 Swiss cantons between 1996 and 2005. The decision to switch and the decision to subscribe to a supplementary contract are jointly estimated.
Our findings show that holding a supplementary insurance contract substantially decreases the propensity to switch. However, there is no negative impact of supplementary insurance on switching when the individual assesses his|her health as 'very good'. Our results give empirical support to one possible mechanism through which supplementary insurance might influence switching decisions: given that subscribing to basic and supplementary contracts with two different insurers may induce some administrative costs for the subscriber, holding supplementary insurance acts as a barrier to switch if customers who consider themselves 'bad risks' also believe that insurers reject applications for supplementary insurance on these grounds. In comparison with previous research, our main contribution is to offer a possible explanation for consumer inertia. Our analysis illustrates how consumer choice for one's basic health plan interacts with the decision to subscribe to supplementary insurance. Copyright � 2009 John Wiley & Sons, Ltd.</P
Building an unbalanced panel of United States (US) bank holding company (BHC) and commercial bank balance-sheet data from 1986 to 2008, we examine the relationship between short-term capital buffer and portfolio risk adjustments. Our estimations indicate that the relationship over the sample period is a positive two-way relationship. Moreover, we show that the management of such adjustments is dependent on the degree of bank capitalization. Further investigation through time-varying analysis reveals a cyclical pattern in the uncovered relationship: negative after the 1991/1992 crisis, and positive before 1991 and after 1997.
We asses the welfare implications of banking competition under various deposit insurance regimes in a model of imperfect competition with social failure costs and where banks are subject to limited liability. We study the links between competition for deposits and risk taking incentives, and conclude that the welfare performance of the market and the appropriateness of alternative regulatory measures depend on the degree of rivalry and the deposit insurance regime. Specifically, when competition is intense and the social failure costs high, deposit rates are excessive both in a free market and with risk-based insurance. If insurance premiums are insensitive to risk then the same is true even if there is no social cost of failure. We find also that in an uninsured market with nonobservable portfolio risk or with flat-premium deposit insurance deposit regulation (rate regulation or deposit limits) and direct asset restrictions are complementary tools to improve welfare. In an uninsured market with observable portfolio risk or with risk-based insurance deposit regulation may be a sufficient instrument to improve welfare.
Exxon Mobil and ConocoPhillips stock price has been predicted using the difference between core and headline CPI in the United States. Linear trends in the CPI difference allow accurate prediction of the prices at a five to ten-year horizon.
As international financial systems become increasingly integrated, the need to reform each country's system has become clear. How to reform those systems is a hotly debated policy issue. Much of this debate has centered on universal banking and the relationship between banks and financial markets. These issues have particular importance for the European Union. The stated goal of creating a single European financial system, without any barriers between member countries, implies a movement toward a single kind of financial system. Should a market system be the goal or would a German-style intermediated system be more desirable? The theories that have been invoked to justify many of the moves to market-based systems are based on traditional neoclassical models. Competition is thought to be desirable because it leads to increased efficiency. Opening up new financial markets is thought to be desirable because it offers increased risk-sharing opportunities. Much of the financial reform that has occurred in countries such as France and Spain has been concerned with moving away from a German-style intermediated system and allowing access to global financial markets. In doing this they gain the advantages of cross-sectional risk sharing. However, they may be losing the advantages of intertemporal smoothing and other forms of risk sharing. It may be that this change is desirable, but it is important that the trade-off be properly understood before moving in this direction. This is particularly true for Germany, where the potential already exists for a system of intertemporal smoothing. Once the move to a market-based system has been made, it is much more difficult to regain the advantages of an intermediated system. The authors identify two types of financial systems. A market-based system promotes cross-sectional risk sharing. An intermediary-based system promotes intertemporal risk smoothing. Which system is best in a particular situation depends on the de
Bank capital regulation seems to be todayÂ’s most accepted regulatory instrument. The reasoning is that limited liability and deposit insurance appear to give banks incentives for excessive risk-taking. Capital requirements can alleviate this problem as banks are obliged to hold more capital which forces them to have more of their own funds at risk. But the theoretical literature has much more to say on how banks determine their capital structure and portfolio risk and how capital regulation influences this decision. This paper attempts to give an overview of the literature in order to see what theory suggests, what empirics seem to tell us, and what there is still to do for future research.
This paper investigates the role of bank capital regulation in risk control. It is known that banks choose portfolios of higher risk because of inefficiently priced deposit insurance. Bank capital regulation is a way to redress this bias toward risk. Utilizing the mean-variance model, the following results are shown: (1) the use of simple capital ratios in regulation is an ineffective means to bound the insolvency risk of banks; (2) as a solution to problems of the capital ratio regulation, the "theoretically correct" risk weights under the risk-b ased capital plan are explicitly derived; and (3) the "theoretically correct" risk weights are restrictions on asset composition, which alters the optimal portfolio choice of banking firms. Copyright 1988 by American Finance Association.
The aim of this study is to examine the effect of bank-specific, industry-specific and macroeconomic determinants of bank profitability, using an empirical framework that incorporates the traditional structure-conduct-performance (SCP) hypothesis. To account for profit persistence, we apply a GMM technique to a panel of Greek banks that covers the period 1985-2001. The estimation results show that profitability persists to a moderate extent, indicating that departures from perfectly competitive market structures may not be that large. All bank-specific determinants, with the exception of size, affect bank profitability significantly in the anticipated way. However, no evidence is found in support of the SCP hypothesis. Finally, the business cycle has a positive, albeit asymmetric effect on bank profitability, being significant only in the upper phase of the cycle.
- Allen F.
- Mehran H.
Universal banking, intertemporal risk smoothing, and European financial integration,” Working Papers 95-6, Federal Reserve Bank of Philadelphia
- F Allen
- D Gale
Credit market competition and capital regulation
- F Allen
- E Carletti
- R Marquez
Influence of tax shield on capital structure of private manufacturing firms in Kenya
- A Manelya
- T Olweny
- M Mutua
- C Mukanzi
The economics of money, banking and financial markets, Pearson, Seventh ed. Canada (Toronto): Colombia University
- F S Mishkin