Having the author been involved in banking and finance for almost 25 years, this thesis intends to reflect on the role of banks with emphasis on cross border lending and credit rating, their ...effectiveness and the impacts of cultural differences. Perhaps this would not differ substantially from a researcher or a scholar, yet the exploratory approach taken in this research will be somewhat different as it deliberately seeks to answer a number of questions relevant to practitioners in today’s banking. In trying to achieve this goal, this thesis hopefully may find its way to international bankers wondering about the perspectives of their business in general and their profession in specific. It even may perhaps improve the understanding of their clients. The Basel committee which published the new Basel II framework on bank regulation and supervision was the result of long and careful discussions, wide consultations and comprehensive impact studies. Whereas Basel II covers the entire risk profile and supervision of financial institutions, this research is limited to the cross border lending by banks to companies and provides the views from both practicing international bankers and their customers on their 3 expectations regarding Basel II, credit rating and the relevance of context and culture differences. Bankers all over the world are being trained on how to read balance sheets, yet less attention is being paid as to by whom they are being created and how precisely these balance sheets came into existence, other than the accountancy standards applied. Bankers furthermore seem to agree on the fact that credit risks in large part are related to the management competencies, effective corporate governance and integrity of management and organization. The argument could be made that the assessment of management capabilities, governance and integrity may be hindered in those cases where the culture is little understood. In a three days conferences titled; “The Future of Relationship Banking”, 80 senior executives from international banks and large companies were gathered in Punta del Este, Uruguay and were asked to speak about these aspects. A transcript of the conference is provided as annex to this thesis (Annex 1) and serves to triangulate the findings of the research. Main findings of three management papers were presented by the researcher during the conference. A survey was performed during the conference and in addition, through an online survey, in total over 100 practitioners in the field participated in the survey. Results show a variation of conclusions, but very especially seem to confirm the view, contrary to the approach taken in Basel II, that cultural differences and context are felt to be highly relevant in cross border lending.
The paper investigates to what extent the convergence of banks over risk-adjusted capital standards set by the new Basel Capital Accord may affect the way in which they screen innovative firms. It ...also gives an overview of the existing forms of credit support to R&D activities. The study is built upon a survey conducted in January and February 2006 on 12 main Italian banking groups. The survey provides interesting insights on the use of non-financial parameters to assess the creditworthiness of potential borrowers and on the architecture of internal rating systems in the light of Basel II requirements. Results suggest that the majority of banks does not consider intangibles as meaningful determinants in credit risk assessment. This could imply that the sole implementation of the Accord might not lead to reduce informational asymmetries between lenders and borrowers as it could be expected. However, such an effect could be compensated by specific measures provided by single financial intermediaries.
The intention of a loss provision is the anticipation of credit's expected losses by adjusting the book values of the credits. Furthermore, this loan loss provision has to be compared to the expected ...loss according to Basel II and if necessary, equity has to be adjusted. This however assumes that the loan loss provision and the expected loss are comparable, which is only valid conditionally in current loan loss provisioning methods according to IAS. The provisioning and accounting model developed in this paper overcomes the before mentioned shortcomings and is consistent with an economic rationale of expected losses. We introduce a de¯nition of expected loss referring to the whole maturity of the loan and show that this measure can be reasonably compared with loan loss provisions. Additionally, this model is based on a close-to-market valuation of the loan. Suggestions for changes in current accounting and capital requirement rules are provided.
The Operational Risk Advanced Measurement Approach requires financial institutions to use scenarios to model these risks and to evaluate the pertaining capital charges. Considering that a banking ...group is composed of numerous entities (branches and subsidiaries), and that each one of them is represented by an Operational Risk Manager (ORM), we propose a novel scenario approach based on ORM expertise to collect information and create new data sets focusing on large losses, and the use of the Extreme Value Theory (EVT) to evaluate the corresponding capital allocation. In this paper, we highlight the importance to consider an a priori knowledge of the experts associated to a a posteriori backtesting based on collected incidents.
The Operational Risk Advanced Measurement Approach requires financial institutions to use scenarios to model these risks and to evaluate the pertaining capital charges. Considering that a banking ...group is composed of numerous entities (branches and subsidiaries), and that each one of them is represented by an Operational Risk Manager (ORM), we propose a novel scenario approach based on ORM expertise to collect information and create new data sets focusing on large losses, and the use of the Extreme Value Theory (EVT) to evaluate the corresponding capital allocation. In this paper, we highlight the importance to consider an a priori knowledge of the experts associated to a a posteriori backtesting based on collected incidents.
With the advent of Basel II, risk–capital provisions need to also account for operational risk. The specification of dependence structures and the assessment of their effects on aggregate ...risk–capital are still open issues in modeling operational risk. In this paper, we investigate the potential consequences of adopting the restrictive Basel’s Loss Distribution Approach (LDA), as compared to strategies that take dependencies explicitly into account. Drawing on a real–world database, we fit alternative dependence structures, using parametric copulas and nonparametric tail–dependence coefficients, and discuss the implications on the estimation of aggregate risk capital. We find that risk–capital estimates may increase relative to that derived for the LDA when accounting explicitly for the presence of dependencies. This phenomenon is not only be due to the (fitted) characteristics of the data, but also arise from the specific Monte Carlo setup in simulation–based risk–capital analysis.
The Global Standard‐Setter Karim, Rifaat Ahmed Abdel
Global Leaders in Islamic Finance,
11/2013
Book Chapter
Professor Datuk Dr Rifaat Ahmed Abdel Karim was the inaugural Secretary‐General for two of the global Islamic finance industry's international standard‐setting bodies – the Accounting and Auditing ...Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB). He is now the CEO of another international industry body – the International Islamic Liquidity Management Corporation (IILM). Professor Rifaat has been at the very heart of strengthening the industry and ensuring its stability. He is also a world‐renowned academic and expert on accounting for Islamic financial institutions. Through his work and contributions we gain insight into the international frameworks that overlook Islamic financial institutions worldwide.
This paper will describe and analyse the development of Basel II Capital Accord and will focus on the use of external ratings in the Standardized Approach in Basel II. Furthermore it will examine the ...problem of adverse selection which appears in Basel II as a result from the proposal for the use of external ratings in determining the risk weights in the standardized approach. The paper will also attempt to find possible solutions to the adverse selection problem by discussing two similar models, and derive implications from them.
