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As a response to the latest financial crisis, the Basel Committee published the Basel III accords which intensify micro- and introduce macro-prudential instruments to enhance the resilience of the financial market. One crucial aspect that the regulatory reforms do not address is the diversity of the banking sector. We introduce a heterogeneous agent-based model that develops a housing and a capital market to assess the ability of Basel III rules to mitigate mutual feedback effects and dampen instability. Computational experiments reveal that the most stable markets are achieved if the financial market is diversified and consists of different types of financial intermediaries that need to comply with type-specific capital adequacy requirements. The results point out that capital adequacy requirements are, in principle, effective in stabilizing the banking sector. However, the stability of housing and share prices and the solidity of the banking sector can be increased if capital adequacy requirements are aligned to the individual business models of financial intermediaries and their institutional frameworks. These findings advocate in favor of a diversified banking sector and heterogeneous capital adequacy requirements. [ABSTRACT FROM AUTHOR]

We study how banks' year-end window dressing affects the identification of global systemically important banks (G-SIBs) and their capital requirements. Some G-SIBs reduce their balance sheet at year-end, especially their derivative books and intra-financial system exposures, to an extent that they can reduce their requirements or avoid G-SIB designation. While window-dressing G-SIBs benefit from lower funding costs during normal conditions, they face tighter funding constraints and increased systemic risk during stress episodes. Supervisory judgement is thus crucial in assessing G-SIBs, and greater use of average as opposed to point-in-time data in regulation is recommended to mitigate window dressing incentives. [ABSTRACT FROM AUTHOR]

In a recent paper "Stochastic Chain-Ladder Reserving with Modeled General Inflation", the effects of modeled general inflation on non-life claims reserving were studied using, along with the so called "market approach", a stochastic two-factor market model, characterized by deterministic expected inflation. In the present paper, we repeat the same study, again with the market approach, using a three-factor market model which extends the two-factor model by including stochastic expected inflation. After detailing the theoretical model and estimating the relevant parameters on the same market data used in "Stochastic Chain-Ladder Reserving with Modeled General Inflation", we repeat the application to claims reserving presented in that paper and compare the results obtained with the two models. With these data, it is found that the inclusion of stochastic expected inflation produces a non-negligible increase in the reserve solvency capital requirement under the one-year view. [ABSTRACT FROM AUTHOR]

The wheels of every business keep rolling with the fuel of working capital. Working capital facilitates the smooth operations of businesses, contributes towards revenue generation and helps in efficient asset utilisation. In this context, the current study examines the determinants of working capital in Indian micro, small, and medium enterprises (MSME), given the dearth of literature in an Indian context. The analysis was done using financial data for a long period of 13 years, from 2006-07 to 2018-19. Firm size, asset tangibility, leverage, profitability and sales growth were taken as determining variables. Stepwise regression was applied by taking the net working capital to total assets ratio and the cash conversion cycle as proxies for working capital requirements (WCRs). The results revealed that firm size and leverage are significant determinants of working capital for chemical firms in the Indian MSME industry. This study has implications for the managers of chemical MSMEs to forecast their WCR efficiently as per the determinants identified in the study. [ABSTRACT FROM AUTHOR]

We examine the impact of Basel III's liquidity requirements, such as the liquidity coverage ratio (LCR), net stable funding ratio (NSFR), and capital adequacy, on bank lending and financial stability using data from 688 commercial banks of 10 developing economies from 2014 to 2021 using fixed effects panel estimation. The findings of the study support that bank lending is positively impacted by the regulatory capital and the short‐term liquidity requirement (LCR), but negatively impacted by the NSFR. We find that the bank's Z‐score benefits from achieving the required capital and liquidity requirements. Lending growth and bank stability are nonlinearly impacted by regulations governing bank capital and liquidity. Furthermore, we use the Generalized Methods of Moments‐Quantile Regression (GMM‐QR). Finally, our results indicate that regulators in these developing countries should support adequate capital and liquidity management to lessen adverse economic shocks' impact on banks' intermediation capabilities and stability. [ABSTRACT FROM AUTHOR]

After the global financial crisis, the use of taxes to enhance financial stability received new attention. This paper analyzes the corrective role of taxes in banking and compares two instruments, namely, an allowance for corporate equity (ACE), which mitigates the debt bias in corporate taxation, and a Pigovian tax on bank debt (bank levy). We emphasize financial stability gains driven by lower bank asset risk and develop a principal‐agent model, in which risk taking depends on the bank's capital structure and, by extension, on the tax treatment of debt and equity. We find that (i) the ACE unambiguously reduces risk taking, (ii) bank levies reduce risk taking if they are independent of bank performance but may be counterproductive otherwise, and (iii) taxes are especially effective if regulatory capital requirements are constrained to low levels. [ABSTRACT FROM AUTHOR]

The Fundamental Review of the Trading Book (FRTB) is the promised overhaul of bankmarket risk regulation. FRTB retains the authorized use of proprietary risk models, however, it introduces two additional criteria: (i) P&L attribution (PLA) tests and (ii) desk‐level backtests. We examine empirically whether these additional criteria influence risk management and portfolio management practice, specifically portfolio construction and choice of risk model. We find that the PLA tests demand significant alignment with risk factors, however, the backtests do not incentivize use of superior risk models. This has important implications for the efficacy of the capital‐based regulatory system. [ABSTRACT FROM AUTHOR]

International financial centres (IFCs) are regarded as important nodes in governing global flows of money and capital. With increased globalization and rapid technological changes, the rivalry among IFCs has further intensified competition for financial labour—as a concentrated pool of highly skilled finance workers in an open and flexible labour market is crucial to sustaining the competitive dynamics of these urban financial hotspots. This study investigates the importance of different skills and tasks in financial work. Based on surveys and interviews conducted among Singapore's IFC workers, the findings show that cognitive, interpersonal communication and managerial‐leadership skills and tasks are more important in financial work, whereas programming, mathematics and systems‐based skills are perceived to be less important. Additionally, a network visualization of finance occupational skills obtained from Singapore's national skills database reinforces the importance of cognitive and relational skills in that sector. Higher‐order cognitive and relational skills are expected to become even more critical as the financial sector undergoes rapid digital transformation, reinforcing the importance of IFCs as agglomerations of skilled finance talent. [ABSTRACT FROM AUTHOR]

The normative narrative about 'crypto' or 'digital assets' as potential substitutes for the traditional financial systems has the downside that such a new system could present new types of risk, thus requiring dedicated risk management. But is this narrative justified by reality? Actual implementations with a trend to centralisation, generic features of blockchain-based systems to be exploited by new types of intermediaries and recent events (including the collapse of the Terra ecosystem and the bankruptcy of FTX), triggered feedback from central banks and banking supervisors. Recently, the current development of regulations was toughened with a proposal that 'trading in unbacked digital assets should be treated by regulators like gambling'. This paper avoids any normative discussion of how crypto or digital assets should look theoretically, but focuses on the actual developments. An analysis of the whole stack of layers of blockchain platforms, from influencer marketing to features such as 'maximum extractable value', can be condensed to the litmus test of ''Cui bono'?' ('to whom is it a benefit?'). This perspective reveals that blockchain-based systems are determined by the objectives and intentionality of the (new) intermediaries and are typically a mixture of gaming, gambling and scam. Consequently, the revised high-level recommendations of the Financial Stability Board for 'global stablecoin' arrangements, the European MiCA regulation and the amended capital requirements to the Basel framework are benchmarks for the treatment of crypto and digital assets. These are based on the economic objectives: from E-money-like instruments on the balance sheet of (new) intermediaries via traditional securities (equity or credit) to native digital assets, which resemble gambling according to 'same business, same risk, same regulation'. [ABSTRACT FROM AUTHOR]

Power system transformation can unleash wide-ranging effects across multiple, frequently interlinked dimensions such as the environment, economy, resource systems, and biodiversity. Consequently, assessing the multidimensional impacts of power system transformation, especially under rapid transitions, has become increasingly important. Nonetheless, there is a gap in the literature when it comes to applying such an analysis to a Mediterranean country facing structural socioeconomic challenges. This paper explores the potential multifaceted implications of rapidly decarbonizing the Greek power sector by 2035, focusing on the local-level consequences. The evaluation criteria encompass the cost-optimal power mix, power costs, land use, biomass utilization, GDP, and employment. In this effort, a technology-rich cost optimization model representing Greece's power sector is linked to a global Computable General Equilibrium (CGE) macroeconomic model focusing on the Greek economy. The results indicate that a fast decarbonization of the Greek power sector could trigger positive socioeconomic consequences in the short- and medium-term (GDP: +1.70, employees: +59,000 in 2030), although it may induce negative long-term socioeconomic effects due to increased capital investment requirements. Additionally, the impact on land use may only be trivial, with the potential to decrease over time due to the de-escalation of biomass power generation, thereby reducing the risk of harming biodiversity. [ABSTRACT FROM AUTHOR]

Risk exposures are defined to be the change in financial valuation induced by a movement in an underlying factor. For derivative valuations, the underlying asset's price is the primary determining factor. When there is no move in the underlying factor there is also no change in valuation and therefore exposure functions are zero at zero. With delta hedging the exposures may also be taken to have zero derivatives at zero. As a consequence the first order of exposure is quadratic variation. These considerations lead us to value exposures in units of quadratic variation as the numeraire. The theory of acceptable risks is then extended to acceptable exposures with pricing reformulated in quadratic variation units. Explicit computations are made using the hyperbolic cosine for the numeraire exposure and the bilateral gamma law for the motion of the underlying asset price. Capital requirements for risk exposures are defined using measure distortions to develop a conservative exposure valuation. Computations illustrate applications to options on ten underlying assets over a six year period. The capital requirements increase with moneyness and volatility and decrease with maturity with a premium for puts over calls. [ABSTRACT FROM AUTHOR]

In counterparty credit risk complete markets, collateral and capital requirements would be indifferent to banks. The quantification by banks of market incompleteness based on various XVA metrics ([11]) has emerged as the unintended consequence of the FRTB banking reform ([26]) and of the more demanding regulatory capital requirements ([38]). The related risks are in fact reckoned today as the major risks for banks, well ahead market risk ([35, Figure 65 page 67]). The XVA metrics have been introduced and traditionally used by investment banks for pricing and collateral/capital optimization purposes. We demonstrate in this paper that they can be fruitfully used for risk management, suggesting a sound approach to regulatory requirements. We present a one-period cost-of-capital XVA setup encompassing bilateral and centrally cleared trading in a unified framework, with explicit formulas for most quantities at hand. We illustrate possible uses of this framework for running stress test exercises on financial networks with one and two clearinghouses from a clearing member's perspective or for optimizing the porting of the portfolio of a defaulted clearing member using Monte-Carlo technique with corresponding confidence errors in elliptical models. A continuous-time extension of this approach is provided in the companion paper [7]. [ABSTRACT FROM AUTHOR]

Purpose: This paper aims to evaluate the impact of intellectual capital in terms of human capital, structural capital and capital employed on the financial performance of Islamic and conventional banks in the Gulf Cooperation Council (GCC) countries. Design/methodology/approach: Along with the measurement discussion, the empirical analysis examines the relationship between intellectual capital measured through value-added intellectual coefficient (VAIC) and the financial performance of banks in the GCC states by conducting a panel of six GCC countries, including 24 Islamic banks and 32 conventional banks covering 2012–2020 period. Findings: This paper shows that while Islamic banks have similar VAIC, human capital efficiency and capital employed efficiency results to conventional banks, Islamic banks have lagged behind conventional banks regarding the impact of structural capital on financial performance. It is argued that this is in contradiction with Islamic ontology and epistemology, which essentialises intellectual capital formation. Practical implications: Islamic banks should promote research and development for their intellectual capital at the product, operational and institutional levels, as Islamic banking is considered an alternative financing method, incorporating a new form of knowledge-based institutions inspired by capitalist institutions. Originality/value: This study conducts a comparative examination of the intellectual capital performance and its impact on financial performance by using interaction variables to capture any differences between Islamic banks and conventional banks in the GCC countries. The paper also considers the knowledge economy impact as a novelty, which is prominent for the GCC countries. In addition, Islamic ontology's essentialisation of knowledge and its articulation in the form of intellectual capital within modern understanding is widely discussed, as part of originality. Finally, the findings are located within Islamic ontology and epistemology. [ABSTRACT FROM AUTHOR]

We study the dynamic effects of the adoption of macroprudential policies on income inequality over the period 1990 - 2015. We utilize local projections for horizons up to 5 years, and we document that the implementation of borrower-targeted MAPs increases income inequality since they pose obstacles to the access to credit based on household-specific characteristics; however, some financial institutions-targeted instruments (i.e., capital and reserve requirements) lead to a more equal income distribution. [ABSTRACT FROM AUTHOR]

Borrower drawdowns on credit commitments reduce a bank's capital buffer. Using Austrian credit register data and exploiting the 2008–09 financial crisis as an exogenous shock to bank health, we provide novel evidence that capital-constrained banks manage this risk by cutting credit commitments that are not fully used. Controlling for their capital position, we find that banks also respond to liquidity problems by cutting such commitments. However, banks manage the capital and liquidity risk posed by undrawn credit in a way that limits negative macroeconomic implications: credit cuts are targeted at financially less constrained firms, and we show that borrowers of more-affected banks can substitute lost credit with credit from other banks and do not suffer real effects. Additional findings suggest that voluntary agreements between constrained banks and strong firms to reduce spare borrowing capacity can explain why strong firms experience larger credit cuts. [ABSTRACT FROM AUTHOR]

The study aims to investigate the factors that contribute to credit risk in Ethiopian commercial banks, considering both macroeconomic and bank-specific factors. The research utilized multiple regression models, a quantitative research approach, and explanatory research designs. A purposive sample technique was used to select 10 commercial banks for the study, and secondary data from audited financial reports were analyzed. The findings of the study reveal a significant positive relationship between credit risk and several variables, including bank size, profitability, efficiency, capital adequacy, and inflation. Conversely, there is an inverse relationship between credit risk and both loan growth and currency rates. Surprisingly, the study found that neither GDP nor interest rates have a significant impact on credit risk. Based on these findings, the study provides recommendations for Ethiopian commercial banks. It suggests maintaining adequate levels of capital, avoiding business in sectors influenced by inflationary pressures, carefully evaluating non-interest income, and adjusting lending policies as necessary. Furthermore, the study advises periodically examining the relationships between GDP growth, interest rates, and credit risk. It also emphasizes the importance of adapting credit risk management practices to changing market conditions and staying vigilant toward emerging trends. [ABSTRACT FROM AUTHOR]

Vasicek's asymptotic single risk factor (ASRF) model is employed by the Basel Committee on Banking Supervision (BCBS) in its internal ratings-based (IRB) approach for estimating credit losses and regulatory credit risk capital. This methodology requires estimates of asset correlations; these are prescribed by the BCBS. Practitioners are interested to know market-implied asset correlations since these influence economic capital and lending behavior. These may be backed out from ASRF loan loss distributions using ex post loan losses. Prescribed asset correlations have been neither updated nor recalibrated since their introduction in 2008 with the implementation of the Basel II accord. The market milieu has undergone significant alterations and adaptations since then; it is unlikely that these remain relevant. Loan loss data from a developed (US) and developing (South Africa) economy spanning at least two business cycles for each region were used to explore the relevance of the BCBS calibration. Results obtained from three alternative methodologies are compared with prescribed BCBS values, and the latter were found to be countercyclical to empirical loan loss experience, resulting in less punitive credit risk capital requirements than required in market crises and more punitive requirements than required in calm conditions. [ABSTRACT FROM AUTHOR]

The Solvency II Directive, in its standard formula, proposes that a permanent 15% increase should be applied to mortality rates for covering normal deviations of mortality and that the rates should be increased uniformly over just the following year by 1.5‰ to cover catastrophic mortality deviations. The latter increase means disproportionally raising the rates for some ages, especially young people, with hardly any modification for others. In this paper we show, using data from Spain, the inadequacy of these loadings and this timing (for 1 year only) in protecting against a pandemic. As a solution, we propose a new methodology that allows the catastrophic risk of life to be modelled/calibrated through two parameters: a parameter to mainly cover catastrophic risks linked to specific extreme disasters (such as earthquakes, hurricanes or nuclear explosions) and another parameter to mainly cover catastrophic risks linked to pandemics. After establishing the relationships between these parameters in three different scenarios where the aggregate levels of risk/mortality associated with the Solvency II catastrophic shock are kept constant, we study its effect in terms of Solvency Capital Requirements (SCR) on a real life insurance portfolio. The results obtained show that the new methodology leads to SCRs, over total BEL, less dependent on the age structure of the portfolio. [ABSTRACT FROM AUTHOR]

Using monthly data from 2005 to 2019, we employ a dynamic heterogeneous cross‐sectionally autoregressive distributed lag (CS‐ARDL) model to examine the impact of higher regulatory capital requirements on the interest rate pass‐through (IRPT) to bank lending and deposit rates in 22 Sub‐Saharan Africa (SSA) countries. Two key findings emerge from the investigation: (i) the average IRPT in SSA is incomplete in the long run, and (ii) stringent (higher) regulatory capital requirements reduce the pass‐through of monetary policy to commercial bank lending and deposit rates. The findings suggest that although higher regulatory capital requirements are an effective macro‐prudential tool for enhancing the stability of the banking sector, they could also have the unintended consequences of limiting economic expansion. This trade‐off calls for a careful analysis and balance in the implementation of monetary and bank regulatory policies in the region. [ABSTRACT FROM AUTHOR]

The central role of Value-at-Risk (VaR) within bank market risk regulation received significant criticism from financial media and government investigations into the events of the 2007–2009 financial crisis. Impending reform of bank market risk regulation under the Fundamental Review of the Trading Book (FRTB) demotes VaR, replacing it with a layered framework centred on expected shortfall (ES). However, many of these criticisms assume full integration of internal and regulatory market risk models and further, a linear relationship between risk models and regulatory capital. We examine bank practitioners' perspectives and experienced realities to better understand the operational relationship between internal and regulatory market risk models, and between risk models and capital. This has important policy implications for the efficacy of the reforms to banking regulation, financial stability and navigating the dichotomy of private and public interests. [ABSTRACT FROM AUTHOR]

Banks have always played an ambivalent role in financial markets. On the one hand, they provide essential services for the market; on the other hand, problems in the banking sector can send shock waves through the entire economy. Given this prominent role, it is not surprising that Pereira and Rua [2018. "Asset Pricing with a Bank Risk Factor." Journal of Money, Credit and Banking 50(5): 993–1032. doi:] found that the health of the banking sector exerts an influence on stock returns in the US. Understanding the relationship between banks and their impact on the asset prices of non-financials is essential to evaluate the risk emanating from an unhealthy banking sector and should be considered in new regulatory requirements. The aim of this study is to determine if the health of European banks is of such importance for the European stock market so that spillover effects are visible. Our results show that none of our banking-health variables have explanatory power on the cross-section of European stock returns. These findings contrast those for the US. The reasons may be manifold, from an unimportant liquidity provisioning channel over reduced room for actions due to regulatory requirements up to a moral hazard situation in Europe, where investors strongly rely on the governmental bailouts of distressed banks. [ABSTRACT FROM AUTHOR]

In this article, we investigate the validity of diversification effect under extreme-value copulas, when the marginal risks of the portfolio are identically distributed, which can be any one having a finite endpoint or belonging to one of the three maximum domains of attraction. We show that Value-at-Risk (V@R) under extreme-value copulas is asymptotically subadditive for marginal risks with finite mean, while it is asymptotically superadditive for risks with infinite mean. Our major findings enrich and supplement the context of the second fundamental theorem of quantitative risk management in existing literature, which states that V@R of a portfolio is typically non-subadditive for non-elliptically distributed risk vectors. In particular, we now pin down when the V@R is super or subadditive depending on the heaviness of the marginal tail risk. According to our results, one can take advantages from the diversification effect for marginal risks with finite mean. This justifies the standard formula for calculating the capital requirement under Solvency II in which imperfect correlations are used for various risk exposures. [ABSTRACT FROM AUTHOR]

The present study used quarterly data from 2014 to 2020 to analyse the financing and returns of Shari'ah-compliant contracts in Oman based on murābahah, ijārah muntahia bittamlīk and wakālah Islamic banking tools and their relationship to sustainable investing, which was measured using three pillars of governance: capital adequacy, asset quality, and risk sensitivity. The autoregressive distributed lag (ARDL) model results revealed significant negative short- and long-run relationships between the financing and returns of Shari'ah-compliant contracts and sustainable investing in Islamic banking in Oman, which was measured by asset quality, capital adequacy, and risk sensitivity except there was a significant positive long-run relationship between the financing of Shari'ah-compliant contracts and capital adequacy in the short run. Additionally, insignificant long-run relationships existed between the financing of Shari'ah-compliant contracts and capital adequacy. The study's main conclusion is that Shari'ah governance practices in Oman may ensure and support asset quality and the capital adequacy ratio. Furthermore, the findings indicated that the capital-to-risk weighted assets ratio protects depositors and promotes financial comprehensive systems' stability, credibility, and efficiency. The study's main recommendation is that Oman should increase Islamic banking assets and enhance the legal and regulatory system to promote the development of Islamic banking services that are compliant with the standards of the Islamic Financial Services Board and the Accounting and Auditing Organization for Islamic Financial Institutions. [ABSTRACT FROM AUTHOR]

In this work, we explore the information content of senior, subordinated and additional tier 1 (or contingent convertible) bonds issued by euro-area banks. We analyze both the asset volatility implied in senior and subordinated bonds and credit default swap market spreads, and the common equity tier 1 (CET1) ratio volatility extracted from additional tier 1 bonds secondary market spreads in the period from December 31, 2012 to March 31, 2021. Furthermore, we jointly consider the following important bank variables: asset, equity and CET1 ratio volatilities. In doing so, we can obtain the market view on credit spreads, banks balance sheet and capital ratio dynamics on a daily basis even if bank data are released quarterly. The approach can be used to monitor the risk of each bank, as perceived by the market, and to investigate banking fragility at a stand-alone or at a country level. Finally, we compare our estimated equity implied volatilities with the volatilities implied in equity option quotes and we show that this indicator depends on the model and the financial instruments considered in the calibration. [ABSTRACT FROM AUTHOR]

Offshore wind (OSW) energy is a renewable source with strong prospects of development that may decisively contribute towards energy independence. Offshore wind is, however, not yet ubiquitously cost competitive, and frequently requires support schemes to finance its extensive capital requirements. Therefore, cost reduction strategies are necessary for the future development of offshore wind technologies. Even if structural health monitoring (SHM) systems are currently applied for the inspection of critical mechanical structures, they have not been the focus of research from offshore wind stakeholders. The main goal of this study is to evaluate the viability of SHM systems on the support structures of bottom-fixed offshore wind (BFOSW), alongside the impact of implementing these systems on life-cycle. Economic models are used to estimate the impact of implementing these systems, explained using a case-study of the Kaskasi farm in the German North Sea. General results indicate that installing SHM systems on the support structures of offshore wind can shift the maintenance strategies from preventive to predictive, allowing the intervals between inspections to be increased without a reduction on equipment availability. The greatest benefit is related with the possibility of extending the operational life of the farm. [ABSTRACT FROM AUTHOR]

Dependence among different cyber risk classes is a fundamentally underexplored topic in the literature. However, disregarding the dependence structure in cyber risk management leads to inconsistent estimates of potential unintended losses. To bridge this gap, this article adopts a regulatory perspective to develop vine copulas to capture dependence. In quantifying the solvency capital requirement gradient for cyber risk measurement according to Solvency II, a dangerous paradox emerges: an insurance company does not tend to provide cyber risk hedging products as they are excessively expensive and would require huge premiums that it would not be possible to find policyholders. [ABSTRACT FROM AUTHOR]

The upswing in finance in recent decades has led to rising inequality, but do downswings in finance lead to a symmetric decline in inequality? We analyze the asymmetry of the effect of ups and downs in finance, and the effect of increased capital requirements and the bonus cap on national earnings inequality. We use administrative employer–employee-linked data from 1990 to 2019 for 12 countries and data from bank reports, from 2009 to 2017 in 13 European countries. We find a strong asymmetry in the effect of upswings and downswings in finance on earnings inequality, a weak, if any, mitigating effect of capital requirements on finance's contribution to inequality, and a restructuring but no absolute effect of the bonus cap on financiers' earnings. We suggest that while rising financiers' wages increase inequality in upswings, they are resilient in downswings and thus downswings do not contribute to a symmetric decline in inequality. [ABSTRACT FROM AUTHOR]

This study employs an augmented realized GARCH (RGARCH) model to examine whether two well‐known tail risk measures, namely the SKEW and VVIX indices, can improve the daily value‐at‐risk (VaR) forecasting accuracy for S&P500 index returns. We find that the RGARCH‐VVIX model exhibits better predictive accuracy than the RGARCH and RGARCH‐SKEW models. The VVIX index provides economically valuable information in forecasting VaR. Given its ability to improve both accuracy and efficiency for VaR forecasts, the RGARCH‐VVIX model is helpful for a risk manager to determine capital requirement and for investors to assess the downside risk of their investments. [ABSTRACT FROM AUTHOR]

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This study investigates the relationship between prudential regulation and banking risk in the West African Economic and Monetary Union contingent on institutional quality. The empirical analysis employed panel data from 63 banks spanning 2006–2019. The key findings reveal that stringent banking regulations and supervision enhance banks' stability. Capital regulations, activity restrictions, and supervisory authorities reduce the risk of bank insolvency. The results suggest that a favorable institutional climate promotes rigorous enforcement of regulatory standards and robust supervision, thereby amplifying their efficacy. Overall, this study concludes that prudential policies exhibit risk-mitigating effects in West African Economic and Monetary Union countries conditional on sound institutional frameworks. [ABSTRACT FROM AUTHOR]

The study employs a two-step system GMM technique within a panel data framework to investigate the effects of capital buffers on the profitability and risk behavior of Indonesian commercial banks from 2010 to 2020. The findings reveal that capital buffers serve a dual role, acting as a safety net against potential losses while also promoting increased financial stability and stronger shareholder engagement. This ultimately benefits the bank and its stakeholders in the long run. However, the positive effects of capital buffers come at a cost, as they are associated with reduced returns on assets and return on equity. The study emphasizes the importance of managing risk effectively, striking a delicate balance between risk-taking and prudent risk management to achieve optimal profitability. It underscores the need for banks to prioritize robust risk management practices and proper capitalization to avoid pursuing profitability at the expense of these critical factors. The study further highlights the significance of policymakers finding the right equilibrium between promoting financial stability through capital requirements and fostering a competitive banking industry that can generate profits and support economic growth. [ABSTRACT FROM AUTHOR]

Determining accurate capital requirements is a central activity across the life insurance industry. This is computationally challenging and often involves the acceptance of proxy errors that directly impact capital requirements. Within simulation-based capital models, where proxies are being used, capital estimates are approximations that contain both statistical and proxy errors. Here, we show how basic error analysis combined with targeted exact computation can entirely eliminate proxy errors from the capital estimate. Consideration of the possible ordering of losses, combined with knowledge of their error bounds, identifies an important subset of scenarios. When these scenarios are calculated exactly, the resulting capital estimate can be made devoid of proxy errors. Advances in the handling of proxy errors improve the accuracy of capital requirements. [ABSTRACT FROM AUTHOR]

The focus of this paper is placed on shadow banking as a less regulated segment of the financial system recognizable by its increasingly significant presence in the countries of Central and Eastern Europe with a tendency of further accelerated growth in recent years. Despite the significant contribution by providing alternative sources of liquidity and alternative funding to the real economy, shadow banking can be a significant source of systemic risk. The subject of this paper is to examine the relationship between selected macroeconomic and financial variables and the size of the shadow banking system by applying the regression with fixed effects in seven Central and Eastern European countries over the period 2007-2021 with a quarterly dataset. Empirical results confirm that shadow banking positively correlates with traditional banks, complementing the demand for financial products that the banking sector, adhering to strict regulatory requirements, abstains from supporting. Our study aims to highlight the threat, more excellent orientation towards strengthening the bank's capital requirements to cause further expansion of the activities in the nonbanking part of the financial sector beyond the sight of the regulators, as well as the necessity to identify the challenge of making this less regulated part of the financial system more stable and sustainable. [ABSTRACT FROM AUTHOR]

Basel Committee on Banking supervision (BCBS) has issued Basel which requires the banks to comply with the minimum capital requirement after the crisis. Nevertheless, whether the requirement imposes impact the banking sector which comprises a dual banking system, in a positive manner is still questionable. Given the higher capital costs from the strict capital requirements, banks are being forced to raise bank margins. This study investigates the effect of capital regulations on conventional and Islamic banks' margins covering the ASEAN banking system from 2009 to 2017. The empirical analysis uses dynamic panel data frameworks to reveal several factors affecting bank margins. Overall, the results suggest that the total regulatory capital ratio helps reduce the margins of conventional banks but does not influence the margins of Islamic banks. As for the Tier-1 capital ratio, the variable increases the Islamic bank margins but does not significantly affect conventional bank margins. Based on the analysis results, regulators of conventional banks need to impose capital requirements as suggested by Basel III to reduce bank margins. Meanwhile, as for Islamic banks, the bank margins can be reduced if regulators can introduce a separate set of requirements tailored explicitly for Islamic banks. [ABSTRACT FROM AUTHOR]

Large lending in the banking industry has sparked concerns about banks' efficiency performance, particularly, if it is related to their credit risk, as trade credit, provided by large, creditworthy firms. We provide evidence of a rather neglected issue regarding the impact of large lending on banks' efficiency using cost and profit stochastic functions. A unique dataset was constructed concerning all US banks collected from the Statistics on Depository Institutions report compiled by the Federal Deposit Insurance Corporation. Our sample contains US banks tracked yearly for the period 2010–2017, creating an unbalanced panel of year observations. An econometric framework based on nested non‐neutral frontiers was developed to estimate the influence and the decomposition of large lending on the three banks' performance aspects. Moreover, different types of frontiers aiming at the cost and profit sides have been investigated, and the associated elasticities have been calculated. We notice that large lending plays a crucial role in banks' technical efficiency. Variations among different frontier models, type of bank and size, banks' ownership structure, and macroeconomic conditions appear to be present. By considering all capital adequacy asset quality management earnings liquidity parameters, we notice that banks' financial strength affects banks' efficiency. [ABSTRACT FROM AUTHOR]

This paper looks at the lessons learned for risk management from two recent events, the default of Archegos Capital Management in March 2021 and the unusually large price jumps in energy markets in summer 2022. The paper finds that the counterparty exposure from margined derivatives transactions exceeded the required initial margin significantly in both cases, so that the exposures were largely uncollateralised when it mattered. In addition, the standardised approach for counterparty credit risk (SA-CCR) resulted in regulatory capital requirements which were insufficient to cover the banks' losses from the unwinding of large and concentrated derivatives exposures. This made it difficult, even for some large banks, to identify the high loss potential of the transactions with a single client. [ABSTRACT FROM AUTHOR]

he article examines the trends observed in the Ukrainian banking sector, specifically focusing on changes in the number of banks from 1992 to 2023. The factors contributing to the increase in insolvent and bankrupt banks and subsequent liquidation and revocation of banking licenses are analyzed. The study identifies key factors that arise from both internal bank operations in the banking services market and external factors stemming from macroeconomic and political situations. These factors include a significant decline in GDP, currency devaluation, inflation, and military operations within the country. The article discusses the monitoring of current legislation norms that define the criteria for classifying banks as problematic and insolvent by the National Bank of Ukraine. The regulator associates these criteria primarily with internal issues within the bank, such as liquidity standards violations, non-compliance with current legislation and regulatory requirements, and a decrease in regulatory capital. Voluntary and forced liquidation processes are examined within the framework of the current legislation. Voluntary liquidation by bank shareholders allows the bank to maintain its legal entity status. Banks undergoing compulsory liquidation have the option to reorganize through mergers and acquisitions. During the process of cleaning up the banking sector, system banks received substantial government support in the form of financing through bonds. The article argues that the cleansing of the banking system, which took place between 2014 and 2016 and continued in subsequent years, contributed to the stability and efficiency of the banking sector amid the war in Ukraine. The regulator liquidated banks with Russian capital during the hostilities and declared two banks insolvent due to risky operations and failure to repay debts to borrowers. Furthermore, the study concludes that the significant decrease in the number of banks in Ukraine did not impact the growth trend of total assets in the banking system, indicating the sector’s efficiency. Stress testing in three stages is highlighted as a means for determining the actual state of the banking system during times of conflict. [ABSTRACT FROM AUTHOR]

The recently finalised Basel Framework continues to allow banks to use internal data and models to define risk estimates and use them to compute their capital adequacy ratios. Globally, there are more than two thousand banks running Basel internal models. However, there are countries that have no such banks. They face the dilemma of which of the transition paths to adopt: the voluntary path, as in the EU, or the mandatory path, as in the US. Our objective is to take an investor's perspective and benchmark the two modes. Thus, we wish to determine whether there is a premium for either of them or whether they are, perhaps, equivalent. The novelty of our research is in its robust estimate that investors prefer a mandatory transition to a voluntary one if we consider the period of the 2007–2009 crisis. However, the use of the common post-crisis sample yields the opposite conclusion. A voluntary transition is preferred, though it implies a rise in stock volatility, and thus, the overall risk-return relationship is preserved. This is mostly driven by the tighter used when adopting internal models in the US compared to the EU. European banks have had more room to expand their business after the IRB transition, while for US banks, the transition involved a reduction in business, all else being equal. Our findings are of value primarily to emerging economies such as Argentina or Indonesia. [ABSTRACT FROM AUTHOR]

High impact research in our fields of banking and finance, and more broadly that of economics, can take three main forms: (1) solving the major unsolved problems in the field, (2) posing major questions/ problems to be solved, and (3) providing a new framework/ approach to synthesize current and extant knowledge in the field. We analyze some recent research in different areas of banking and finance (institutions, risk, governance, bank capital/ regulation, innovation) with a view to distil the creative processes at work. We find that the common themes that emerge are consistent with the theory of bisociation proposed by Koestler in his seminal 1964 book, "The Act of Creation". We also provide a simple combinatorial exercise in the process of creativity that can be used by the reader by adapting to the topics and areas of her research. [ABSTRACT FROM AUTHOR]

Protection of creditors is a key objective of financial regulation. Where the protection needs are high, that is, in banking and insurance, regulatory solvency requirements are an instrument to prevent that creditors incur losses on their claims. The current regulatory requirements based on value at risk (V@R) and average value at risk (AV@R) limit the probability of default of financial institutions, but they fail to control the size of recovery on creditors' claims in the case of default. We resolve this failure by developing a novel risk measure, recovery V@R. Our conceptual approach is flexible and allows the construction of general recovery risk measures for various risk management purposes. We provide detailed case studies and applications. We show that recovery risk measures can be used for performance‐based management of business divisions of firms and discuss how to calibrate recovery risk measures to historical regulatory standards. Finally, we analyze how recovery risk measures react to the joint distributions of assets and liabilities on firms' balance sheets and compare the corresponding capital requirements with the current regulatory benchmarks based on V@R and AV@R. [ABSTRACT FROM AUTHOR]

We provide evidence that banks distort the composition of credit supply in order to comply with ratio-based capital requirements in times of economic distress. An unexpected intervention by the European Banking Authority provides a natural experiment to study how banks respond to falling below minimum required capital ratios during an economic downturn. We show that affected banks respond by cutting lending but also by reallocating credit to distressed firms with underreported loan losses. We develop a method to detect underreported losses using loan-level data. The credit reallocation leads to a reallocation of inputs across firms. We calculate that the resulting increase in input misallocation accounts for about 22 percent of the decline in productivity in Portugal in 2012. (JEL E23, E32, G21, G28, G32, G38) [ABSTRACT FROM AUTHOR]

The Moroccan banking system suffered a significant impact due to the extreme market conditions caused by the COVID-19 outbreak, which led to an increase in non-performance loans. This, in turn, reduced the value of banks' assets and their ability to meet their obligations, implicitly raising systemic risk. In such circumstances, the collapse of one financial institution could cause a series of bankruptcies and endanger the overall state of the economy. Given the limited attention devoted to the analysis of systemic risk in the Moroccan banking system, this paper aimed to fill this gap by analyzing the Moroccan banks' systemic risk exposure and assessing their stability during the COVID-19 crisis, using Quantile Regression Neural Network (QRNN) optimized by Adam algorithm to calibrate the Conditional Value at Risk (CoVaR). This study revealed a significant increase in systemic risk during the pandemic crisis and highlights the suitability of more complex QRNN in assessing systemic risk. The findings emphasize the need for regulators to pay close attention to banks' risk exposures when implementing measures to mitigate systemic risk, such as increasing banks' capital requirements or increasing the amount of high-quality liquid assets. [ABSTRACT FROM AUTHOR]

The purpose of the Bank for International Settlements regulatory agenda, as implemented by financial regulators globally, has been to make banks safer and reduce the likelihood of systemic events. Using an original model of bank profit maximisation under a regulatory constraint, we statistically examine how market risk exposure has interacted with financial performance and capital structure, to see if the Basel regulatory agenda concerning the quantity, quality and liquidity of capital, has prompted changes in banking behaviour as measured by exposure to market risk. Breaking new ground, we empirically explore how the regulatory agenda has affected the largest banks. We analyse if the regulatory agenda has succeeded in aligning the cost of capital with their exposure to market risk, measured by Value at Risk; or if regulations have induced changes to banking activities. We find rather than regulation inducing changes to the rate at which unchanged risk exposure is capitalised; it leads to changes in the nature of exposures. Risk has declined along with financial performance while the cost of capital is largely unchanged. A consequence of regulation may be to encourage the migration of riskier activities to organisations where it may be borne more cheaply. [ABSTRACT FROM AUTHOR]

We study the performance of collateralized loan obligations (CLOs) to understand the market imperfections giving rise to these vehicles and their corresponding economic costs. CLO equity tranches earn positive abnormal returns from the risk‐adjusted price differential between leveraged loans and CLO debt tranches. Debt tranches offer higher returns than similarly rated corporate bonds, making them attractive to banks and insurers that face risk‐based capital requirements. Temporal variation in equity performance highlights the resilience of CLOs to market volatility due to their closed‐end structure, long‐term funding, and embedded options to reinvest principal proceeds. [ABSTRACT FROM AUTHOR]

The outbreak of war in Ukraine raises questions about its impact on the economies and financial systems of countries directly and indirectly involved in the war, but also on the economies of non-participating countries. The article aims to identify the channels through which the war in Ukraine has affected commercial banking in Poland. The original contribution of this paper to the literature dedicated to the impact of the outbreak of war on financial sector consists in the identification of channels of direct and indirect effects of war on commercial bank performance, adoption of unique empirical strategy to point out features of banks determining their sensitivity to the materialisation of geopolitical risk as well as groups of banks whose shares move along similar trajectories during the war. The conclusions emphasize that the long-term negative indirect effects of the war outweigh the short-term indirect ones. The policy implications consist in the benefits of introduction of new reporting standards for banks that focus on the exposure of their clients to the geopolitical risk, augmentation of scope of risks to be covered by regulatory capital by geopolitical risk as well as creation scenarios of stress tests that would include geopolitical risk. Facing war, the implications for commercial banks' managers come down to the necessity to prioritize cyber risk management and implement a new paradigm of credit and market risk assessment, taking into account the impact of geopolitical factors. [ABSTRACT FROM AUTHOR]