Estimation of Duration Gap and its Determinants for Islamic Banks: Empirical Evidence using Two-Step Robust GMM

The banking industry is in the business of risk management, which is of significant consideration to banks and their regulators. Islamic commercial banks (ICBs) are no exception as they too deal with a variety of peculiar risks. One specific risk is the rate of return risk (ROR) in the banking book, which is dealt with under Pillar 2 of the Basel Committee on Banking Supervision (BCBS) and the Islamic Financial Services Board (IFSB) standards. The IFSB, similar to the BCBS, provides a detailed framework on the management of ROR risk for the ICBs, including modalities of maturity gap and calculation of precise duration of assets and liabilities. However, existing studies on risk management practices show significant gaps; there are no studies which specifically highlight the assessment of ROR risk with duration gap for ICBs. Therefore, we estimate the duration gap of ICBs and determine the factors influencing the duration gaps in the context of ROR risk. Using Duration Gap Model and Two-Step Robust Generalized Method of Moments (GMM), with a sample of 50 ICBs from 13 countries, for the period 2007-2015, our empirical findings are three-fold: (a) time series and cross-sectional duration gap of ICBs reflecting significant variations across the banks and countries; (b) ICBs have a general tendency of maintaining a higher (more) duration gap compared to their conventional counterparts, and are exposed to increasing ROR risk due to their larger duration gaps and severe liquidity mismatches; and (c) there is significant difference in the estimated coefficients of idiosyncratic factors influencing the duration gaps of ICBs. This study makes profound contributions to the existing corpus of literature and provides direction to the ICBs to reflect upon the significance of liquidity mismatch risk, ROR risk management with the duration gap, factors influencing the duration gaps, and management of the ROR risk under Pillar 2 of the BCBS and the IFSB standards.

Some Time Violations Go Less Noticed: Gestalt Grouping? A Brief Report

This brief report is inspired by Bolton’s (1894, Am. J. Psychol., 6, 145–238) tick-tock phenomenon, which describes an illusionary accented grouping of isochronous, non-accented click sequences. It has repeatedly been shown that in stimulus-wise grouped sequences of an XXXOOO character (where X differs from O in terms of intensity, pitch level, or filled or unfilled duration), gap deviations between groups are more prone to go unnoticed compared to deviations within a group (e.g., Fitzgibbons et al., 1974, Percept. Psychophys., 16, 522–528.). Yet, not much is known about whether comparable anisochrony insensitivities might also occur in equal-accented sequences (XXXXX). In a same/different task setting, listeners had to detect isochrony deviations that appeared in different empty-interval locations across 800 trials within a five-pulse sequence of 250 ms interonset intervals. Findings revealed a major location dependency, with least detection accuracy for gap deviations occurring in the last interval, particularly if the 250 ms gap was lengthened rather than shortened. Results are discussed in relation to potential Gestalt grouping and Nakajima et al.’s (2014, Perception, 33, 1061–1079) perceptual assimilation and contrast observations in three-tone sequences.

Austria

The insurance sector is experiencing low growth, stemming mainly from life business and a prolonged low-interest-rate environment. While the total assets have increased in nominal terms, it has underperformed GDP growth. Some segments, in particular single-premium products in life insurance, are suffering from material declines of premiums. Insurers are coping with the challenges with large-scale mergers domestically and international expansions. The duration gap between asset and liabilities was one of the highest among the European peers. The average guaranteed rates remain high, while the investment returns continue to decline.

Risk management with a duration gap approach

Purpose In line with the IFSB and BCBS methodology, the purpose of this study is to undertake a comparative analysis of dual banking systems for asset-liability management (ALM) practices with the duration gap, in Islamic Commercial Banks (ICBs) and Conventional Commercial Banks (CCBs). Based on the research objective, two research questions are developed: How do the duration gaps of ICBs compare with those of similar sized CCBs? Are there any country-specific and regional differences among ICBs in terms of managing their duration gaps? Design/methodology/approach The research methodology comprises two-stages: stage one uses a duration gap model to calculate the duration gaps of ICBs and CCBs; stage two applies parametric tests. In terms of the duration gap model, the study determines the duration gap with a four-step process. The study selected a sample of 100 banks (50 ICBs and 50 CCBs) from 13 countries for the period 2009-2015. Findings The paper provides empirical insights into the duration gap and ALM of ICBs and CCBs. The ICBs have more variations in their mean duration gap compared to the CCBs, and they have a tendency for a higher (more) mean duration gap (28.37 years) in comparison to the CCBs (11.79 years). The study found ICBs as having 2.41 times more duration gap compared to the CCBs, and they are exposed to increasing rate of return (ROR) risk due to their larger duration gaps and severe liquidity mismatches. There are significant regional differences in terms of the duration gap and asset-liability management. Research limitations/implications Future studies also consider “Off-Balance Sheet” activities of the ICBs, with multi-term duration measures. A larger sample size of 100 ICBs with 10 years’ data after the GFC would be more beneficial to the industry. In addition, the impact of an increasing benchmark rate (e.g. 100, 200 and 300 bps) on the ICBs as per the IFSB 20 per cent threshold can also be established with the duration gap approach to identify the vulnerabilities of the ICBs. Practical implications The study makes profound contributions to the literature and suggests various policy recommendations for Islamic banks, regulators, and standard setters of the ICBs, for identifying and measuring the significance of the duration gaps; and management of the ROR risk under Pillar 2 of the BCBS and IFSB, for financial soundness and stability purposes. Originality/value To the best of the authors’ knowledge, this is a pioneer study in Islamic banking involving a sample of 100 banks (50 ICBs and 50 CCBs) from 13 countries. The results of the study provide original empirical evidence regarding the estimation of duration gap, and variations across jurisdictions in terms of vulnerability of ICBs and CCBs in dual banking systems.

Duration gap analysis revisited method in order to improve risk management: the case of Chinese commercial bank interest rate risks after interest rate liberalization

Modern theories attach much attention to interest rate-related problems. We discuss the impacts of the interest rate liberalization, in China, for ten commercial banks of three markedly different ownership types. The methodology is based on revisited interest rate sensitivity analysis, duration analysis and value-at-risk analysis. The situation is examined within both vertical (composition of operating income and interest rate sensitivity gap for the ten banks in the same year) and horizontal (one bank over a 7-year period) aspects. Thereafter, we discuss the present management of interest rate risks by such banks. We conclude with several suggestions on how such commercial banks risk management can be refocused and on how their cases can be used for comforting other banking cases.

Risk assessment methodology: implementation of duration gap in corporate portfolios in order to reduce the systemic risk

In this article we propose a new methodology for measuring companies with financial risk exposure, based on the concept of duration in assets and liabilities management that can be applied in corporate portfolios. Risk indicators in banks usually try to measure the dynamic of accounts in the income statement and capital levels. With this research, we demonstrate how the methodology can be applied from banks to any company or industry sector. Then, we compare the methods for managing accounts in financial institutions and also identifying their adaptability to any type of corporation. We also made a comparison between the management elements used in financial markets and organizations assets, verifying their adaptability level. Finally, we present a real case study.

On the determinants of return on equity in South Africa's financial services industry

This study examines the factors that determine the return on equity (ROE) of financial companies listed on the Johannesburg Securities Exchange (JSE). Two empirical strategies were adopted: the DuPont model and a multifactor Arbitrage Pricing Theory (APT). Using the financial data of 73 companies and macro-economic indicators from 2002 to 2012, the study found that there was a positive relationship between profit margin and ROE, which can be enhanced if managers employ cost leadership strategies. Companies with predictable cash flows can afford high levels of debt and therefore high ROE, while companies characterised by unpredictable market conditions should use debt with caution. We found a positive relationship between interest rates and ROE for banks, insurance and real estate companies, which may suggest that managers employ short-term duration gap strategies in managing assets and liabilities mismatch rather than relying on long-term strategies. Inflation for banks, insurance and real estate companies is inversely related to ROE, and financial firms are better off immunising their portfolios against revenue erosion.