Macro-Model-Based Stress Testing of Basel II Capital Requirements

Islamic Banking Regulations in Light of Basel II

American Journal of Islamic Social Sciences ◽

10.35632/ajiss.v27i1.357 ◽

2010 ◽

Vol 27 (1) ◽

pp. 74-101 ◽

Cited By ~ 3

Author(s):

M. Kabir Hassan ◽

Muhammad Abdul Mannan Chowdhury

Keyword(s):

Financial Institutions ◽

Banking Regulation ◽

Capital Requirements ◽

Basel Ii ◽

Capital Adequacy ◽

Regulatory Agencies ◽

Islamic Banking ◽

Islamic Banks ◽

Minimum Capital ◽

Regulatory Standards

This paper seeks to determine whether the existing regulatory standards and supervisory framework are adequate to ensure the viability, strength, and continued expansion of Islamic financial institutions. The reemergence of Islamic banking and the attention given to it by regulators around the globe as to the implications of a recently issued Basel II banking regulation makes this article timely. The Basel II framework, which is based on minimum capital requirements, a supervisory review process, and the effective use of market discipline, aligns capital adequacy with banking risks and provides an incentive for financial institutions to enhance risk management and their system of internal controls. Like conventional banks, Islamic banks operate under different regulatory regimes. The still diverse views held by the regulatory agencies of different countries on Islamic banking and finance operations make it harder to assess the overall performance of international Islamic banks. In light of the increased financial innovation and diversity of instruments offered in Islamic finance, the need to improve the transparency of bank operations is particularly relevant for Islamic banks. While product diversity is important in maintaining their competitiveness, it also requires increased transparency and disclosure to improve the understanding of markets and regulatory agencies. The governance of Islamic banks is made even more complex by the need for these banks to meet a set of ethical and financial standards defined by the Shari`ah and the nature of the financial contracts banks use to mobilize deposits. Effective transparency in this area will greatly enhance their credibility and reinforce their depositors and investors’ level of confidence.

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Solvency stress testing of Islamic commercial banks

Journal of Islamic Accounting and Business Research ◽

10.1108/jiabr-09-2014-0031 ◽

2016 ◽

Vol 7 (2) ◽

pp. 112-147 ◽

Cited By ~ 2

Author(s):

Jamshaid Anwar Chattha ◽

Simon Archer

Keyword(s):

Commercial Banks ◽

Stress Testing ◽

Profit Sharing ◽

Capital Requirements ◽

Capital Adequacy ◽

Stress Tests ◽

Regulatory Requirement ◽

Content Type ◽

Numerical Example ◽

Remedial Actions

Purpose This paper aims to provide a methodology for designing and conducting solvency stress tests, under the standardised approach as per IFSB-15, including the establishment of macro-financial links, running scenarios with variation of assumptions and stress scenario parameters; apply and illustrate this methodology by providing a stylised numerical example through a tractable Excel-based framework, through which Islamic Commercial Banks (ICBs) can introduce additional regulatory requirements and show that they would remain in compliance with all capital requirements after a moderate to severe shock; and identify the potential remedial actions that can be envisaged by an ICB. Design/methodology/approach The paper uses the data of the one of the groups to which certain amendments and related assumptions are applied to develop a stylised numerical example for solvency stress-testing purposes. The example uses a Stress Testing Matrix (STeM; a step-by-step approach) to illustrate the stress-testing process. The methodology of the paper uses a two-stage process. The first stage consists of calculating the capital adequacy ratio (CAR) of the ICB using the IFSB formulae, depending on how the profit sharing investment account (PSIA) are treated in the respective jurisdiction. The second stage is the application of the stress scenarios and shocks. Findings Taking into account the specificities of ICBs such as their use of PSIA, the results highlighted the sensitivity of the CAR of an ICB with respect to the changes in the values of alpha and the proportion of unrestricted PSIA on the funding side. The simulation also indicated that an ICB operating above the minimum CAR could be vulnerable to shocks of various degrees of gravity, thus bringing the CAR below the minimum regulatory requirement and necessitating appropriate remedial actions. Practical implications The paper highlights various implications and relationships arising out of stress testing for ICBs, including the vulnerability of an ICB under defined scenarios, demanding appropriate immediate remedial actions on future capital resources and capital needs. The findings of the paper provide a preliminary discussion on developing a comprehensive toolkit for the ICBs similar to what is developed by the International Monetary Fund Financial Sector Assessment Programme. Originality/value This paper focuses on the gap with respect to the stress testing of capital adequacy. The main contribution of the paper is twofold. The first is the development of an STeM – a step-by-step approach, which provides a method for simulating solvency (i.e. capital adequacy) stress tests for ICBs; the second is the demonstration of the potentially crucial impact of profit-sharing investment accounts and the way they are managed by ICBs (notably the smoothing of profit payouts) in assessing the capital adequacy of the ICBs.

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Islamic Banking Regulations in Light of Basel II

American Journal of Islam and Society ◽

10.35632/ajis.v27i1.357 ◽

2010 ◽

Vol 27 (1) ◽

pp. 74-101

Author(s):

M. Kabir Hassan ◽

Muhammad Abdul Mannan Chowdhury

Keyword(s):

Financial Institutions ◽

Banking Regulation ◽

Capital Requirements ◽

Basel Ii ◽

Capital Adequacy ◽

Regulatory Agencies ◽

Islamic Banking ◽

Islamic Banks ◽

Minimum Capital ◽

Regulatory Standards

This paper seeks to determine whether the existing regulatory standards and supervisory framework are adequate to ensure the viability, strength, and continued expansion of Islamic financial institutions. The reemergence of Islamic banking and the attention given to it by regulators around the globe as to the implications of a recently issued Basel II banking regulation makes this article timely. The Basel II framework, which is based on minimum capital requirements, a supervisory review process, and the effective use of market discipline, aligns capital adequacy with banking risks and provides an incentive for financial institutions to enhance risk management and their system of internal controls. Like conventional banks, Islamic banks operate under different regulatory regimes. The still diverse views held by the regulatory agencies of different countries on Islamic banking and finance operations make it harder to assess the overall performance of international Islamic banks. In light of the increased financial innovation and diversity of instruments offered in Islamic finance, the need to improve the transparency of bank operations is particularly relevant for Islamic banks. While product diversity is important in maintaining their competitiveness, it also requires increased transparency and disclosure to improve the understanding of markets and regulatory agencies. The governance of Islamic banks is made even more complex by the need for these banks to meet a set of ethical and financial standards defined by the Shari`ah and the nature of the financial contracts banks use to mobilize deposits. Effective transparency in this area will greatly enhance their credibility and reinforce their depositors and investors’ level of confidence.

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A simple isochore model evidencing regulation risk

Annals of Actuarial Science ◽

10.1017/s174849951800009x ◽

2018 ◽

Vol 12 (2) ◽

pp. 233-248 ◽

Cited By ~ 1

Author(s):

J. Lévy Véhel

Keyword(s):

At Risk ◽

Systemic Risk ◽

Value At Risk ◽

Solvency Ii ◽

Basel Ii ◽

Minimal Volume ◽

Model Based

AbstractIn this note, we provide a simple example of regulation risk. The idea is that, in certain situations, the very prudential rules (or, rather, some of them) imposed by the regulator in the framework of the Basel II/III Accords or Solvency II directive are themselves the source of a systemic risk. The instance of regulation risk that we bring to light in this work can be summarised as follows: wrongly assuming that prices evolve in a continuous fashion when they may in fact display large negative jumps, and trying to minimise Value at Risk (VaR) under a constraint of minimal volume of activity leads in effect to behaviours that will maximise VaR. Although much stylised, our analysis highlights some pitfalls of model-based regulation.

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