The financial crisis has been blamed on reckless bankers, irrational exuberance, government support of mortgages for the poor, financial deregulation, and expansionary monetary policy. Specialists in ...banking, however, tell a story with less emotional resonance but a better correspondence to the evidence: the crisis was sparked by the international regulatory accords on bank capital levels, the Basel Accords.
In one of the first studies critically to examine the Basel Accords,Engineering the Financial Crisisreveals the crucial role that bank capital requirements and other government regulations played in the recent financial crisis. Jeffrey Friedman and Wladimir Kraus argue that by encouraging banks to invest in highly rated mortgage-backed bonds, the Basel Accords created an overconcentration of risk in the banking industry. In addition, accounting regulations required banks to reduce lending if the temporary market value of these bonds declined, as they did in 2007 and 2008 during the panic over subprime mortgage defaults.
The book begins by assessing leading theories about the crisis-deregulation, bank compensation practices, excessive leverage, "too big to fail," and Fannie Mae and Freddie Mac-and, through careful evidentiary scrutiny, debunks much of the conventional wisdom about what went wrong. It then discusses the Basel Accords and how they contributed to systemic risk. Finally, it presents an analysis of social-science expertise and the fallibility of economists and regulators. Engagingly written, theoretically inventive, yet empirically grounded,Engineering the Financial Crisisis a timely examination of the unintended-and sometimes disastrous-effects of regulation on complex economies.
Modeling the Loss Distribution Chava, Sudheer; Stefanescu, Catalina; Turnbull, Stuart
Management science,
07/2011, Letnik:
57, Številka:
7
Journal Article
Recenzirano
Odprti dostop
In this paper, we focus on modeling and predicting the loss distribution for credit risky assets such as bonds and loans. We model the probability of default and the recovery rate given default based ...on shared covariates. We develop a new class of default models that explicitly accounts for sector specific and regime dependent unobservable heterogeneity in firm characteristics. Based on the analysis of a large default and recovery data set over the horizon 1980-2008, we document that the specification of the default model has a major impact on the predicted loss distribution, whereas the specification of the recovery model is less important. In particular, we find evidence that industry factors and regime dynamics affect the performance of default models, implying that the appropriate choice of default models for loss prediction will depend on the credit cycle and on portfolio characteristics. Finally, we show that default probabilities and recovery rates predicted
out of sample
are negatively correlated and that the magnitude of the correlation varies with seniority class, industry, and credit cycle.
This paper was accepted by Wei Xiong, finance.
This paper attempts to study loan interest rate Nash game models in the banking sector under regulatory solvency constraints. By taking solvency constraints as Basel I, Basel II, and Expected ...Shortfall (ES), we obtain results regarding the existence of loan interest rate equilibrium. A sensitivity analysis for solvency models and some numerical results are presented. Numerical results show that the weighted loan interest rate of the Mongolian banking system is consistent with the base case of the theoretical weighted loan interest rate corresponding to the Nash equilibrium.
Celotno besedilo
Dostopno za:
BFBNIB, DOBA, GIS, IJS, IZUM, KILJ, KISLJ, NUK, PILJ, PNG, SAZU, UILJ, UKNU, UL, UM, UPUK
This study first investigates why only some banks use the internal models (IMs) introduced by Basel II that lead to more risk-sensitive capital ratios than standardized approaches (SA). I predict ...that banks opt for an IM if it allows economizing on capital requirements, given their underlying risk. I find support for this hypothesis by analyzing Mexican banks’ adoption of an IM for deposit maturity, a key input to measure interest rate risk, between 2006 and 2016. Secondly, I examine whether banks increase the duration of assets after IM adoption—high-maturity assets can be offset with deposits, leading to a lower risk exposure and additional capital savings. For the average maturity of total assets, I find no support for this conjecture. However, when a flattening of the yield curve spurs firms’ demand for high-maturity debt, micro data reveal that banks using the IM increase the duration of commercial loans more than those using the SA. These findings have broad implications for the design of internal risk models and of capital regulation.
The main goal of this study is to investigate the impact of monetary policy (MP) on the risk-taking behavior of Bangladeshi banks. It also attempts to examine the role of Basel II in the association ...between MP and bank risk-taking pre- and post-2010. This study analyzes data from 33 commercial banks in Bangladesh over the 20 years from 2002 to 2021 and uses the two-step system generalized method of moments to address heteroscedasticity and autocorrelation issues. Unlike previous research, this study confirms the significant effect of Basel II on the relationship between MP and banks' risk-taking behavior. The main findings are first that a non-linear U-shaped relationship exists between MP and banks' risk-taking behavior, implying that when bank rate (BR) and cash reserve ratio (CRR) increase, bank credit risk first decreases, then later increases. Second, bank-level characteristics such as liquidity, regulatory capital, and size have a significant effect on risk, whereas bank age has an insignificant effect on risk-taking behavior. Third, MP and Basel II jointly influence risk-taking so that banks take higher risks before implementing Basel II. Overall, thisstudy offers significant practical implications for academics, researchers, and regulators interested in leveraging the findings.
•Higher capital requirements imply more aggressive monetary policy.•The countercyclical buffer in Basel III is represented by rule responding to credit.•The buffer and optimal monetary policy deliver ...extra economic and financial stability.•The buffer and optimal monetary policy dampen the effects of expansionary shocks.•Effects of Basel regulations not evenly distributed among savers, borrowers, banks.
The aim of this paper is to study the interaction between Basel I, II and III regulations with monetary policy. In order to do that, we use a dynamic stochastic general equilibrium (DSGE) model with a housing market, banks, borrowers, and savers. Results show that monetary policy needs to be more aggressive when the capital requirement ratio (CRR) increases because it is less effective in this case. However, this policy combination brings a more stable economic and financial system. We also analyze the optimal way to implement the countercyclical capital buffer stated by Basel III. We propose that the CRR follows a rule that responds to deviations of credit from its steady state. We find that the optimal implementation of this macroprudential rule together with monetary policy brings extra financial stability with respect to Basel I and II.
The internal capital adequacy and assessment process (ICAAP) was first introduced in the second pillar of Basel II in 2004 to offset the deficiencies of Basel I and capital adequacy regulations in ...the first pillar of Basel II. This process is aimed at identifying and measuring risks generated in banks’ activities, and then provides the requirements for internal capital levels and methods to raise capital to deal with these risks. In fact, the implementation of Basel II and ICAAP in Vietnamese commercial banks has attained notable achievements, but it also revealed some major weaknesses. The purpose of this research is to evaluate the implementation of ICAAP in Vietnamese commercial banks in eight components of the ICAAP addressed by Basel II using the survey method and then to simulate the implementation of ICAAP in a Vietnamese commercial bank. From the facts and the simulation of the ICAAP framework in this study, the authors offer some suggestions for Vietnamese commercial banks to implement ICAAP effectively in their banking operations.
Purpose
The paper aims to examine the impact of tighter banking regulation on banks’ loan loss provisioning in an emerging market context.
Design/methodology/approach
The authors exploit the adoption ...of the Basel II Accord in Vietnam as a quasi-natural experiment and use Difference-to-Difference (DiD) method to examine the impact of tighter banking regulation on Vietnamese banks’ provisioning during the period of 2010–2019.
Findings
The paper finds that affected banks (i.e. those taking part in the pilot adoption programme) manage to reduce their provisions significantly compared to their control peers in the post-adoption period. More importantly, this paper further finds that the affected banks manage their provisions primarily for incomes smoothing and signalling. This paper also finds that those banks expand their lending significantly and experience an increase in financial performance in the post-adoption period. Overall, the results provide supports for the “borrowing from the future” proposition that banks may perceive that a tighter banking regulation provides them with growth opportunities, so they have the tendency to manipulate their provisions to facilitate their current income.
Originality/value
This paper contributes to the established literature on the manipulation of bank provisioning as well as the impact of banking regulation, and especially Basel II on bank economic decisions. As compared to prior literature, the adoption of Basel II in Vietnam provided an ideal shock for us to conduct a DiD design to estimate the causal impact of tighter banking regulation on banks’ provisioning practices.
Display omitted
•A fuzzy inference model for the assessment of operational risk is proposed.•The model combines Montecarlo method and different risk management matrices.•The model uses three profiles ...based on fuzzy sets to estimate the loss distribution.•Similar structure and shape of loss distributions confirm the model stability.•Loss distribution evolves lower values of expected loss, unexpected loss and OpVaR.
Operational risk was one of the most important risks in the 2008 global financial crisis. This is due to limitations of the applied models in explaining and estimating this type of risk from highly qualitative information related to failures in the operations of financial organizations. A review of research literature on this area indicates an increase in the development of models for the estimation of the operational value at risk. However, there is a lack of models that use qualitative information for estimating this type of risk. Motivated by this finding, we propose a Flexible Inverse Adaptive Fuzzy Inference Model that integrates both a novel Montecarlo sampling method for the linguistic input variables of frequency and severity that allow the characterization of a risk event, the impact of risk management matrices to estimate the loss distribution and the associated operational value at risk. The methodology follows a loss distribution approach as defined by Basel II. A benefit of the proposed model is that it works with highly qualitative risk data and it also connects the risk measurement (operational value at risk) with risk management, based on risk management matrices. This way, we mitigate limitations related to a lack of available operational risk event data when assessing operational risk. We evaluate the experimental results obtained through the proposed model by using the Index of Agreement indicator. The results provide a flexible loss distribution under different risk profiles or risk management matrices that explain the evolution of operational risk in real time.
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