Capital Requirement Ratio Research Articles

The Assessment of Early Warning for Insurance Company Using Machine Learning Methods

Developing an early warning indicator is essential to strengthen the financial structure and take necessary precautions in a non-life insurance company. This paper aims to implement machine learning techniques on financial ratios to estimate the capital requirement ratio and investigate the solvency of an insurance company. For this purpose, the historical ratios of insurance companies in an emerging market are considered in accordance with the regulator’s solvency requirements. The ratios collected based on the performances of insurance companies in Türkiye are studied in two cases based on the number of features to be included in to four machine learning algorithms. “Full” data set with 69 and “Boruta” implemented data set with 33 ratios are employed to depict the efficiency of methods in predicting the early warning state of the company in terms of their capital requirement ratio predictions. Additionally, the assessment of these predictions to be utilized as an early warning indicator is performed. The findings illustrate that proposed early warning model predicts well the capital requirement ratio one year in advance. Moreover, among four ML methods, XGBoost achieves a prediction accuracy of 85% for estimating the state of the solvency in an insurance company compared to the other algorithms.

Anticipating the Unforeseen and Expecting the Unexpected: Effectiveness of Macro-Prudential Policies in Curbing the Impact of Stranded Assets in the Banking Sector

Banks are exposed to climate risks through stranded assets. This risk can be substantial in the banking sector, as it can spawn systemic risk. After the Great Recession, macro-prudential instruments effectively addressed systemic risk. However, climatic risks raise the research question of how feasible it is to address them by adopting macro-prudential instruments. The researchers, therefore, investigate how banks can respond to the risk posed by stranded assets through the framework of using macro-prudential instruments. A semi-systematic review of the related literature is carried out based on the researchers’ aim to evaluate theory evidence in the effectiveness of macro-prudential instruments in addressing climate-related risks. The adaptability of macro-prudential instruments to address climatic risks and, by implication, systemic risk is demonstrated in the findings. The researchers develop a framework constituting climate transparency disclosures, climate capital requirement ratio, climate capital conservation, carbon countercyclical buffer and macro-prudential climate stress tests to mitigate the effects of climate risks in banking.

Can Regulation Affect the Solvency of Insurers? New Evidence from European Insurers

Successive crises in the early twenty-first century prompted regulators around the world to ask financial institutions to implement a series of regulations. These measures aimed to increase transparency, improve consumer and investor protection, restructure financial capital, stabilize insurance and pension markets, and improve solvency. The Solvency II framework introduced in the European Union applied these principles to insurance companies. This study attempts to predict the solvency of an insurer within a set of European insurers. The dataset consists of 29 insurance groups that operate across the European Union with a country of origin within the European Union for the period 2016 to 2020. The variables were constructed from annual financial statements retrieved from (Thomson Reuters) DataStream. The solvency capital requirement ratios were obtained manually from the solvency financial condition reports of each group. Regularized linear regression applying a ℓ1/ least-absolute-shrinkage-and-selection-operator penalty showed that the reinvestment rate, cash and equivalents, long term investment, and losses-benefits-and-adjustments expenses have the greatest predictive impact on the solvency of insurers. The contribution of this paper lies in the identification of determinants that allow insurance companies to maintain strong solvency capital requirement ratios so that they can maintain internal operations with minimal interruption.

Regulation of bank proprietary trading post 2007–09 crisis: An examination of the Basel framework and Volcker rule

In the aftermath of bank proprietary trading losses in the 2007–09 crisis, the Basel framework uses stressed Conditional Value-at-Risk to set minimum capital requirements for proprietary trading portfolios, whereas the Volcker rule restricts their composition in the US. With or without this rule, such requirements have the benefit of inducing a reduction in the risk of the optimal portfolio (measured by standard deviation) but at the cost of increasing its risk-to-minimum capital requirement ratio. As a hypothetical regulatory alternative, the proper use of standard deviation to set minimum capital requirements and circumvent pro-cyclicality improves upon the Basel framework and Volcker rule.

Coordination Effects and Optimal Policy Choices of Macroprudential Policy and Monetary Policy

Considering three monetary policy rules, together with two endogenous macroprudential policies that are credit constraints (loan to value, LTV) for households and counter-cyclical capital (capital requirement ratio, CRR) for bankers, this paper establishes a dynamic stochastic general equilibrium (DSGE) model. Based on the welfare analysis of different combinations of macroprudential rules and monetary policy rules, this paper identifies the optimal policy combinations and analyzes the coordination effects between macroprudential policies and monetary policies. The results show that no matter what kind of monetary policy rules is implemented, the introduction of macroprudential rules has improved the level of total social welfare. In the optimal “two pillars” framework of monetary policies and macroprudential rules, the main objective of monetary policy is to stabilize price inflation, and the macroprudential policy to be implemented is the CRR macroprudential policy. This combination can effectively promote the stability of the real estate market, financial market, and macroeconomy, while maximizing the improvement of total social welfare.

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)

A Framework for Macro Stress-Testing the Credit Risk of Commercial Banks: The Case of Vietnam

In this paper, we assess the capacity of Vietnamese commercial banks to withstand the effects of an increase in credit risk as a result of macroeconomic shocks. Firstly, VAR model is used to estimate the relationship among macro variables (real GDP, real exchange rate, lending interest rate and inflation rate) and from that, macroeconomic scenarios are set up. Next, we employ a GMM model to estimate the relationship between the non-performing loan ratio (credit risk) and macro variables involved in first step. Finally, the new capital requirement ratio (CAR) is recalculated, which is based on the increase in loan provision followed by the rise in non-performing loan. The results show that credit risk which the commercial banks have to face is relatively limited when their risk weighted assets are unchanged. If these numbers, however, increase as banks broaden their lending, all banks’ CAR will reduce remarkably and four large banks will be lack of capital seriously and cannot meet the requirement of Central Bank.

Risk Management of Full-Fledged Islamic Banks versus Islamic Subsidiaries of Conventional Banks in Malaysia : The Sustainable Growth within Restricted Minimum Requirements

This paper aims to analyze the risk management practices of full-fledged Islamic banks versus Islamic subsidiaries of conventional banks in Malaysia and thesustainable rate of growth within restricted minimum requirements of capital adequacy, leverage and liquidity. In achieving these objectives, the paper assessesthe risk management practices of full-fledged Islamic banks, i.e. Bank Islam Malaysia Berhad and Bank Muamalat Malaysia Berhad and Islamic subsidiaries ofconventional banks, i.e. Maybank Islamic Berhad and CIMB Islamic Berhad. This paper uses annual reports and focus group interview to obtain the data. Theresults of the analysis show that the Leverage Ratio, Liquidity Coverage Ratio (LCR) and capital requirement ratios, such as Common Equity Tier 1 capital Ratio, Core Capital Ratio (CCR) and Risk Weighted Capital Ratio (RWCR) have exceeded the minimum requirement by Basel Accord. The result of the focus group interview shows that full-fledged Islamic banks and Islamic subsidiaries of conventional banks conformed and implemented the risk management framework imposed by the regulatory agency. However, the growth rate in total asset, loan, Return On Assets (ROA) and net income margin has mixed growth except for loan to total asset which increase over the year, albeit of the minimum risk management requirement. These empirical and focus group results suggest an important policy on issues pertaining to how Islamic banks have to adjust the changes in the banking environment in terms of growth and its comparative advantages specifically on management efficiency.

Bank Capital Requirements and Collateralised Lending Markets

In this paper, we take as a baseline a dynamic stochastic general equilibrium (DSGE) model, which features a housing market, borrowers, savers and banks, in order to evaluate the welfare and macroeconomic effects of the new fixed capital requirements in the Basel accords. Our results show that the higher capital requirements imposed by Basel I, II and III decrease both the quantity of borrowing and its variability, producing distributional welfare effects among agents: savers are better off, but borrowers and banks are worse off. Then, we propose a macroprudential rule for the countercyclical capital buffer of Basel III in which capital requirements respond to credit growth, output and housing prices. We find that the optimal implementation of Basel III is countercyclical for borrowers and banks, the agents directly affected by capital requirements, while procyclical for savers. From a normative perspective, we see that this macroprudential rule for Basel III delivers higher welfare for the society than a situation with no regulation. Keywords: Basel I, Basel II, Basel III, banking regulation, welfare, banking supervision, macroprudential, capital requirement ratio, credit, countercyclical capital buffer.

Understanding Implementation of Basel II and III in Albania: Obstacles and Solutions

Banking Sector in Albania is suffering from high NPL levels, compared with historic levels of NPL in Albania, or with regional nations who have comparable economics. The 2008 crises in USA taught us the impact that the real economy can have from a crisis in Banking Sector. Thus the implementation of Basel III framework and its Capital Requirement ratios becomes crucially important for the stability of the Financial sector and stable growth of the economy. This paper firstly examines the state of Basel II implementation in Albania by the banking sector. The banking sector is primarily invested in government bonds and treasuries and lending to businesses and individuals but the high levels of NPL from both bankrupted businesses and individual poses a credit risks and wider market risks. Albanian Government has committed to speed up implementation of Basel II and Basel III on capital ratios. But questions remain: What’s the status of the implementation? Can the economy absorb the costs of implementing or not implementing Basel III? Secondly we research the additional costs associated with implementation of the banking sector. Because of the expansionary policy of the Bank of Albania the lending rates have fallen but not as fast as expected. Credit growth has been mostly stagnant posing a risk to the growth of the economy. For this study we use time series on Financial Institutions in Albania from the Bank of Albania on capital ratios as well as the policies and requirements set. We find that Basel II criteria have not been met and more can be done to prepare the implementation of Basel III.

Understanding Implementation of Basel II and III in Albania: Obstacles and Solutions

Banking Sector in Albania is suffering from high NPL levels, compared with historic levels of NPL in Albania, or with regional nations who have comparable economics. The 2008 crises in USA taught us the impact that the real economy can have from a crisis in Banking Sector. Thus the implementation of Basel III framework and its Capital Requirement ratios becomes crucially important for the stability of the Financial sector and stable growth of the economy. This paper firstly examines the state of Basel II implementation in Albania by the banking sector. The banking sector is primarily invested in government bonds and treasuries and lending to businesses and individuals but the high levels of NPL from both bankrupted businesses and individual poses a credit risks and wider market risks. Albanian Government has committed to speed up implementation of Basel II and Basel III on capital ratios. But questions remain: What’s the status of the implementation? Can the economy absorb the costs of implementing or not implementing Basel III? Secondly we research the additional costs associated with implementation of the banking sector. Because of the expansionary policy of the Bank of Albania the lending rates have fallen but not as fast as expected. Credit growth has been mostly stagnant posing a risk to the growth of the economy. For this study we use time series on Financial Institutions in Albania from the Bank of Albania on capital ratios as well as the policies and requirements set. We find that Basel II criteria have not been met and more can be done to prepare the implementation of Basel III.

The new financial regulation in Basel III and monetary policy: A macroprudential approach

The aim of this paper is to study the interaction between Basel I, II and III regulations with monetary policy. In order to do that, we use a dynamic stochastic general equilibrium (DSGE) model with a housing market, banks, borrowers, and savers. Results show that monetary policy needs to be more aggressive when the capital requirement ratio (CRR) increases because it is less effective in this case. However, this policy combination brings a more stable economic and financial system. We also analyze the optimal way to implement the countercyclical capital buffer stated by Basel III. We propose that the CRR follows a rule that responds to deviations of credit from its steady state. We find that the optimal implementation of this macroprudential rule together with monetary policy brings extra financial stability with respect to Basel I and II.

Capital requirements, banking supervision and lending behavior: evidence from Tunisia

This paper represents a contribution to the very meager literature on the impact of the prudential regulations on Tunisian bank behavior. It attempts to examine the effect of the capital requirements on bank credits during the period from 1999 to 2010 and assess the effectiveness of the banking supervision policy in containing the financial system's risk. On the basis of a theoretical dynamic model, the results show that the capital requirement ratio was binding bank credits during the period of study; well-capitalized banks have been lending more than less-capitalized ones. Despite this apparent stringency of the Tunisian bank regulator, our paper reveals that the supervision policy was weakly effective in restraining systemic risk. This research recommends further reinforcement of the supervision policy and initiating the assessment of its current design in order to improve its effectiveness.

CoCo Bonds, Conversion Prices and Risk Shifting Incentives. How Does the Conversion Ratio Affect Management's Behaviour?

The aim of this paper is to analyze risk shifting incentives for managers and shareholders of the financial institution issuing a CoCo bond. We assess the role of the conversion price settlement in enhancing both shareholders’ and management's discipline. Three recent contingent reverse convertible deals are analyzed, with the intention of showing how shareholder conversion returns are linked to the conversion ratio. The findings demonstrate that, in the case of an ingoing or ongoing crisis, a poor settlement of the conversion ratio could exacerbate both debt overhang and risk shifting issues. This will end in discouraging bank management from issuing new equity and from investing in low risk assets. We argue that a contingent bond triggered on Basel III capital requirement ratios and having a significantly discounted conversion price reduces risk shifting incentives. Moreover, we illustrate how the unexpected wealth transfers between CoCo bondholders and shareholders tends to zero when the bond face value is higher than the current stock market price and there is a concentration of bond subscribers. Accordingly, regulators should consider and oversee not only the conversion trigger but also all the other features of a contingent capital security, especially the conversion ratio.

Pro-cyclicality of the Basel Capital Requirement Ratio and Its Impact on Banks

This paper proposes replacing the present Basel capital requirement with a new counter-cyclical measure. Optimally, (i) the Basel capital requirement ratio should depend on various economic factors such as the cyclical stage of GDP, credit growth, stock prices, interest rates, and land prices—hence, avoiding the expansion of bank loans during a boom period and a credit crunch during a sluggish period; (ii) the Basel minimum capital requirement rule should be different from country to country since the economic structures and the behavior of banks are different; and (iii) cross-border bank operation should follow the minimum capital requirement ratio where bank lending activities occur rather than the origin of the source of funds.

Summary of General Discussion on “Pro-cyclicality of the Basel Capital Requirement Ratio and Its Impact on Banks”

Summary of General Discussion on “Pro-cyclicality of the Basel Capital Requirement Ratio and Its Impact on Banks”

De Bâle 1 à Bâle 2

<titre>R&#233;sum&#233;</titre>Nous &#233;tudions les effets de l&#8217;introduction d&#8217;un ratio de capital exig&#233; pour les banques qui d&#233;pende d&#8217;abord du niveau du cr&#233;dit distribu&#233; (selon les r&#232;gles de B&#226;le&#160;1), puis aussi du risque de d&#233;faut des emprunteurs, au travers de leur rating (selon les r&#232;gles futures de B&#226;le&#160;2). Pour cette &#233;tude, nous utilisons un mod&#232;le th&#233;orique d&#8217;&#233;quilibre du march&#233; du cr&#233;dit bancaire, avec deux types d&#8217;emprunteurs qui diff&#232;rent par le risque des projets qu&#8217;ils entreprennent, et qui subissent un co&#251;t de d&#233;faut, et une banque soumise &#224; une exigence de capital (de type B&#226;le&#160;1 ou B&#226;le&#160;2). Les emprunteurs et la banque maximisent l&#8217;esp&#233;rance du rendement du capital. Nous examinons l&#8217;effet sur les taux d&#8217;int&#233;r&#234;t et les niveaux de cr&#233;dit, les probabilit&#233;s de d&#233;faut des emprunteurs et la solidit&#233; financi&#232;re de la banque de l&#8217;introduction des deux types de r&#233;gulation des banques.