Abstract
This paper investigates the effects of the new post‐financial crisis regulatory regime – risk‐based capital ratios (RBC) and stress tests – on banks' off‐balance sheet activities (OBS). We ...use a panel of US bank holding companies over the period 2001–2018 to examine the relationship between banks' capital levels and OBS activities. Our major finding is that banks significantly reduced their OBS exposure following the introduction of the new capital regulatory framework requirements. In particular, we show that tighter regulatory RBC resulted in a reduction of OBS activities in well‐capitalised banks. Conversely, we find that under‐capitalised banks increased their OBS activities, which suggests the possibility of regulatory arbitrage.
We study the effects of both tighter and looser bank capital requirements on bank risk-taking. We exploit credit register data matched with firm and bank level data in conjunction with changes in ...capital requirements stemming from Basel III, including the introduction of a SME supporting bank capital factor in the European Union. We find that tighter capital requirements reduce the supply of bank credit to firms, while looser capital requirements mitigate the credit supply effects of increasing capital. Importantly, at the loan level (credit supply), banks more affected by capital requirements change less the supply of credit to riskier than to safer firms, and these asymmetric effects occur for both the tightening and the loosening of bank capital requirements. Finally, these effects are also important at the firm-level for total credit availability and for firm survival. Interestingly, our results suggest that those banks most impacted by the tighter Basel III capital requirements prioritize credit among ex-ante riskier firms to avoid their closure, consistent with loan evergreening.
•We present a meta-analysis of Basel III regulations based on 48 primary studies.•We analyze the long-run output effect of an increase in the target capital ratio by one percentage point.•We discuss ...publication bias in econometric and calibration studies.•We estimate meta-probit models for publication of large effects.
We present a meta-analysis of the impact of higher capital requirements imposed by regulatory reforms on the macroeconomic activity (Basel III). The empirical evidence derived from a unique dataset of 48 primary studies indicates that there is a negative, albeit moderate GDP effect in response to a change in the target capital ratio. Meta-regression results suggest that the estimates reported in the literature tend to be systematically influenced by a selected set of study characteristics, such as econometric specifications, the authors’ affiliations, and the underlying financial system. Finally, we discuss the publication bias.
Model risk of risk models Danielsson, Jon; James, Kevin R.; Valenzuela, Marcela ...
Journal of financial stability,
04/2016, Letnik:
23
Journal Article
Recenzirano
Odprti dostop
•We evaluate the model risk of models used for forecasting systemic and market risk.•We propose a method for quantifying model risk, which we term risk ratio.•We consider models in the current Basel ...regulations and the Basel III proposals.•Model risk is low during times of no financial distress.•Model risk increases in periods of market distress, which frustrates risk inference.
This paper evaluates the model risk of models used for forecasting systemic and market risk. Model risk, which is the potential for different models to provide inconsistent outcomes, is shown to be increasing with market uncertainty. During calm periods, the underlying risk forecast models produce similar risk readings; hence, model risk is typically negligible. However, the disagreement between the various candidate models increases significantly during market distress, further frustrating the reliability of risk readings. Finally, particular conclusions on the underlying reasons for the high model risk and the implications for practitioners and policy makers are discussed.
Using COVID-19 as an exogenous shock to the banking system, we implement the Difference-in-Differences method to empirically evaluate the role of the regulatory capital in strengthening the ...resiliency of bank lending activities during the crisis period. Our results suggest that banks with a higher level of regulatory capital ratio prior to the COVID-19 shock lend more resiliently to the real economy during the crisis than those with lower regulatory capital ratios ex-ante. It implies that the recent reforms on bank regulatory capital have effectively built up bank strength which in turn helped banks continue lending to the real economy during the COVID-19 crisis.
•We examine the effectiveness of the recent regulatory reform on bank capital.•The DID method is implemented using COVID-19 as an exogenous shock.•Coarsened exact matching and dynamic DID methods are performed as robustness checks.•Banks with higher capital ratios ex-ante lend more resiliently during the crisis.•Risk-weighted capital ratios are more informative than the equity-to-assets ratio.
Abstract
After the great turmoil of the latest financial crisis, the criticism of the regulatory frameworks became increasingly stronger. The rules that banks needed to comply with are presumed to be ...procyclical and unable to prevent and mitigate the extent of strong financial and economic cycles. As a result, Basel III introduced a set of macroprudential tools to overcome these regulatory shortfalls. One tool that strives to counteract the issue of procyclicality is the countercyclical capital buffer (
$$CCyB$$
CCyB
). This paper introduces a heterogeneous agent-based model that investigates the implication of the new regulatory measure. We develop a housing and a financial market where economic agents trade residential property that is financed by financial institutions. To examine the macroeconomic performance of the
$$CCyB$$
CCyB
, we evaluate the dynamics of key stability indicators of the housing and the financial market under four different market conditions: in an undisturbed market and in times of three different structural shocks. Computational experiments reveal that the
$$CCyB$$
CCyB
is effective in stabilizing the housing and the financial market in all market settings. The new macroprudential tool helps to mitigate economic fluctuations and to stabilize market conditions, especially in the aftermath of a crisis. It is not able to prevent any of the crises tested. However, the extent of the stabilizing effect varies according to market conditions. In the shock scenarios, the
$$CCyB$$
CCyB
performs better in dampening market fluctuations and increasing banking soundness than in the base scenario.
•Simulate interbank networks in Europe via the minimum density algorithm.•Assess the influence of individual network variables on bank liquidity ratios.•Consider the impact of bank size and crisis ...times.•Find that local (systemwide) network positions matter for small (large) banks.•Draw implications for the implementation of Basel III liquidity requirements.
By applying interbank network simulation, this paper investigates the impact of interbank network topology on bank liquidity ratios. Whereas regulators have put more emphasis on liquidity requirements since the global financial crisis of 2007–2008, how differently shaped interbank networks affect individual bank liquidity behavior remains an open issue. We look at how banks' interconnectedness within interbank loan and deposit networks affects their decisions to hold more or less liquidity during normal times and distress times. Our sample consists of commercial, investment, and real estate and mortgage banks in 28 European countries and allows us to differentiate large and small networks. Our results show that accounting for bank connections within a network is important to understand how banks set their liquidity ratios. Our findings have critical implications for the implementation of Basel III liquidity requirements and bank supervision more generally.
Purpose
The increased capital requirements and the implementation of new liquidity standards under Basel III sparked various concerns among researchers, academics and other stakeholders. The question ...is whether Basel III regulation is ideal, that is, adequate to deal with a crisis, such as the 2007–2009 global financial crisis? The purpose of this paper is threefold: First, perform a stress testing exercise on the US banking sector, while examining liquidity and solvency risk indicators jointly under the Basel III regulatory framework. Second, allow the study to cover the post-crisis period, while referring to key Basel III regulatory requirements. And third, focus on the resilience of domestic systemically important banks (D-SIBs), which are supposed to support the US financial system in times of stress and therefore whose failure causes the entire financial system to fail.
Design/methodology/approach
The authors used a sample of the 24 largest US banks observed over the period Q1-2015 to Q1-2021 and a scenario-based vector autoregressive conditional forecasting approach.
Findings
The authors found that the model successfully produces accurate forecasts and simulates the responses of the solvency and liquidity indicators to different real and historical macroeconomic shocks. The authors also found that the US banking sector is resilient and can withstand both historical and hypothetical macroeconomic shocks because of its compliance with the Basel III capital and liquidity regulations, which consist of encouraging banks to hold high-quality liquid assets and stable funding resources and to strengthen their capital, which absorbs the losses incurred in a crisis.
Originality/value
The authors developed a framework for testing the resilience of the US banking sector under macroeconomic shocks, while examining liquidity and solvency risk indicators jointly under Basel III regulatory framework, a point not yet well studied elsewhere, and most studies on this subject are based on precrisis data. The authors also focused on the resilience of D-SIBs, whose failure causes the failure of the entire financial system, which previous studies have failed to examine.
This article argues that not all business politics is 'quiet politics' and it explores the conditions of when this is likely to be the case. Drawing on a remarkable lobbying success in the process of ...reforming banking in Europe, it shows that it was neither capture nor quiet politics within the financial expert community that led to the lobbying success. Business lobbyists from Germany, supported by representatives from other countries, obtained a favourable regulatory treatment of bank lending to small and medium-sized businesses thanks to noisy business politics. Noisy business politics seeks political influence through pressuring by raising the salience of an issue and expanding the conflict. This strategy is most likely to succeed if the mobilization of opponents can be countervailed through the use of frames that are widely perceived as legitimate and create positive perceptions.
Purpose
This study aims to determine how Basel III capital requirements affect the stability of Islamic banks globally during the global financial crisis and the COVID-19 pandemic.
...Design/methodology/approach
The secondary data for all Islamic banks worldwide from 2004 to 2021 is obtained from the FitchConnect database. The main technique was a two-step gen
eralized
method of moment (GMM) system, and the data were tested using pooled ordinary least squares, fixed effects and difference GMM models for robustness checks.
Findings
Regression results support the moral hazard hypothesis based on evidence that both the total capital ratio and the Tier 1 capital ratio have a statistically significant positive impact on the stability of Islamic banks globally. Furthermore, neither the global financial crisis of 2008–2009 nor COVID-19 (2020–2021) significantly impacted the stability of Islamic banks worldwide. The results are robust across alternative measures of stability, capital buffers, dummy variables and estimation techniques. According to the descriptive statistics, the number of Islamic banks that disclose their regulatory capital ratios to the public has increased over the study period, and the mean of total capital and Tier 1 ratios are considerably greater than what is required by Basel II and Basel III.
Research limitations/implications
Bankers, regulators and policymakers should benefit from the evidence on capital and risk management in Islamic banking according to Basel Committee on Banking Supervision (BCBS) and Islamic financial services board (IFSB) international standards in various jurisdictions.
Originality/value
This research builds on earlier studies that were both beneficial and instructive by exploring the relationship between BCBS and IFSB capital guidelines and the trustworthiness of Islamic banks in greater depth. This study uses numerous capital ratios, buffers and stability measures to provide an international context for research on Islamic banking. In addition, the database is up-to-date to include information about the COVID-19 pandemic aftereffects in the year 2021. This study also introduces the Basel membership of Islamic banks to provide context for countries still at the Basel II stage or are yet to begin implementing the Basel III international standard.
PDF
