Purpose
The purpose of this paper is to explore to what extent risk disclosure is associated with banks’ governance characteristics. The research also focuses on how the business environment and ...culture may create a bank’s awareness of risk management and its disclosure. This study is conducted in a setting where banks are not mandated to follow international standards for their risk disclosures.
Design/methodology/approach
Using 300 bank-year observations comprising hand-collected private commercial bank data, the study uses regression analysis to investigate the influence of risk governance characteristics on risk disclosure.
Findings
This paper reports a positive relationship between risk disclosure and banks’ governance characteristics, such as the presence of various risk committees and a risk management unit.
Practical implications
Because studies are lacking on risk disclosure and risk governance conducted in developing countries, it is expected that this research will make a significant contribution to the literature and provide a foundation for further research in this field.
Social implications
This study complements the corporate governance literature, more specifically the risk governance literature, by incorporating agency theory, institutional theory and proprietary cost theory to provide robust evidence of the impact of risk governance practices in the context of a developing economy.
Originality/value
Previous studies on risk disclosure and governance determinants primarily involve developed countries. This paper’s contribution is to examine risk disclosure and risk governance characteristics in a developing country in which reporting according to international standards is effectively voluntary.
Purpose
In a bid to enhance the stability of banks, supervisory authorities in sub-Sahara Africa (SSA) have also adopted international bank regulatory standards based on the Basel core principles. ...This paper aims to investigate the effectiveness of these regulations in mitigating Bank risk (instability) in SSA. The focus of empirical analysis is on examining the implications of four regulations (capital, activity restrictions, supervisory power and market discipline) on risk-taking behaviour of banks.
Design/methodology/approach
This paper uses two dimensions of financial stability in relation to two different sources of bank risk: solvency risk and liquidity risk. This paper uses information from the World Bank Regulatory Survey database to construct regulation indices on activity restrictions and the three regulations pertaining to the three pillars of Basel II, i.e. capital, supervisory power and market discipline. The paper then uses a two-step system generalised method of moments estimator to estimate the impact of each regulation on solvency and liquidity risk.
Findings
The overall results show that: regulations pertaining to capital (Pillar 1) and market discipline (Pillar 3) are effective in reducing solvency risk; and regulations pertaining to supervisory power (Pillar 2) and activity restrictions increase liquidity risk (i.e. reduce bank stability).
Research limitations/implications
Given some evidence from other studies which show that market power (competition) tends to condition the effect of regulations on bank stability, it would have been more informative to examine whether this is really the case in SSA, given the low levels of competition in some countries. This study is limited in this regard.
Practical implications
The key policy implications from the study findings are three-fold: bank supervisory agencies in SSA should prioritise the adoption of Pillars 1 and 3 of the Basel II framework as an effective policy response to enhance the stability of the banking system; a universal banking model is more stability enhancing; and there is a trade-off between stronger supervisory power and liquidity stability that needs to be properly managed every time regulatory agencies increase their supervisory mandate.
Originality/value
This paper provides new evidence on which Pillars of the Basel II regulatory framework are more effective in reducing bank risk in SSA. This paper also shows that the way regulations affect solvency risk is different from that of liquidity risk – an approach that allows for case specific policy interventions based on the type of bank risk under consideration. Ignoring this dual dimension of bank stability can thus lead to erroneous policy inferences.
This paper sets out to help explain why estimates of asset correlations based on equity prices tend to be considerably higher than estimates based on default rates. Resolving this empirical puzzle is ...highly important because, firstly, asset correlations are a key driver of credit risk and, secondly, both data sources are widely used to calibrate risk models of financial institutions. By means of a simulation study, we explore the hypothesis that differences in the correlation estimates are due to a substantial downward bias characteristic of estimates based on default rates. By varying the time horizon, the default probability, the asset correlation and the number of firms in the portfolio, we investigate these estimators in a systematic comparative study. Our results suggest that correlation estimates from equity returns are more efficient than those from default rates. This finding still holds if the model is misspecified such that asset correlations follow a Vasicek process which affects foremost the estimates from equity returns. The results lend support for the hypothesis that the downward bias of default-rate based estimates is an important although not the only factor to explain the differences in correlation estimates. Furthermore, our results help to quantify the estimation error of asset correlations dependent on the true values of default probability and asset correlation.
► We study the extent of international diversification gains in banking. ► We find substantial risk-return gains stemming from bank activities abroad. ► Concentration of bank activities within ...geographic regions partly eroded these gains. ► A mean–variance portfolio optimization model shows a home bias in banking. ► Suboptimal allocation of bank assets is more severe in emerging market countries.
This paper studies international diversification in banking, exploiting a bank-level dataset that covers the operations of 38 global banks and their subsidiaries overseas during 1995–2004. The paper finds that banks with a larger share of assets allocated to subsidiaries in emerging market countries were able to attain higher risk-adjusted returns. These gains were somewhat reduced by the concentration of bank subsidiaries in specific geographical regions, which is typical of the observed international expansion strategies. The paper also finds a substantial home bias in the international allocation of bank assets relative to the results of a mean–variance portfolio optimization model.
The Internal Ratings Based (IRB) approach introduced in the Basel II Accord requires financial institutions to estimate not just the probability of default, but also the Loss Given Default (LGD), ...i.e., the proportion of the outstanding loan that will be lost in the event of a default. However, modelling LGD poses substantial challenges. One of the key problems in building regression models for estimating the loan-level LGD in retail portfolios such as mortgage loans relates to the difficulty of modelling their distributions, as they typically contain extensive numbers of zeroes. In this paper, an alternative approach is proposed where a mixed discrete-continuous model for the total loss amount incurred on a defaulted loan is developed. The model accommodates the probability of a zero loss and the loss amount given that a loss occurs simultaneously. The approach is applied to a large dataset of defaulted home mortgages from a UK bank and compared to two well-known industry approaches. Our zero-adjusted gamma model is shown to present an alternative and competitive approach to LGD modelling.
Purpose: The issue of access to credit for private enterprises has been given an increased amount of attention given their crucial role in fueling economic growth. Vietnamese small and medium-sized ...businesses, however, face many obstacles in accessing financing for profitable investment opportunities, with up to 70% unable to access or obtain bank loans. This paper aims to address the factors affecting the credit accessibility of Vietnamese enterprises, and provide further insights of this issue under the new context of Basel II.
Research design, data and methodology: We adopt a pooled sections approach to construct a sample of 155 firm observations before and after the implementation of Basel II accord in Vietnam and employing binary logistic regression and interaction terms for data analysis. Results: We find that firm characteristics (export participation, female ownership) and proxies for bank-borrower relationship (deposit, overdraft facility) have significant and positive effects on firm’s access to credit. Notably, the sign of interaction coefficient shows that the implementation of Basel II tends to benefit small-sized firms in terms of credit accessibility. Conclusions: The finding further emphasizes the important role of relationship lending in Vietnam’s credit market, which is even more critical for small firms when Basel II is universally applied as the new banking standards in the coming years. KCI Citation Count: 1
This empirical study investigates whether borrowers manage earnings to ameliorate their accounting portrait and to achieve a better borrowing capacity in the private loan market. We analyse the ...impact of borrowers’ earnings management activity on the amount and costs of their private loans both at the time of lending (ex post earnings management) and before a lending agreement is made (ex ante earnings management). We test our hypothesis on a panel sample of 465 small and medium-sized private corporations from the debt-dependent southern EU economies of Italy, Portugal and Spain over the 2002–2012 period. Using a generalized method of moments (GMM) model to control for endogeneity, we find that the discretionary earnings management activity of borrowers favours larger loan amounts, both ex post and ex ante. By contrast, we find no impact of borrowers’ earnings management activity on the costs of loans. Interestingly, we find that the relationship between earnings management and firms’ borrowing capacity is not significant before the enactment of the Basel II regulation; however, in the period following its enactment, we find a positive and systematic impact of earnings management (both ex post and ex ante) on the amount of bank loans, as well as some positive impact on the costs of bank loans. Our results indicate that borrowers manage earnings to signal better quality to lenders and to ameliorate their borrowing capacities, regardless of the excessive costs of doing so. In addition, we find that the introduction of the Basel II rules likely strengthened this tendency. The findings of this research should alert bank regulators to the feasibility of an unintended economic consequence of rigid discipline with respect to bank risk taking—namely, reducing borrowers’ transparency may lead to less prudent assessments of borrowers’ creditworthiness.
The new Basel II Accord (2006), established new and revised capital requirements for banks. In this paper we analyze and estimate the possible effects of the new rules on the pricing of bank loans. ...We relate to the two approaches for capital requirements (internal and standardized) and distinguish between retail and corporate customers. Our loan-equation is based on a model of a banking firm facing uncertainty operating in an imperfectly competitive loan market. We use Israeli economic data and data of a leading Israeli bank. The main results indicate that high quality corporate and retail customers will enjoy a reduction in loan interest rates in (big) banks which, most probably, will adopt the
IRB approach. On the other hand high risk customers will benefit by shifting to (small) banks that adopt the standardized approach.
International coordination of banking policies can be seen through the work of the Basel Committee, where the importance of security and protection of information in banks and other financial ...institutions highlights the Basel II agreement, as it identifies operational risk as one of the key risks for these entities. Based on the said agreement, the National Bank of Serbia adopted an accompanying norm, which does not exhaust the field of information protection in that sense, but represents a good basis for further elaboration of information protection systems in banks, through development of local security policies and other acts regulating information protection in them.
Using a dynamic stochastic general equilibrium (DSGE) model, we analyzed the impact of the Basel II and III capital requirements regulations on the effects of monetary policy shocks on the behavior ...of the macroeconomy and the Iranian banking system. According to the structural shocks, four observable variables including output gap, bank capital adequacy, inflation and money base growth rate during the period from 2004Q1 to 2020Q4 were included in the Bayesian estimation process along with some other predetermined parameters. Finally, the impulse-response functions of the model were interpreted in two scenarios Basel II or III to the capital adequacy ratio. The results suggest that if banks operate under the Basel II capital regulations, the central bank’s use of money supply may lead to low growth in the economy in the short-run, but in the medium- and long-run, the negative effects will be much larger. However, with the introduction of Basel III regulations for banking business, the output fluctuations will be reduced by the expansion of money supply. The results also show that a shock to the money supply leads to a sharp increase in inflation, and it is noteworthy that the introduction of Basel II or III does not affect the nature of the inflation response to monetary policy. Finally, we found that in both scenarios of the introduction of Basel II and III due to a monetary policy shock, bank profitability falls sharply in the short-run. However, with the adjustments that the bank makes to interest rates, it quickly returns to profitability.
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