Capital Adequacy Requirements Research Articles

Regulating Bitcoin Exchanges: A Risk-Based Approach

Bitcoin, the decentralised peer-to-peer payment system equips us with a new revolutionary financial tool to send codified value across the globe. As a peer-to-peer payment network, however, bitcoin’s decentralised characteristics make it significantly challenging for regulators to influence bitcoin governance. With legacy regulation insufficiently commanding control over the bitcoin network, regulatory debate has shifted towards finding appropriate regulatory solutions for mitigating bitcoin risk crystallisation. Stark academic regulatory analysis on bitcoin exchange risk has created a profound gap in the literature and sets a logical starting point for this thesis. Using a technical risk-based methodology, I analyse bitcoin exchange risk under three broad headings: consumer protection, financial stability, and anti-money laundering and terrorist financing. Assessing objective empirical evidence, I argue that contrary to mainstream regulatory opinion, the most salient bitcoin exchange risk pertains to consumer protection. From theft, fraud, embezzlement, hacking, and various other scandals, the bitcoin exchange marketplace, for the most part, constitutes as a 'wild west' environment. Inadequate wallet storage mechanisms, insecure cyber security, and deficient capital adequacy requirements, to name but a few, consistently engender risk and harm consumers. As a result, I argue that the slow response from European regulators to address these issues calls for a reevaluation of risk appraisal and a need for a more robust consumer oriented regulatory structure. In that manner, I posit for a 'consumer by design' regulatory framework that inter alia emphasises cold wallet infrastructure, holistic cyber security measures, and capital adequacy requirements. The focal point of this approach centers on changing predominantly malevolent and negligent bitcoin exchange behaviors to that of a prudentially minded entity. Hard targeted risk-based rules fabricate this change, which coincides with post 2008 crises consensus for more financial regulation and the proposition that markets benefit from effective regulatory architecture.

Bankruptcy Prediction Model of Banks in Indonesia Based on Capital Adequacy Ratio

Objective - The purpose of this study is to examine the influence of capital on bankruptcy banks. The hypothesis of this research is that capital has an effect on the bankruptcy of a bank. Methodology/Technique - This research examines financial reports between 2005-2014. An econometric model with a logistical regression analysis technique is used. In this study, capital is measured by CAR, taking into account credit risk; CAR by taking into account market risk; Ratio of Obligation to Provide Minimum Capital for Credit Risk and Operational Risk; Ratio of Minimum Capital Adequacy Ratio for Credit Risk, Operational Risk and Market Risk; Capital Adequacy Requirements (CAR). Findings - The results show that the capital adequacy ratio for market ratio and capital adequacy ratio for credit ratio and operational ratio support the research hypothesis and can form a logit model. The test results of CAR by taking into account credit risk, Minimum Capital Requirement Ratio for Credit Risk, Operational Risk and Market Risk and Minimum Capital Provision Obligations do not support the research hypothesis. Novelty – This paper contribute to bank bankruptcy prediction models based on time dimension and bank groups using financial ratios which are expected can influence bank in bankrupt condition. Type of Paper - Empirical. Keywords: Banking crisis, Cost of bankruptcy, Adequacy Ratio, Financial ratios, Prediction models JEL Classification: G32, G33, G39. DOI: https://doi.org/10.35609/jfbr.2019.4.1(2)

Transformational Growth within the Monetary Circuit

p.p1 {margin: 0.0px 0.0px 0.0px 0.0px; font: 12.0px 'Minion Pro'; min-height: 14.0px} p.p2 {margin: 0.0px 0.0px 0.0px 0.0px; text-align: justify; line-height: 10.1px; font: 10.0px 'Minion Pro'; color: #2d2829} span.s1 {font: 12.0px 'Minion Pro'; color: #000000} Endogenous money view can be described as the supply of money is not under the absolute control of the central banks and emerges endogenously within financial markets, market structure and credit availability. Most importantly, the theory of endogenous money reveals enormous significance of the source of interest rates in the definition of financial fragility. The aim of this article is to present the post-Keynesian theme of the monetary circuit as argued by the General Theory of Transformational Growth. According to this approach, capital adequacy requirements are procyclical, and for this reason, it is important to analyze the relationship between the growth rate and the rate of interest, since the growth of bank capital is tied to the latter.

Marginal cost of risk-based capital and risk-taking

Abstract We explore the impact of capital adequacy requirements on financial institutions’ risk-taking behavior from a novel perspective. Specifically, we show that an important feature of the risk-based capital (RBC) system—a built-in diversification benefit in aggregating risk categories—induces moral hazard. We find that insurers that face lower marginal RBC costs of fixed-income (FI) investment tend to purchase riskier FI securities. This relationship holds even when lower marginal RBC costs result from increased risk in other risk categories, which is an unintended consequence of the RBC's square root rule. Using Hurricanes Katrina and Sandy as exogenous shocks to the RBC cost, we find that insurers that suffered more in the two disasters undertook more risk in their FI investments and witnessed an increase in their overall risk. We further show that insurers with a high RBC cost sell similar risky bonds during the financial crisis, presenting a source of systemic risk. These results provide an important regulatory implication for minimum capital calculation in capital regulation regimes.

Sovereigns and Financial Intermediaries Spillovers

We examine the spillover effects between sovereigns and banks in a model with a heterogeneous banking system. An increase in sovereign’s default risk affects financial intermediaries through two channels in this model. First, banks’ funding costs might increase, inducing higher interest rates on loans and bonds and a cut back in these assets. Second, financial regulator’s risk-weighted asset framework would assign higher weights to lower quality assets, implying a portfolio rebalancing and more deleveraging. While capital adequacy requirements weaken the impact of shocks emerging from the real economy, they amplify the effect of shocks on banks’ balance sheets.

Sovereigns and Financial Intermediaries Spillovers

We examine the spillover effects between sovereigns and banks in a model with a heterogeneous banking system. An increase in sovereign's default risk affects financial intermediaries through two channels in this model. First, banks' funding costs might increase, inducing higher interest rates on loans and bonds and a cut back in these assets. Second, financial regulator's risk-weighted asset framework would assign higher weights to lower quality assets, implying a portfolio rebalancing and more deleveraging. While capital adequacy requirements weaken the impact of shocks emerging from the real economy, they amplify the effect of shocks on banks' balance sheets.

Internal capital adequacy process: A framework for participating banks from east and west African countries

Orientation: Basel III makes provision for banks to assess their internal capital adequacy by means of risk-based approaches, stress tests and a leverage ratio. However, the Basel regulations do not prescribe to banks or to bank supervisors which method should be used or how it should be used. Research purpose: The research problem was whether a framework could be formulated for the implementation of an internal capital adequacy assessment process in accordance with the Basel III accord. Motivation for the study: East and west African banks and bank supervisors (BS) aspire to become fully compliant with Basel regulations and requested research regarding an internal capital adequacy assessment process (ICAAP) framework for the implementation of Basel III. Research approach/design and method: A participatory action research (PAR) approach was used because PAR contributes to both knowledge creation and improving professional practice. The PAR comprised a survey and interest groups attended by bank supervisors and senior officers of banks. Main findings: As a result, an actionable framework for the performance of internal capital adequacy assessment is proposed. Practical/managerial implications: Capital adequacy, applied appropriately, safeguards a bank’s own economic sustainability and the stability of the financial sector in general. Contribution/value-add: The proposed capital adequacy framework assists bank supervisors and risk managers to apply a more consistent approach for the implementation of the capital adequacy requirements of Basel III.

The Analysis Of Sharia Banks Soundness Level Using RGEC Method

The results of the RGEC method research with the Islamic bank financial statements as an intervening variable show that it is on the NPF ratio seen from the Risk profile. This percentage shows that the total problem financing banks do not exist, the total of 11 Islamic banks show good NPF performance results. The highest value is in Victoria sharia bank 4.75% in 2014 and the lowest is in Bca sharia bank 0.1 in 2014. Meanwhile there are several banks that do not include the NPF results in their financial statements. When referring to the provisions of the Indonesian bank which states that the NPF ideal standard is <5%, the performance of the Sharia Banks is in ideal condition. In the implementation of eleven Sharia Banks’ GCG, not all report the value of GCG at their annual report. In general it can be said that based on the results of self-assessment on the implementation of Good Corporate Governance in 2010 to 2014, the bank received good and very good predicate, although there is difference in value weight of 0.05. The earning was measured by ROA ratio, the highest ROA ratio was Sharia Maybank Bank with 4.8% in 2010 and the lowest was 0.35 of Sharia BRI, then in 2012 Sharia Victoria was 6.93 and the lowest was 0.52 of Sharia Bukopin. In 2013 to 2014 ROA of a number of Sharia banks were still at reasonable or stable level. The Capital was measured by their CAR during 2010 – 2014. The percentage of CAR shows that the CAR value was ideal. If it refers to Indonesian Bank provisions regarding minimum capital adequacy requirements (CAR), the best standard or minimum CAR was 8% in ideal condition because it had CAR value exceeding the BI standard provisions. Keywords : RGEC, NPF, ROA, NOM, BOPO, LDR, GCG

Overlapping Legal Rules in Financial Regulation and the Administrative State

Reforms which seek to overhaul the Dodd-Frank Act have begun to gain support within the Trump Administration and Congress. The leading proposals go beyond technical matters and reflect a wholesale critique: financial regulation has become too burdensome, too complex, and grants too much discretion to regulators. This article argues that what is really at stake in these debates is the distinct issue of “regulatory overlap”—meaning the joint use of multiple legal rules to address a common market failure. It begins by developing a general framework for analyzing overlapping legal rules of all kinds. That framework is then applied in case studies of the two cornerstones of financial regulation: capital adequacy requirements and resolution authority procedures. The most direct contribution of this article is to substantive issues in financial regulation. Each case study yields insights about particular portions of the Dodd-Frank Act that pending reforms attempt to eliminate, as well as the big picture problems of systemic risk and banks that are Too Big to Fail. On a more theoretical level, it also situates the concept of regulatory overlap within the law-and-economics literature on the optimal design of legal rules, where it is otherwise conspicuously absent. Lastly, the article shows how an analysis of overlapping rules in finance carries lessons for the regulatory process as a whole. It thereby adds to scholarship on administrative law, especially to research in that area that deals with a related set of problems concerning the structure of agency jurisdiction, regulatory cost-benefit analysis, and the role of uncertainty in the policymaking environment.

Is the MENA banking sector competitive?

The purpose of this paper is to investigate the competitive conditions and revenue drivers of commercial banks in the MENA region in the context of Panzar–Rosse model. It is the first study of its kind that examines a large sample of MENA banks for an extensive period (1999–2012) during an era of political and economic unrest and transformation that includes the the global financial crisis (2007–2009). Panel data analysis using fixed effects was employed in order to examine whether the competitive conditions in MENA banks is explained by monopoly, monopolistic competition or perfect competition. Findings show that MENA banks operate under monopolistic competition, and bank-specific variables show a positive impact on revenue. These findings indicate that policymakers should relax capital adequacy requirements to guarantee the stability of the financial system. They also raise a concern that commercial banks in the MENA economies tend to concentrate on traditional lending activities, where their competitive position may be eroded in the long run by the decreasing state role of Islamic banks and by mergers that are not empirically justified for MENA banks during this period.

Determinants of non-performing loans in banking sector in small developing island states

PurposeThe banking sector stability depends in large part on the size of non-performing loans (NPLs). Hence, the factors which explain the problem loans are very useful information for banks. Notably, studies in this regard with respect to the small developing countries’ banking sector have received less attention. Therefore, this study aims to examine the determinants of NPLs with a case of Fiji’s banking sector, over the period 2000-2013.Design/methodology/approachThe balanced sample consists of the entire banking sector (five commercial banks and two non-bank financial institutions). First, the authors estimate a base model which comprise bank-specific indicators that are related to bank management and then they extend the estimations to include macroeconomic/structural factors such as economic growth, inflation, changes of the real effective exchange rate, unemployment, remittances, political instability and external events like the global financial crisis. The estimations are done using pooled OLS, the random effects and the fixed effects regression methods.FindingsThe results show that the following indicators have negative association with NPL and are statistically significant with the conventional levels: return on equity, capital adequacy requirement, market share based on assets, unemployment and time. On the other hand, the net interest margin has a positive and statistically significant association with NPL.Research limitations/implicationsSubsequently, the stability of the banking sector in small developing countries such as Fiji is largely dependent on banks’ profitability, solvency, size in terms of market share and the presence of a learning curve and keeping a close tab on the interest rate spread between loans and deposits.Practical implicationsThe paper highlights the specific factors determining NPL in small developing economy of Fiji.Originality/valueThis study is the first to examine specific factors determining NPLs with respect to small developing economies in the Oceania region.

Banks' Asset Reporting Frequency and Capital Regulation: An Analysis of Discretionary Use of Fair-Value Accounting

ABSTRACTThis paper examines banks' choice between fair-value and historical-cost accounting when reported accounting information is used in capital requirement regulation. We center our analysis on a key difference between fair-value and historical-cost accounting: the frequency with which asset value changes are reported. We show that the elasticity of banks' loan returns to aggregate lending is a critical determinant of the interaction between capital adequacy requirements and accounting choices. If lending returns are inelastic, then higher capital requirements reduce fair-value usage. By contrast, higher capital requirements encourage fair value if capital requirements are low and lending returns are sufficiently elastic. In equilibrium, banks may elect different accounting choices, and we find that mandating uniform adoption of historical cost (fair value) is desirable when capital requirements are loose (tight). Our study offers many other implications about fundamental links between accounting and prudential choices.

Basel I to Basel III: Impact of Credit Risk and Interest Rate Risk of Banks in India

The study explores the theoretical background of Basel III and investigates the drivers of interest rate risk and credit risk of banks in various parlances, namely, pre and post the financial crisis, phases of implementation and ownership on a sample of 36 listed banks in India. The findings indicate that the high capital adequacy requirement (CAR) exhibits a positive relation with gross non-performing assets (GNPAs) and net interest margin (NIM). This is perhaps one of the major drawbacks of Basel implementation, which may become a cause of lower GDP in the future as explained in the findings of the literature. Originality/value: This article is perhaps the first attempt of its kind to empirically examine the bank-specific, macroeconomic variables and link it with the Basel implementation in the Indian banking system for the time period 2002–2015. This study endeavours to enhance the existing empirical research in the field and give insights into the role of various factors on GNPAs and interest rates (with regards to Indian banks).

BUBBLES, CRASHES, AND THE FINANCIAL CYCLE: THE IMPACT OF BANKING REGULATION ON DEEP RECESSIONS

This paper explores how different credit market and banking regulations affect business fluctuations. Capital adequacy- and reserve requirements are analyzed for their effect on the risk of severe downturns. We develop an agent-based macroeconomic model in which financial contagion is transmitted through balance sheets in an endogenous firm-bank network, which incorporates firm bankruptcy and heterogeneity among banks to capture the fact that contagion effects are bank specific. Using concepts from the empirical literature to identify amplitude and duration of recessions and expansions, we show that more stringent liquidity regulations are best to dampen output fluctuations and prevent severe downturns. Under such regulations, both leverage along expansions and amplitude of recessions become smaller. More stringent capital requirements induce larger output fluctuations and lead to deeper, more fragile recessions. This indicates that the capital adequacy requirement is procyclical and therefore not advisable as a measure to prevent financial contagion.

Impact of Basel II &amp; III Implementation to Mitigate Bank Risk: A Study on Al-Arafah Islami Bank Limited

This study has examined the implementation process, effects, outcomes, of Basel II &amp; reforms of Basel III within the Al-Arafah Islami Bank Limited. The purpose of Basel II is to create regulation about how many capital banks need to put away to guard against the financial and operational risk. Basel III newly introduced accord provides stricter approach toward managing risk with capital in order to strengthen capital &amp; liquidity structure of international banking system. The purpose &amp; aim of this study is to analyze capital adequacy framework whether it is complied with the regulatory supervisions under the prescription of Bangladesh bank as well as its capability to absorb shocks arising from financial and economic stress. Published disclosures &amp; financial statements of last five years are used to collect data. OLS regression model is used to find out the relationship between profitability and capital adequacy requirement in terms of relevant influencing variables (e.g. asset turnover, size of the firm, capital adequacy ratios).capital adequacy ratio of this bank is higher than minimum standard level. The average capital adequacy ratio (CAR) is about 13.78%. The result of regression analysis is statistically significant and there is a positive relationship between capital and return on asset (ROA).If the capital adequacy requirement is increased the return on asset (ROA) will be increased. Islamic Banking sector has some uniqueness compared to the conventional Banking sector. Products are linked with real economic activities that are why financial crisis of 2008 did not create any extreme pressure on this sector.&#x0D;

Global Finance and Capital Adequacy Regulation: Recreating Capitalist Social Relations

The paper argues that capital adequacy regulation has served to recreate the neoliberal form of capitalist social relations. It identifies two dimensions to this process. First, the paper argues that capital adequacy regulation in historical perspective can be understood to have incentivized, facilitated, and legitimated the kind of arbitrage that allow it to proceed. Second, it argues revisions to capital adequacy requirements serve to discipline mutual and cooperative forms of finance.JEL Classification: G28, P13, P16

THE IMPORTANCE OF A CAPITAL ADEQUACY FOR ISLAMIC BANKS

Conceptually, an Islamic bank has an equity-based capital structure, dominated by shareholders’ equity and investment deposits based on profit and loss sharing [PLS]. There is no need for capital adequacy regulations if the Islamic banks are structured as pure PLS-based organizations. However, due to informational asymmetry and risk aversion by investors, there currently exist fixed claim liabilities on the Islamic banking balance sheets. This necessitates the imposition of capital adequacy requirements, which aim at maintaining systemic stability by achieving two fundamental objectives. First, capital regulations should protect risk-averse (assumed unsophisticated) depositors. This requires a minimum equity capital cushion and an optimal assets-liabilities composition. Second, capital regulations should give the right incentives to shareholders to promote prudent behavior by the banks. This requires analysis of the effect of financial participation by shareholders on Pareto optimality, and analysis of potential behavior by shareholders when facing financial uncertainty.

Is MENA Banking Sector Competitive?

This paper investigates the competitive conditions and revenues drivers of commercial banks in MENA region in the context of Panzar-Rosse model. It is the first study of its kind that examines a large sample of MENA banks for an extensive period (1999-2012) during an era of political and economic unrest and transformation that includes the 2007 global crisis, providing the ability to draw reliable conclusions. We find that MENA banks operate under monopolistic competition. Our findings indicate that policies that favoured relaxing capital adequacy requirements, decreasing state role and mergers are not empirically justified for MENA banks during this period.

The Unintended Consequences of Bank Stress Tests

Stress tests are assessments conducted by regulators to determine whether banks have sufficient capital buffers to withstand severe recessions. Unlike ordinary bank examinations, stress tests involve forward-looking scenarios and their results are publicly disclosed. This paper is the first study to show the consequences of bank stress tests. My estimates indicate that there is a negative causal impact of capital adequacy requirements on managerial decisions in the U.S. banking system. Managers make real decisions regarding restructuring problematic loans or removing them completely from their books. Stress-tested banks reduce net loan charge-offs and keep problematic loans on their books to a greater extent than banks in a non-tested group to meet the capital ratio requirements. Managers increase the level of non-performing loans in the aftermath of stress tests announcement. Stress-tested banks with greater exposure to the housing market change the classification of loan losses to a greater extent than other banks. The study’s results remain robust using mid-sized banks that have been subject to the latest rounds of stress tests.

Capital requirement, bank competition and stability in Africa

Monetary authorities around the world are implementing enhanced banking capital adequacy requirements under Basel III meant to improve financial stability. Critics however argue that increased capital requirements concentrate the banking industry reducing competition while not guaranteeing financial sector stability. Using data from 167 banks in 37 African countries, we find that increased capital beef-up significantly increases financial instability in Africa (except in big banks) implying that higher capital requirements did not make African banks safer. We also find that increased regulatory capital improves competitive pricing for foreign banks while it makes domestic banks less competitive mainly attributed to the high cost of sourcing and holding extra capital for domestic banks compared to foreign banks who can source cheaper capital from parent companies. The results put to question the effectiveness of enhanced regulatory capital on stability and competitiveness of the African financial system.