Capital Risk Research Articles

The effect of financial risks on the performance of Islamic and commercial banks in UAE

Risk management has emerged as a critical element across several economic sectors, with particular significance in the banking industry. The governing bodies of these industries encounter a multitude of threats stemming from the escalation of an unpredictable economic environment, the intricacy of transactions and big data, and several other concealed factors. The primary aim of the present research is to investigate the impact of certain financial risks, including capital risk, liquidity risk, and operational risk, on the financial performance of both commercial and Islamic banks operating within the banking sector of the United Arab Emirates. The study will focus on the time frame spanning from 2015 to 2022. The data used in this study was sourced from the annual reports of banks, which were acquired from the official websites of the Abu Dhabi Securities Exchange and the Dubai stock market. The most prevalent indicators used to assess a bank's financial performance are Return on Assets (ROA) and Return on Equity (ROE). In contrast, the financial risk metrics included three distinct categories of risk: capital risk, liquidity risk, and operational risk. The findings indicate that there is a statistically significant positive relationship between capital risk and both return on assets (ROA) and return on equity (ROE). However, it was observed that neither liquidity risk nor operational risk had a statistically significant impact on either of the financial performance metrics. Moreover, the size of a bank has a notable and favorable impact on both return on assets (ROA) and return on equity (ROE). The ramifications of the study's conclusions have significant importance for regulators, bank management, and investors. IPolicymakers need to prioritize the enhancement of the regulatory framework pertaining to caboutements in order to the financial stability of banks. Bank managers should give priority to the management of capital risk and the size of the bank in order to their financial performance. In order to optimize profits, it is important for investors to carefully evaluate and take into account the many risk considerations associated with their investment selections.JEL:G20, G21

Impact of financial risk management on performance of Nigerian commercial banks

This study explored the impact of financial risk management Nigerian commercial banks' financial performance from 2009 to 2022. Return on assets (ROA) is used to assess financial performance, and capital risk (CAR), liquidity risk (LQR), market risk (MKR), and operational risk (OPR) are used to proxy financial risks. Fixed effects panel data regression analysis is used in the study on a sample of 70 observations from five significant commercial banks in Nigeria. The findings demonstrate that, even while the model as a whole is statistically significant, demonstrating the joint significance of the financial risk factors, when bank-specific heterogeneity is taken into account, none of the risk variables individually significantly affect ROA. The lack of significance of individual predictors points to issues of model misspecification, omitted variable bias, multicollinearity and autocorrelation. Further research should focus on refining the econometric approach through inclusion of pertinent control variables, use of dynamic modeling techniques and addressing diagnostic concerns. From a policy perspective, the findings highlight the imperative of enhancing risk management practices and prudential oversight to safeguard bank profitability and financial stability. The study provides a baseline model and recommendations for improving modeling strategies to gain richer insights into the financial risk-performance nexus for Nigerian commercial banks. With a robust empirical approach, valuable policy guidance can be provided to promote sound risk management systems and regulations for a profitable, stable and resilient banking sector that supports Nigeria's economic growth.

The Conception of Local Economic Development as an Instrument for Sustainable Economic Growth of Territories: Ukrainian Aspect

The aim of this article is to study the conception of local economic development as an instrument for sustainable economic growth of territories in the context of decentralization, including the process of implementation of foreign experience of this conception in Ukrainian realities. The article analyzes modern theories of local economic development. An analysis of the definition of the concept of «local economic development», key elements and basic principles is carried out. The main barriers that hinder local economic development are noted, namely: financial and economic, innovative, social, environmental, political, lack of motivation and controlling system, as well as institutional barrier. The key risks characteristic of the general goals of local economic development are studied, including: risks of physical capital; risks associated with technological innovations; human capital risks; social capital risks, as well as risks related to the macroeconomic environment; risks related to the technological environment; ecological risks; risks associated with the cultural environment; infrastructure-related risks and political and legal risks. The key stakeholders of local economic development have been identified, which include: the government, local self-governments, non-profit organizations, business organizations, international organizations and the population. An analysis of the activities of stakeholders in the measurement of international trends is carried out. The advantages for the development of territories through the use of the conception of local economic development are substantiated. It is proved that the implementation of the conception of local economic development, taking into account the positive experience of foreign countries, will accelerate the development of the domestic economy and reduce the negative dynamics of destructive changes due to military aggression on the territory of Ukraine.

Exploration and Prevention of Social Capital Risks in Medical PPP Projects

Exploration and Prevention of Social Capital Risks in Medical PPP Projects

Impact of higher federal funds rates on bank risk during higher inflation in the U.S.

Since March 2022, U.S. banks are facing rising federal funds rates. After eliminating banks’ reserve requirement in March 2020, higher funds rates became U.S. Federal Reserve System's key instrument to control inflation. However, it is unclear how banks’ risk is affected by rising Fed funds rates in absence of reserve requirements. Therefore, we examine the impact of higher Fed funds rates on banks’ risk indicators. Analyses reveal that higher Fed funds rates favorably impact credit risk – while adversely impacting regulatory capital risk, leverage risk, and insolvency risk. Moreover, the impact of higher Fed funds rates is heterogeneous across banks.

ASSESSMENT OF CREDIT RISK OF A COMMERCIAL BANK

This article presents a method for assessing the risks of commercial banks, mainly analyzing the credit risk, interest rate risk and capital risk faced by commercial banks. A model for assessing the credit risk of commercial banks in Uzbekistan is also reviewed.

OP62 Development Of The Oral Health Risk Adjustment Model To Predict The Outpatient Dental Expenditure In Children With Autism

IntroductionNational health insurance (NHI) Taiwan has provided additional markups on dental service fees for people with specific disabilities, and the expenditure has increased significantly from TWD473 million (USD15 million) in 2016 to TWD722 million (USD24 million) in 2022. The purpose of this study was to determine oral health risk and to develop a risk assessment model for capitation outpatient dental payments in children with Autism.MethodsBased on the literature and expert opinion, we developed a level of oral health risk model from the claim records of 2019. The model uses oral outpatient claim data to analyze: (i) the degree of caries disease; (ii) the level of dental fear or cooperation; and (iii) the level of tooth structure. Each factor was given a score from zero to four and a total score was calculated. Low-, medium-, and high-risk groups were formed based on the total points. The oral health risk capitation models are estimated by ordinary least squares using an individual’s annual outpatient dental expenditure in 2019 as the dependent variable. For subgroups based on age group and level of disability, expenditures predicted by the models are compared with actual outpatient dental expenditures. Predictive R-squared and predictive ratios were used to evaluate the model’s predictability.ResultsThe demographic variables, level of oral health risk, preventive dental care, and the type of dental health care predicted 30 percent of subsequent outpatient dental expenditure in children with autism. For subgroups (age group and disability level) of high-risk patients, the model substantially overpredicted the expenditure, whereas underprediction occurred in the low-risk group.ConclusionsThe risk-adjusted model based on principal oral health was more accurate in predicting an individual’s future expenditure than the relevant study in Taiwan. The finding provides insight into the important risk factor in the outpatient dental expenditure of children with autism and the fund planning of dental services for people with specific disabilities.

On Risk Management of Mortality and Longevity Capital Requirement: A Predictive Simulation Approach

In the insurance industry, life insurers are required by regulators to meet capital requirements to avoid insolvency caused by, for example, sudden mortality changes due to the COVID-19 pandemic. To prevent any large movements in this required capital, insurance companies are motivated to establish hedging strategies to mitigate the inherent risk exposures they face. Nonetheless, devising and implementing risk mitigation solutions to risk managing capital requirement is frequently impeded by the computational complexities stemming from the extensive simulations required. In this paper, we delve into a simulation quandary concerning the management of solvency capital risk associated with mortality and longevity. More specifically, we introduce a thin-plate regression spline method as a surrogate alternative to the standard nested simulation approach. Using this efficient simulation method, we further investigate hedging strategies that utilize mortality-linked securities coupled with stochastic mortality dynamics. Our simulation results provide a numerical justification to the market-making of mortality-linked securities in the context of mortality and longevity capital risk management.

Stabilizing leverage, financial technology innovation, and commercial bank risks: Evidence from China

With the rapid development of financial technology (FinTech), balancing FinTech innovation with capital risk management is an emerging issue for banks and regulators. To address this issue, we investigate FinTech's impact on the leverage risks of commercial banks. First, we formulate a theoretical model about the optimal leverage ratio determination for commercial banks within the context of FinTech development. We then conduct an empirical study using Chinese banking microdata from 2005 to 2020. Furthermore, we perform robustness tests by varying FinTech indexes. Our empirical results reveal that (1) an optimal leverage ratio exists that minimizes the risks of commercial banks. Furthermore, (2) FinTech helps banks balance their asset allocation structure, playing a countercyclical role in risk reduction. Finally, (3) FinTech can improve profitability and decrease leverage risks of large, medium-sized, and listed banks. These findings can help banks enhance their FinTech innovation capabilities and regulators prevent governance risks.

Optimal allocations in growth models with private information

This paper considers a class of growth models with idiosyncratic human capital risk and private information about individual effort choices (moral hazard). Households are infinitely-lived and have preferences that allow for a time-additive expected utility representation with a one-period utility function that is additive over consumption and effort as well as logarithmic over consumption. Human capital investment is risky due to idiosyncratic shocks that follow a Markov process with transition probabilities that depend on effort choices. The production process is represented by an aggregate production function that uses physical capital and human capital as input factors. We show that constrained optimal allocations are simple in the sense that individual effort levels and individual consumption growth rates are history-independent. Further, constrained optimal allocations are the solutions to a recursive social planner problem that is simple in the sense that exogenous shocks are the only state variables. We also show that constrained optimal allocations can be decentralized as competitive equilibrium allocations of a market economy with a simple tax- and transfer scheme. Finally, it is always optimal to subsidize human capital investment in the market economy.

Naomi Yarrow

Naomi Yarrow earned the CQF in 2006. Naomi started her career as a Quant in the product Control Valuations Group at ABN AMRO Bank before working her way up to her current role as Head of Capital Risk Oversight at NatWest Group. We spoke to Naomi to find out more about why she decided to pursue a career in quant finance, her advice for people looking to advance in quant finance roles, and the most rewarding things about working in the field.

Heterogeneous Intermediary Asset Pricing in Iran’s Stock Market: Privately-Owned vs. State-Owned

ABSTRACT In Iran’s stock market, this paper examines a new dimension of heterogeneity: ownership type, using an intermediary asset pricing model. When only state-owned intermediaries are considered, the price for exposure to capital ratio shocks is negative; thus, the group is not a marginal investor. Considering only privately-owned intermediaries has greater explanatory power than considering both types, and the price for capital risk is positive in both cases. We propose a new criterion to represent the sector with even greater explanatory power: a group of privately-owned intermediaries with positive capital risk prices when tested individually.

Impact of Compliance with the International Financial Reporting Standard IFRS No. 9 on Financial Risk Reduction in Banks Listed on the Palestine Stock Exchange

Purpose - This study empirically investigates the impact of compliance with International Financial Reporting Standard (IFRS) No. 9 on reducing financial risks in the banks listed on the Palestine Stock Exchange.
 Design/methodology/approach – The sample of study consists of all financial statements of the banks for the period 2015-2021 that met the study’s criteria. A simple linear regression test was used to examine the study’s hypotheses.
 Findings - The findings of the study show a correlation between the compliance with IFRS No. 9 and the mitigation of financial risks in the banking sector. The study shows an adverse effect of the compliance with IFRS No. 9 on reducing credit and capital risks in the banks under study. It also found that there was an insignificant effect of the compliance with IFRS No. 9 on the reduction of exchange rate and interest rate risks in those banks, while the study observed a positive effect of the compliance with IFRS No. 9 on reducing liquidity risk in those banks.
 Recommendation - The study recommended the necessity to develop and cultivate the banks’ human resources and work on increasing the awareness of the users of financial statements. The study also underscored the need for banks to bolster their capital reserves to meet the expected increase in provisions stipulated within IFRS No. 9.
 Originality/value: Our research highlights the importance of underscored of banks to bolster their capital reserves to meet the expected increase in provisions stipulated within IFRS No. 9. and reducing financial risk in those banks

Influence of Capital Risk on Financial Performance of Microfinance Institutions in Kenya

Microfinance Institutions (MFIs) services and activities in Kenya have helped the country reduce its poverty rate, but the country is still among the poorest in the world. Microfinance institutions in Kenya have also reported capital risk in terms of pricing since they have less flexibility to adjust prices due to their financial structure. The main objective of the study is to establish the influence of capital risk on the financial performance of microfinance institutions in Kenya. The study used a descriptive survey research design with a target population of 12 MFIs listed under the Central Bank of Kenya (CBK). The study used a census approach to sample the entire population. The study used secondary data from published CBK reports over a 7-year period from 2015 to 2021. Descriptive statistics are comprised of skewness, kurtosis, and jarque bera. Inferential statistics used were Pearson correlation and hierarchical regression. A study on financial risk factors and financial performance may be of value to the government in policy formation. The microfinance act policy formulators can use the study to ascertain contagious issues that need to be addressed, especially how to handle capital risk challenges. The study may assist the management of microfinance institutions in establishing the problems facing financial risk factors in their sector. Capital risk had a significant positive effect on the financial performance of the Nairobi Securities Exchange in Kenya (t =0.0346763, p<0.05). This model produced an R square of 0.378, implying that 3.78% of the variation in the risks of microfinance institutions is significantly affected by capital risk. Regarding microfinance size, the incorporation of IV*MV, thus interaction terms, moved R squared from 0.337 to 0.378, hence an increase of 0.041. The P value of 0.024 and an R squared increase of 0.041 shows that microfinance size has a moderatingly significant effect on the relationship between capital risk and the financial performance of microfinance institutions. The study rejected the null hypothesis. The findings guided the following recommendations: It was found that capital risk has a significant impact on financial performance; hence, microfinance firms should improve their assets so as to minimize the risks associated with their capital base.

Measurement and Calibration of Regulatory Credit Risk Asset Correlations

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.

OWNERSHIP STRUCTURE’S IMPACT ON CORPORATE SOCIAL PERFORMANCE IN DISSIMILAR INDUSTRY GROUPS: EVIDENCE FROM PAKISTAN

This paper investigates the mixed relations among ownership structure and corporate social responsibility in different non-financial industries across Pakistan. The OLS regression models are estimate using the data from 2011 to 2020 of Pakistani non-financial industries. Ownership structure including managerial ownership (MOWN) concentration ownership (COWN) and family ownership (FOWN) encourages corporate social responsibility (CSR) of organizations with social and environmental market capitalization risk coverage. Generally, the positive outcome of ownership structure is established in different non-financial industries at a combined level whereas investigates the firms with a whole market capitalization risk exposure. The detecting suggest that ownership structure can mitigate the market capitalization risk coverage non-financial industries in terms of relationship improving the CSR and the benefit can emerged with the addition of equal female director in family ownership firms (executive or independent) to the panel. This study also call attention to the ownership structure improves CSP in different non-financial industries with market capitalization risk coverage while performance so in industries with control risk coverage after accompaniment by independent director effects and critical mass effects.

Heterogeneous impact of Covid-19 on the US banking sector

This study discusses the impact of Covid-19 on important financial performance indicators and risk indicators of US banks using quarterly panel data of the 87 insured U.S.-chartered commercial banks, covering periods from 2017 to 2021. Based on random effect and two step system GMM models, we provide strong empirical evidence of the adverse impact of the pandemic on important accounting and market-based measures and risk indicators. The presence of Covid-19 implies declining profitability, deteriorating cost efficiency and decreasing level 3 assets to securities ratios. It also adversely impacted key risk indicators by increasing credit risk and the risk of regulatory capital. Using quantile regression, we have also identified heterogeneity among banks in terms of financial performance and risk indicators. The findings of the study will add value in research to the existing literature and provide the newest findings to the stakeholders who are engaged with the US banking sector.

Do Robots Increase Wealth Dispersion?

Abstract We document significant negative effects of exposure to increased automation at work on household wealth accumulation. Beyond the income and savings channels, we uncover a novel mechanism contributing to the negative wealth effects of automation that arises through the endogenous optimal portfolio decisions of households. We show that households rebalance their financial wealth away from the stock market in response to increased human capital risk induced by pervasive automation, thereby attaining lower wealth levels and relative positions in the wealth distribution. Our evidence suggests that the portfolio channel amplifies the inequality-enhancing effects of increased automation. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Risk management and performance of deposit money banks in Nigeria: A re-examination

Risks inherent in banking businesses should be managed to prevent financial losses to the sector’s stakeholders and negative externalities to the global economy. To this end, this study examines the effect of risk management on the performance of deposit money banks in Nigeria. A sample of eight (8) deposit money banks with international authorization are purposively selected out of 12 deposit money banks due to data availability. Panel data analysis techniques were adopted to analyze the secondary data that were obtained from the annual reports of banks. Findings based on the disaggregated model results reveal that both liquidity and capital risk variables exert a negative but insignificant effect on performance. However, credit risk drives performance of the internationally authorized banks positively and significantly. Furthermore, Management quality (MQ) is the only control variable that has a significant influence on the performance of the selected deposit money banks. The study concludes that credit risk and management quality significantly and positively drive performance among the financial entities.

Research on Crowdsourcing Distribution Model of Community E-commerce Logistics Development

This paper provides an overview of the concept and characteristics of community e-commerce logistics, crowdsourcing logistics, existing models and the current situation and problem analysis of community logistics development, analyzes the necessity and feasibility of developing crowdsourcing distribution model for community e-commerce logistics, designs a crowdsourcing distribution platform for community e-commerce logistics from the perspective of considering security, reliability and flexibility, and proposes measures such as information risk guarantee, quality risk guarantee, security risk guarantee, capital risk guarantee and legal risk guarantee, in order to provide reference and reference for the study of community e-commerce logistics crowdsourcing distribution model. It also proposes measures such as information risk protection, quality risk protection, security risk protection, capital risk protection and legal risk protection to provide reference and reference for the research on the crowdsourcing delivery model of community e-commerce logistics, with a view to promoting the development of community e-commerce logistics delivery and improving the competitiveness of community e-commerce logistics.