scholarly journals Dynamic Prudential Regulation

2020 ◽  
Vol 66 (7) ◽  
pp. 3183-3210
Author(s):  
Ajay Subramanian ◽  
Baozhong Yang
Keyword(s):  
Risk Taking ◽  
Regulatory Policy ◽  
Capital Requirements ◽  
Economic Environment ◽  
Basel Iii ◽  
Capital Requirement ◽  
Prudential Regulation ◽  
Regulatory Policies ◽  
Structural Framework ◽  
Optimal Target

We analyze the design and impact of bank regulation using a dynamic structural framework. The optimal regulatory policy combines a target capital requirement, the mitigation of underinvestment, an intervention capital requirement to control inefficient risk taking, and recapitalization of distressed banks. The optimal target and intervention capital requirements from our structural estimation are consistent with the substantially higher capital requirements proposed in Basel III and together achieve most of the regulatory benefits by alleviating underinvestment and asset substitution. They are interdependent and respond differently to banks’ asset characteristics, thereby suggesting that regulatory policies should be carefully tuned to the economic environment. This paper was accepted by Kay Giesecke, finance.

scholarly journals Developing “best practices” for bankers’ pay in line with Basel III.

2011 ◽  
Vol 1 (3) ◽  
pp. 7-16 ◽  
Author(s):  
Peiyi Yu ◽  
Jessica Hong Yang ◽  
Nada Kakabadse
Keyword(s):  
Financial Crisis ◽  
Risk Taking ◽  
Global Financial Crisis ◽  
Capital Requirements ◽  
Capital Adequacy ◽  
Incentive Compensation ◽  
Basel Iii ◽  
Bank Capital ◽  
Bank Executives ◽  
The Global Financial Crisis

This paper proposes hybrid capital securities as a significant part of senior bank executive incentive compensation in light of Basel III, a new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. The committee developed Basel III in a response to the deficiencies in financial regulation brought about by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. The hybrid bank capital securities we propose for bank executives’ compensation are preferred shares and subordinated debt that the June 2004 Basel II regulatory framework recognised as other admissible forms of capital. The past two decades have witnessed dramatic increase in performance-related pay in the banking industry. Stakeholders such as shareholders, debtholders and regulators criticise traditional cash and equity-based compensation for encouraging bank executives’ excessive risk taking and short-termism, which has resulted in the failure of risk management in high profile banks during the global financial crisis. Paying compensation in the form of hybrid bank capital securities may align the interests of executives with those of stakeholders and help banks regain their reputation for prudence after years of aggressive risk-taking. Additionally, banks are desperately seeking to raise capital in order to bolster balance sheets damaged by the ongoing credit crisis. Tapping their own senior employees with large incentive compensation packages may be a viable additional source of capital that is politically acceptable in times of large-scale bailouts of the financial sector and economically wise as it aligns the interests of the executives with the need for a stable financial system.

8. Micro-prudential regulation I

2019 ◽  
pp. 329-406
Author(s):  
Iris H-Y Chiu ◽  
Joanna Wilson
Keyword(s):  
Financial Crisis ◽  
Risk Taking ◽  
Global Financial Crisis ◽  
Basel Ii ◽  
Capital Adequacy ◽  
Basel Iii ◽  
Prudential Regulation ◽  
Basel Committee ◽  
The Global Financial Crisis ◽  
Capital Adequacy Regulation

This chapter studies capital adequacy regulation, which prescribes that banks can only take certain levels of risk that are supported by adequate levels of capital. In this way, capital adequacy rules provide a form of assurance that banks with adequate levels of capital are likely able to withstand losses that may result from their risk-taking. The Basel Committee developed its first set of capital adequacy standards in the Basel I Capital Accord of 1988. It was subsequently overhauled into the Basel II Capital Accord in 2003. After the global financial crisis of 2007–9, the Basel II Accord’s shortcomings were extensively discussed and the Basel Committee introduced a package of reforms in order to plug the gaps in Basel II. The Basel III package is the most extensive suite of micro-prudential regulation reforms seen to date, as they deal with capital adequacy and a range of other micro-prudential standards.

scholarly journals Solvency Regulation—An Assessment of Basel III for Banks and of Planned Solvency III for Insurers

2021 ◽  
Vol 14 (6) ◽  
pp. 258
Author(s):  
Peter Zweifel
Keyword(s):  
Risk Taking ◽  
Capital Market ◽  
Regulatory Focus ◽  
Capital Requirements ◽  
Business Strategies ◽  
Insurance Companies ◽  
Basel Iii ◽  
Solvency Regulation ◽  
The Impact ◽  
The Capital Market

Basel III, regulating the solvency of banks, is to be fully implemented by 2027 while Solvency III directed at insurers is being prepared. In view of past experience, it will be closely modelled after Basel III. This raises two questions. (i) Will Basel III and Solvency III be more successful than their predecessors? (ii) Is it appropriate to continue regulating the solvency of banks and insurers in the same way? The first question is motivated by an earlier finding that Basel I and II risked inducing more rather than less risk-taking by banks, which also holds for Solvency I and II w.r.t. insurers. The methodology applied was to determine the slope of an endogenous perceived efficiency frontier (EPEF) in (μ^,σ^)-space derived from banks’ and insurers’ optimal adjustment to exogenous changes, in expected returns dμ¯ and volatility dσ¯ on the capital market. Both Basel I and II and Solvency I and II neglected the impact of these developments on banks’ and insurers’ EPEF. This neglect had the effect of steepening the EPEF, causing senior management to opt for an increased rather than reduced value of σ^, and hence a lower solvency level. This issue is resolved by Basel III (Principle 5), which requires banks to take developments in the capital market into account in the formulation of their business strategies designed to ensure solvency. In combination with increased capital requirements, this is shown to result in a reduced slope of their EPEF and hence a reduced risk exposure. However, planned Solvency III may cause the EPEF of highly capitalized insurance companies to become steeper, with a concomitant decrease in their risk-taking and an increase of their solvency level. The second question, concerning the appropriateness of the uniformity of solvency regulation directed at banks and insurers, arises because the parameters determining the slope of the respective EPEF are found to crucially differ. Therefore, the uniformity of Basel and Solvency norms creates the risk of a mistaken regulatory focus.

scholarly journals Impact of regulation and supervision on European banks’ stability

2014 ◽  
Vol 4 (1) ◽  
pp. 23-37
Author(s):  
Faten Ben Bouheni
Keyword(s):  
Risk Taking ◽  
Financial Stability ◽  
Generalized Method Of Moments ◽  
Capital Requirements ◽  
Capital Adequacy ◽  
European Countries ◽  
Regulatory Policies ◽  
Regulation And Supervision ◽  
Dynamic Panels ◽  
The Impact

This article applies the Generalized Method of Moments technique for dynamic panels, using bank-level data for the selected European countries over the period 2005 to 2011, to investigate the impact of regulation and supervision on risk taking. Three conclusions are reached. First, in France, Germany and UK, restriction on bank activities boosts banking stability. However, supervisors’ power and capital adequacy encourage risk taking. Second, in Italy, Greece and Spain, we find that with more supervisors’ power, largest banks tend to take greater risks and strengthening regulation and supervision weakens the bank’s stability. However, the capital requirements decrease the risk taking. Third, strengthening regulatory and supervisory framework, and compliance with Basel principles enhance financial stability in Europe. These different results between European countries show that the application of regulation and supervision depends on the monitoring mode and the rhythm of application of regulatory policies

Basel III, Ownership Concentration, Risk-Taking, and Capital Stability: Evidence from Asia

2014 ◽  
Author(s):  
Pichaphop Chalermchatvichien ◽  
Seksak Jumreonwong ◽  
Pornsit Jiraporn
Keyword(s):  
Risk Taking ◽  
Ownership Concentration ◽  
Basel Iii

Accounting Information Quality, Interbank Competition, and Bank Risk-Taking

2014 ◽  
Vol 90 (3) ◽  
pp. 967-985 ◽  
Author(s):  
Carlos Corona ◽  
Lin Nan ◽  
Gaoqing Zhang
Keyword(s):  
False Alarm ◽  
Risk Taking ◽  
Information Quality ◽  
Accounting Information ◽  
Capital Requirements ◽  
Quality Of Accounting Information ◽  
Accounting Information Quality ◽  
Fierce Competition ◽  
Excessive Risk Taking

ABSTRACT We study the interaction between interbank competition and accounting information quality and their effects on banks' risk-taking behavior. We identify an endogenous false-alarm cost that banks incur when forced to sell assets to meet capital requirements. We find that when the interbank competition is less intense, an improvement in the quality of accounting information encourages banks to take more risk. Keeping the banks' investments in loans constant, the provision of high-quality accounting information reduces the false-alarm cost of assets sales and improves the discriminating efficiency of the capital requirement policy. When considering the banks' endogenous investment decisions, however, this improvement in discriminating efficiency causes excessive risk-taking, because banks respond by competing more aggressively in the deposit market, and the increase in deposit costs motivates banks to take more risk. Our paper shows that improving information quality increases risk-taking with mild competition, but has no effect under fierce competition.

scholarly journals Systemic Risk and Insurance Regulation †

Risks ◽  
2018 ◽  
Vol 6 (3) ◽  
pp. 74 ◽  
Author(s):  
Fabiana Gómez ◽  
Jorge Ponce
Keyword(s):  
Systemic Risk ◽  
Formal Model ◽  
Public Support ◽  
Solvency Ii ◽  
Capital Requirements ◽  
Insurance Companies ◽  
Prudential Regulation ◽  
High Exposure ◽  
Insurance Firms ◽  
Low Exposure

This paper provides a rationale for the macro-prudential regulation of insurance companies, where capital requirements increase in their contribution to systemic risk. In the absence of systemic risk, the formal model in this paper predicts that optimal regulation may be implemented by capital regulation (similar to that observed in practice, e.g., Solvency II ) and by actuarially fair technical reserve. However, these instruments are not sufficient when insurance companies are exposed to systemic risk: prudential regulation should also add a systemic component to capital requirements that is non-decreasing in the firm’s exposure to systemic risk. Implementing the optimal policy implies separating insurance firms into two categories according to their exposure to systemic risk: those with relatively low exposure should be eligible for bailouts, while those with high exposure should not benefit from public support if a systemic event occurs.

scholarly journals Credit Risk Management of Property Investments through Multi-Criteria Indicators

Risks ◽  
2021 ◽  
Vol 9 (6) ◽  
pp. 106
Author(s):  
Marco Locurcio ◽  
Francesco Tajani ◽  
Pierluigi Morano ◽  
Debora Anelli ◽  
Benedetto Manganelli
Keyword(s):  
Real Estate ◽  
Credit Risk ◽  
Risk Index ◽  
Capital Requirements ◽  
Basel Iii ◽  
Participatory Process ◽  
Regulatory Capital ◽  
The Real Estate ◽  
Financial Variables ◽  
Synthetic Index

The economic crisis of 2008 has highlighted the ineffectiveness of the banks in their disbursement of mortgages which caused the spread of Non-Performing Loans (NPLs) with underlying real estate. With the methods stated by the Basel III agreements, aimed at improving the capital requirements of banks and determining an adequate regulatory capital, the banks without the skills required have difficulties in applying the rigid weighting coefficients structures. The aim of the work is to identify a synthetic risk index through the participatory process, in order to support the restructuring debt operations to benefit smaller banks and small and medium-sized enterprises (SME), by analyzing the real estate credit risk. The proposed synthetic risk index aims at overcoming the complexity of Basel III methodologies through the implementation of three different multi-criteria techniques. In particular, the integration of objective financial variables with subjective expert judgments into a participatory process is not that common in the reference literature and brings its benefits for reaching more approved and shared results in the debt restructuring operations procedure. Moreover, the main findings derived by the application to a real case study have demonstrated how important it is for the credit manager to have an adequate synthetic index that could lead to the avoidance of risky scenarios where several modalities to repair the credit debt occur.

Sign in / Sign up

Export Citation Format

Share Document