The introduction of the Basel II Accord has had a huge impact on financial institutions, allowing them to build credit risk models for three key risk parameters: PD (probability of default), LGD ...(loss given default) and EAD (exposure at default). Until recently, credit risk research has focused largely on the estimation and validation of the PD parameter, and much less on LGD modeling. In this first large-scale LGD benchmarking study, various regression techniques for modeling and predicting LGD are investigated. These include one-stage models, such as those built by ordinary least squares regression, beta regression, robust regression, ridge regression, regression splines, neural networks, support vector machines and regression trees, as well as two-stage models which combine multiple techniques. A total of 24 techniques are compared using six real-life loss datasets from major international banks. It is found that much of the variance in LGD remains unexplained, as the average prediction performance of the models in terms of R2 ranges from 4% to 43%. Nonetheless, there is a clear trend that non-linear techniques, and in particular support vector machines and neural networks, perform significantly better than more traditional linear techniques. Also, two-stage models built by a combination of linear and non-linear techniques are shown to have a similarly good predictive power, with the added advantage of having a comprehensible linear model component.
The manipulation of basel risk-weights Mariathasan, Mike; Merrouche, Ouarda
Journal of financial intermediation,
07/2014, Letnik:
23, Številka:
3
Journal Article
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In this paper, we examine the relationship between banks’ approval for the internal ratings-based (IRB) approaches of Basel II and the ratio of risk-weighted assets to total assets. Analysing a panel ...of 115 banks from 21 OECD countries that were eventually approved for applying the IRB to their credit portfolio, we find that risk-weight density becomes lower once regulatory approval is granted. The effect persists when we control for asset structure, and we provide evidence showing that this phenomenon cannot be explained by modelling choices, or improved risk-measurement alone. Consistent with theories of risk-weight manipulation, we find the decline in risk-weights to be particularly pronounced among weakly capitalised banks, where the legal framework for supervision is weak, and in countries where supervisors are overseeing many IRB banks. We conclude that part of the decline in reported riskiness under the IRB results from banks’ strategic risk-modelling.
The main purpose of this study was to determine how the implementation of Basel II in commercial banks in Palestine can reduce their credit risks. A sample of 150 credit risk officers was selected ...among 246 credit risk officers working in the commercial banks inside Palestine Both descriptive statistics and econometric approach were applied to test the hypothesis. The study found a substantial role for applying Basel II on managing the credit risk in the commercial banks in Palestine. The study confirmed the proficiency of the credit risk officers to implement Basel instructions which was confirmed by 82% of the sample. We accepted the null hypothesis that the implementation of Basel II (risk management) will not reduce the credit risk (credit policy) at 5% level of significance. Also no impact for the implementation of Basel II on preventing credit concentration risks at 5% level of significance. However, we rejected the null hypotheses that there is no significant relationship between Basel II and the credit risks (cash ratio). Similarly, we reject the null hypothesis that there is no significant relationship between Basel II with the ability of the banks to reduce the level of credit risk at 5% level of significance. لقد قمنا في هذه الدراسة باختبار الدور الذي يلعبه تطبيق اتفاقية بازل II في الحد من المخاطر الائتمانية في البنوك التجارية العاملة في دولة فلسطين ، من خلال دراسة عينة مكونة من (150) موظفاً من جميع العاملين في الدوائر والأقسام المعنية في إدارة المخاطر الائتمانية في البنوك التجارية العاملة في فلسطين. من ثم اعتمد الباحثان كل من المنهج الوصفي التحليلي والمنهج القياسي من أجل إختبار فرضيات الدراسة. لقد تم قبول الفرضية الصفرية بحيث لا يوجد دور ذو دلالة إحصائية عند المستوى α≤0.05 بين تطبيق متطلبات بازل (II) (إدارة المخاطر) وبين الحد من المخاطر الائتمانية (السياسة الائتمانية)، وقبول الفرضية الصفرية بحيث لا يوجد دور ذو دلالة إحصائية عند المستوى α≤0.05 بين تطبيق متطلبات بازل (II) وبين الحد من المخاطر الائتمانية مخاطر التركيز. بينما تم رفض الفرضية الصفرية بحيث لا يوجد علاقة ذات دلالة إحصائية عند المستوى α≤0.05 بين تطبيق متطلبات بازل (II) وبين الحد من المخاطر الائتمانية (السيولة النقدية)، والفرضية الصفرية بحيث لا يوجد اثر ذو دلالة إحصائية عند المستوى α≤0.05 بين تطبيق متطلبات بازل II وبين قدرة البنوك على الحد من المخاطر الائتمانية.
The paper investigates the presence of market discipline in the banking sectors of India and Pakistan, using the CAMEL approach and the stringent calculations of liquidity and capital as per Basel ...II. It employs a fixed effects model to market discipline as reflected in the capital adequacy, asset quality profitability, management and liquidity of banks, with bank size and changes and GDP as control variables, for the years 2008 to 2017. The results show varying degrees of market discipline in both India and Pakistan, which manifest through different variables.
The aim of this study is to test whether financial risk disclosures required by IFRS 7 and Pillar 3 are value relevant for investors to support them in their investment decisions. The sample in the ...study consists of banks listed on the London, Paris, Frankfurt, Madrid, and Milan Stock Exchanges over an 8-year period, from 2007 to 2014. Based on the aforementioned standards, we built financial risk disclosure indexes and distinguished different risk categories, qualitative and quantitative, as well as credit, liquidity, and market risk. Our analyses confirm that there is a positive association between bank value and several categories of established risk disclosures. Furthermore, it suggests that disclosure adds value to more traditional risk value measures. Besides, our results suggest that investors pay attention to the strength of the bank authority when using risk disclosures.
ABSTRACT
We examine how the presence of multiple supervisory agencies affects firm‐level compliance in form and substance with disclosure regulations. This analysis is important because coordination ...problems among regulators are frequently present in practice but often overlooked in academic research. We exploit that banks are subject to equivalent risk disclosure rules under securities laws (IFRS 7) and banking regulation (Pillar 3 of the Basel II Accord) but that different regulators start enforcing the rules at different points in time. We find that banks substantially increase their formal risk disclosures upon the adoption of Pillar 3 even if they already had to comply with the same requirements under IFRS 7. The effects are stronger if the central bank is responsible for bank supervision and bank regulators are equipped with more supervisory resources, but are less pronounced if the securities market regulator is an independent entity. In turn, banks facing more market pressures are more compliant with the rules. We further find persistent liquidity benefits of the increased risk disclosures but only after Pillar 3 became effective and its compliance was enforced by the banking regulator. Our results suggest that formal and material compliance with risk disclosure regulation are a function of both the resources of the supervisory agency and its incentive alignment with the regulated firms. In our setting, the banking regulator seems more effective in fulfilling this role.
RÉSUMÉ
Un conte de deux superviseurs : conformité avec la réglementation relative à la divulgation des risques dans le secteur bancaire
Nous examinons de quelle façon la présence de plusieurs organismes de surveillance influence la conformité des entreprises avec la réglementation relative à la communication de l'information, tant sur le plan de la forme que sur le fond. Cette analyse est importante, car les problèmes de coordination entre les organismes de réglementation sont fréquents dans la pratique, mais sont souvent mis de côté dans le cadre de la recherche universitaire. Nous faisons valoir que les banques sont assujetties à des règles équivalentes en matière de divulgation des risques en vertu des lois sur les valeurs mobilières (IFRS 7) et de la réglementation du secteur bancaire (pilier 3 de l'accord de Bâle II), mais que les divers organismes de réglementation appliquent les règles à différents moments. Nous établissons que les banques augmentent de façon importante leurs divulgations des risques formelles depuis l'adoption du pilier 3 même si elles étaient déjà tenues de respecter les mêmes exigences aux termes de la norme IFRS 7. Les effets sont plus marqués lorsque la banque centrale est responsable de la supervision des banques et que les organismes de réglementation du secteur bancaire disposent de plus de ressources de surveillance, mais sont moins prononcés lorsque l'organisme de réglementation du marché des valeurs mobilières est une entité indépendante. En retour, les banques qui font face à des pressions plus importantes du marché respectent davantage les règles. Nous trouvons aussi des avantages persistants en termes de liquidité associés avec la hausse des divulgations des risques, mais seulement depuis l'entrée en vigueur du pilier 3 et lorsque son application était assurée par l'organisme de réglementation des banques. Nos résultats portent à croire que la conformité formelle et matérielle avec la réglementation en matière de divulgation des risques est fonction des ressources de l'organisme de surveillance et de son harmonisation sur le plan des incitatifs avec les entreprises réglementées. Dans notre contexte, l'organisme de réglementation du secteur bancaire semble plus efficace pour s'acquitter de cette tâche.
With the majority of large UK and many US banks collapsing or being forced to raise capital over the 2007–9 period, blaming bankers may be satisfying but is patently insufficient; Basel II and ...Federal oversight frameworks also deserve criticism. We propose that the current methodological void at the heart of Basel II, Pillar 2 is filled with the recommendation that banks develop fully-integrated models for economic capital that relate asset values to fundamental drivers of risk in the economy to capture systematic effects and inter-asset dependencies in a way that crude correlation assumptions do not. We implement a fully-integrated risk analysis based on the balance sheet of a composite European bank using an economic-scenario generation model calibrated to conditions at the end of 2007. Our results suggest that the more modular, correlation-based approaches to economic capital that currently dominate practice could have led to an undercapitalisation of banks, a result that is clearly of interest given subsequent events. The introduction of integrated economic-scenario-based models in future can improve capital adequacy, enhance Pillar 2’s application and rejuvenate the relevance of the Basel regulatory framework.
•We propose a novel method of Mean-Capital Requirements (CR) portfolio optimization.•Our large-scale optimization framework combines NSGA-II algorithm and R software.•Obtained optimal portfolios are ...not penalized by Basel 2.5 regulation.•Stressing original correlations of asset returns improves Mean-CR tradeoffs.•Improvements are related to reductions in cardinality of optimal portfolios.
We propose a novel method of Mean-Capital Requirement portfolio optimization. The optimization is performed using a parallel framework for optimization based on the Nondominated Sorting Genetic Algorithm II. Capital requirements for market risk include an additional stress component introduced by the recent Basel 2.5 regulation. Our optimization with the Basel 2.5 formula in the objective function produces superior results to those of the old (Basel II) formula in stress scenarios in which the correlations of asset returns change considerably. These improvements are achieved at the expense of reduced cardinality of Pareto-optimal portfolios. This reduced cardinality (and thus portfolio diversification) in periods of relatively low market volatility may have unintended consequences for banks’ risk exposure.
We use a sample of banks from 24 European countries to investigate whether the adoption of the Basel II Capital Accord in 2008 affects the market valuation of discretionary loan loss provisions ...(DLLPs). Although Basel II lowers the incentives of internal ratings-based (IRB) banks to recognize income-increasing DLLPs in an opportunistic manner, it has no such impact on the remaining banks, which adopt the Standardized methodology. We use this setup in a difference-in-difference (DiD) design, where Standardized banks act as a control group. Our evidence supports the three hypotheses that, for IRB relative to Standardized banks, Basel II is associated with (i) less income-increasing DLLPs and (ii) less income-smoothing via DLLPs, which enhances the informational content of DLLPs about future loan losses and leads to (iii) higher market valuation of DLLPs. Our findings are timely and have policy implications for future regulatory developments in the banking industry.
This paper investigates the direct and joint effects of bank governance, regulation, and supervision on the quality of risk reporting in the banking industry, as proxied for by operational risk ...disclosure (ORD) quality in European banks. After controlling for the endogeneity between bank stability and risk reporting quality, we find that banks having a higher proportion of outside board directors, lower executive ownership, concentrated outside non-governmental ownership, and more active audit committee, and operating under regulations promoting bank competition (i.e., less stringent entry to banking requirements) provide ORD of higher quality. In addition, we find that the contribution of bank supervisors to the enhancement of ORD quality depends on the ownership structure of the bank. Specifically, powerful and independent bank supervisors mitigate the incentives for entrenched bank executives to withhold voluntary ORD. Moreover, bank supervisors and largest shareholders perform substitutive roles in monitoring the bank management's compliance with mandatory ORD requirements. For the sake of enhancing risk reporting quality in banks, our findings recommend sustaining board independence, enhancing audit committee activity, easing entry to banking requirements, and promoting a more proactive role for bank supervisors.
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