Banking industry is exposed to different type of risks like credit, operational, interest rate risk, liquidity risk, foreign currency risk, compliance risk, reputational risk, and country risk. ...Banking industry can only become stable and stronger if they have proper tools to mitigate these risks. Due to product innovation and complexity of operations banks are giving more importance to mitigate these types of risks. Regulators (SBP) are emphasizing banks to develop their tools in order to control these risks. BASEL-II is a basic tool which is used internationally in banking sector to mitigate these risks. Our study is focused on the implementation of BASEL-II in Pakistani Banking Industry. Researcher has analyzed that its implementation will bring positive effect in the Pakistani banking industry. Moreover what are the basic challenges banks are facing during its implementation. Data have been collected from fifteen banks a combination of Large, Medium, Small, Islamic and foreign banks operating in Pakistan selected on random basis. Results are analyzed through Pie Charts. This research will be helpful for the banking professional especially associated with risk management division and working towards the implementation of BASEL-II. Basel-II is still in the phase of implementation in the Banking industry in Pakistan. This research will provide the base to those want to study the after implementation effects of Basel-II in the Banking industry.
Following the methodology applied by Nguyen (2020), this paper tests for the potential impact of capital adequacy ratios on bank profitability in a Jordanian context by using static panel data for a ...sample of 24 banks covering the period 2008–2018. Furthermore, the study examines the viability of various potential determinants of profitability led by primary bank-specific variables: cost-income ratio, bank size, debt ratio, and non-performing loans. The main objective is to assess if and how capital adequacy ratios have had any measurable effects along with other bank-specific variables on bank profitability that is determined by the return on assets (ROA) and return on equity (ROE). The study’s main takeaway is that ROA is negatively correlated with the four capital adequacy ratios. However, mixed results are observed when ROE is used as a proxy for bank profitability. ROE is positively affected by both core capital to risk-weighted assets ratio and total capital to risk-weighted assets ratio. On the contrary, ROE is negatively affected by the core capital to total assets ratio and total equity capital to total assets ratio. It can be argued that the most significant finding in this paper is that the impact on bank profitability differs according to the proxy used for capital adequacy. Furthermore, the cost-income ratio is inversely related to both bank profitability measures and both bank profitability measures are inversely affected by the non-performing loan ratio.
We analyze the relationship between bank size and risk-taking under the Basel II Capital Accord. Using a model with imperfect competition and moral hazard, we show that the introduction of an ...internal ratings based (IRB) approach improves upon flat capital requirements if the approach is applied uniformly across banks and if the costs of implementation are not too high. However, the banks’
right to choose between the standardized and the IRB approaches under Basel II gives larger banks a competitive advantage and, due to fiercer competition, pushes smaller banks to take higher risks. This may even lead to higher aggregate risk-taking.
This paper studies loss given default using a large set of historical loan-level default and recovery data of high loan-to-value residential mortgages from several private mortgage insurance ...companies. We show that loss given default can largely be explained by various characteristics associated with the loan, the underlying property, and the default, foreclosure, and settlement process. We find that the current loan-to-value ratio is the single most important determinant. More importantly, mortgage loss severity in distressed housing markets is significantly higher than under normal housing market conditions. These findings have important policy implications for several key issues in Basel II implementation.
The goal of this paper is to build an operational model for assessing creditworthiness of innovative small and medium-sized enterprises. To this purpose, a novel multicriteria methodology is ...implemented through a simulation approach within the context of the ELECTRE TRI-based framework. The model is applied to a database, retained from AIDA, involving a sample of Italian innovative small and medium-sized enterprises. The main finding is twofold. From a theoretical point of view, the credit rating model proposed allows to incorporate an override in the credit class, as required by Basel II in all the cases in which the availability of data is insufficient to describe the risk factors or a judgmental rating model is advised, as well as in innovative small and medium-sized enterprises. From an operational point of view, this methodology could be a useful tool for banks' innovative lending processes, because of the lack of a credit model in this context.
We evolve competitive measures of market discipline, and explore their associated ramifications for banking, by way of the effects of Basel II adoption. Using principal component analysis on the data ...of 706 banks from 34 countries, we generate measures that are better reflective of market discipline universally than any single variable that is popularly in use – e.g., subordinated debt activity. Interestingly, some of our measures are more suited to assessing market discipline in emerging economies than in developed economies and vice-versa, and some are suited to use across both groups of economies. Importantly, using impact assessment, we find that our constructs are indeed credible proxies for the Basel II envisaged market discipline; they are variously negatively related to Basel II adoption. Furthermore, bank performance, measured by profitability and stability, also exhibit significant responsiveness to the adoption of market discipline, with, for instance, less impact on developed economy banks’ profitability than on emerging economy banks’ profitability, and decline in loan risk in emerging economy banks versus the increase in loan risk in developed economy banks (which is interestingly mitigated by stable equity cushion and higher liquidity). These and other results of our paper provide useful policy guides for several stakeholders of the banking industry.
AbstractAs every other business, there are a variety of risks in the banking industry, including operational risks. The Central Bank of the Islamic Republic of Iran, as the Basel Committee, has ...required computing and managing the operational risk for banks and financial institutions. Accordingly, the goal of this study is to evaluate the operational risk management in banks based on the Basel II accord methodology. This study is of case study type. That is to achieve the research purpose, the Bank Hekmat Iranian (merged with Bank Sepah) was chosen as a young bank in Iran. Due to access to the bank's financial statements, no sampling was used and all audited statements of this bank over 2011 to 2016 were selected as the statistical population of the study. Then, the operational risk of this bank was calculated using two "Basic Indicator" and "Standardized" approaches based on the Basel II accord methodology. Also, the Central Bank of the Islamic Republic of Iran directive were used to identify different groups of bank activity in Standardized method.Descriptive statistics were used for data analysis. The results represent an ascending slope in operational risk in this bank over the research period. Due to the impact of the volume and the extent of banks' operations on the operating risk, this result could be due to an increase in the scope and volume of the operations in the bank during these years, which has directly affected the operational risk. This paper, while providing a relatively comprehensive and coherent literature about the operational risk, also provides details for calculating of this risk in banks. These details are based on the bank’s audited financial statements and can be used as a pattern to calculate operational risk in other banks.IntroductionEvery economic activity is exposed to risk. Because economic activities deal with the future and the future is always faced with risk and uncertainty. Credit and financial institutions are no exception. These institutions face a variety of risks, including credit risk, market risk and operational risk. Operational risk is the risk associated with the way a bank operates and manages its operations. Every risk arising from the way a bank operates is somehow indicative of operational risk. Operational risk factors can be within the organization (eg management and staff performance) or outside the organization (eg natural disasters). The variety of factors that can lead to operational risk has made it difficult to measure this risk. Each bank's management must identify mechanisms for identifying and managing the risk and mobilize organizational culture to control and mitigate this risk. As described above, it is essential that banks and financial institutions are actively involved in the risk management process in order to monitor, manage and measure operational risk. They must have methods for quantifying operational risk so that they can calculate and control and mitigate this risk in their management scope. Therefore, the main question in this study is how much a bank's operational risk is according to the Basel II accord methodology.Case studyThis study is of case study type and the statistical population of the study is the data extracted from the audited financial statements of the Bank Hekmat Iranian (merged with Bank Sepah) during the research period. Since access to this data is feasible for the purpose of this study, sampling has not been used and the entire statistical population has been investigated.Materials and MethodsFollowing Basel II (2006) and Central Bank of the Islamic Republic of Iran (2007) instructions, the “basic index” and the “standardized” approaches are used to calculate operational risk. In the “basic index” approach, a bank's operational risk per year equals a constant percentage of the bank's average earnings over the last three years. The “standardized” approach is similar to the “basic index” approach, except that it takes into account the fact that operational risk can vary between different segments of banks' operations. The “standardized” approach divides the bank's activities into eight working groups and considers for each working group a separate percentage of the average gross income as the operating risk for that group. Descriptive statistics were used to analyze and interpret the results.Discussion and ResultsThe results showed that although the amount of operational risk in the “basic index” and the “standardized” approaches is slightly different and is greater in “standardized” approach than the “basic index” approach, but both methods show an increasing slope for the operational risk since 2014 to 2017. This means that the operating risk for Bank Hekmat Iranian has increased over these years.ConclusionThe results can be interpreted as having a significant increase in the volume and scope of operations of the Bank Hekmat Iranian (merged with Bank Sepah) from 2014 to 2017, the risk associated with these operations has been increased too. Since the scope of operational risk is very wide and encompasses almost all aspects of bank activity, it is natural that as the scope of bank operations broadens, operating risk will increase. Of course, this increase is due to the expansion of the bank's operations and its upward trend and does not necessarily have a negative message for the bank. Because the higher the risk, the higher the return. Banks may rely on the output of the standardized approach to apply more stringent and maximum precautionary measures and consider larger precautionary reserves to cover the capital required for operational risk.
The Basel Committee on Banking Supervision proposes a capital adequacy framework that allows banks to calculate capital requirement for their banking books using internal assessments of key risk ...drivers. Hence the need for systems to assess credit risk. Among the new methods, artificial neural networks have shown promising results. In this work, we describe the case of a successful application of neural networks to credit risk assessment. We developed two neural network systems, one with a standard feedforward network, while the other with a special purpose architecture. The application is tested on real-world data, related to Italian small businesses. We show that neural networks can be very successful in learning and estimating the
in bonis/
default tendency of a borrower, provided that careful data analysis, data pre-processing and training are performed.
Based on UK data for major retail credit cards, we build several models of Loss Given Default based on account level data, including Tobit, a decision tree model, a Beta and fractional logit ...transformation. We find that Ordinary Least Squares models with macroeconomic variables perform best for forecasting Loss Given Default at the account and portfolio levels on independent hold-out data sets. The inclusion of macroeconomic conditions in the model is important, since it provides a means to model Loss Given Default in downturn conditions, as required by Basel II, and enables stress testing. We find that bank interest rates and the unemployment level significantly affect LGD.
•We propose a new model to reflect effects of risk-based capital rules on volatility.•The regulator imposes dynamic limits on the asset risk of financial institutions.•Volatility is reduced when ...capital cushion becomes too small (leverage too high).•Regulation reduces cost of deposit insurance, credit spread, and default probability.•Merton (1974), Black and Cox (1976) are special cases of our dynamic volatility model.
Unlike non-financial firms, financial institutions are often heavily regulated to prevent bankruptcies and negative spillovers. A main regulatory tool is risk-based capital requirements. To reflect this reality, we develop a model that allows for dynamically updated asset risk, in contrast to standard contingent claim models that assume constant volatility. Regulators impose a decrease in asset volatility when the capital cushion becomes small, thereby reducing the risk of distress. We show that such regulation of financial institutions affects their credit spreads, credit ratings, transition matrices, valuation of liabilities, cost of deposit insurance, and risk-shifting incentives.
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