Financial Soundness Indicators Research Articles

The Effects of Firm-Specific Factors on the Financial Soundness by using CARAMELS Framework Indicators: A Case of Non-Life Insurance Industry of Pakistan

The study is carried out to identify the relations of firm-specific factors with the financial soundness indicators of CARAMELS framework for the non-life insurance industry, by using a panel data set of 22 non-life insurance companies of Pakistan from 2007 to the year 2016. This study is established on two most applicable panel data techniques (random effects as well as fixed effects models), referring to the Hausman’s test. This test proves that the fixed effect model is appropriate for the analyses of firm-specific factors. Based on the highest number of relationships among variables, fixed effects model’s results propose that three firm-specific factors (age of company, management competence index and operating ratios) have significant relations with the CARAMELS financial soundness indicators. However, seven firm-specific factors (size of the company, equity capital, leverage, market share, investment ratio, premium growth and solvency margin) have insignificant relation with the CARAMELS financial soundness indicators. According to author’s best knowledge, it’s the first study that identifies the relations of firm-specific factors with the CARAMELS financial soundness indicators, that will assist to the scholars, managers and policymakers of the non-life insurance industry of Pakistan to consider the significant factors.

Financial Stability of Islamic versus Conventional Banks in Pakistan

This study aims to analyze and compare the financial stability of Pakistani banks covering a timeframe of 5 years from 2012 to 2016. This study employs the financial soundness indicators of the International Monetary Funds and State Bank of Pakistan and the z-score index. The comparative analysis through average scores is performed using 3 indicators of financial stability namely Z-Score, Capital Adequacy Ratio (CAR) and Equity to Total Assets Ratio. The findings of the research reveal that (i) conventional banks are more financially stable than Islamic banks; (ii) large conventional banks are more financially stable than large Islamic banks; (iii) small Islamic banks are less stable than small conventional bank. The implication of this paper is that conventional banks have the potential of absorbing financial stability shock as compare to Islamic banks on the basis of stated financial soundness indicators and Z-Score specifically. DOI: 10.15408/aiq.v10i2.6500

Macro stress testing and resilience assessment of Indian banking

This study conducts policy-based macro stress testing of the Indian banking sector and also assesses its resilience towards compliance with BASEL norms with the aid of an empirical macro-financial model. It uses scenario analysis and quantitative techniques to capture the impact of macroeconomic stress on the stability of the Indian banks by evaluating financial soundness indicators (credit quality, quantity and quality of capital adequacy). The scenarios are generated through policy-based shocks vis-à-vis other external shocks. The results from the estimation of the model indicate a cointegrating relationship between credit quality and key macroeconomic variables including output growth rate, interest rate, money growth rate and exchange rate. The results of the scenario analysis reveal that the Indian banking sector remains largely sound in terms of total regulatory capital adequacy ratio as per current BASEL II and even BASEL III requirement. The results also show that expansionary monetary policy impacts credit quality and capital adequacy in a positive and significant manner via its effect on the economy’s growth rate.

Georgia: Technical Assistance Report on the Financial Accounts and Financial Soundness Indicators Mission

Georgia: Technical Assistance Report on the Financial Accounts and Financial Soundness Indicators Mission

KEY FACTORS OF NON-PERFORMING LOANS IN BALTIC AND SCANDINAVIAN COUNTRIES: LESSONS LEARNED IN THE LAST DECADE

A cross-country panel data regression was performed for non-performing loans (NPL) in Denmark, Estonia, Finland, Latvia, Lithuania and Sweden covering a period of years 1998-2014. The main objective was to determine the major factors that were driving the NPL in the selected countries. Also, we expected to draw the differences in the banking industry between emerging economies in the Baltic countries and Western economies in the Scandinavian region. The selected variables were banking industry-related (net interest margin, ROA, ROE) and macroeconomic variables (GDP growth, RE prices, Unemployment), of which the majority is included as the Financial Soundness Indicators by the IMF. Key findings of the research show that NPL in both regions were mostly dependent on GDP growth and Unemployment, whereas the banking industry variable ROA had a very moderate effect only on a country level. The research is contributing to a better understanding of financial stability in the banking industry during the last decade, and it may have possible implications for the macroprudential policy.

Effects of Financial Soundness and Openness on Financial Development

Using panel data estimation, we evaluate the effects of financial soundness indicators, financial openness and bank liquidity on financial development across 40 countries. According to our dynamic panel estimates, the following variables are found to significantly affect financial development: capital to asset ratio, nonperforming loans and direct foreign investment. Our result indicated that the change in capitalization ratio was the main driver of financial development. Moreover, nonperforming loan shock has a negative and significant influence on financial development. This study emphasizes the important role of financial soundness and financial openness in maintaining financial stability and development of banking system.

Financial Soundness of Indian Life Insurance Firms : An Investigation Based on the CARAMELS Framework

Liberalization of the Indian life insurance sector has brought about a lot of opportunities and challenges. The enactment of the IRDAI Act in 1999 brought in a lot of opportunities with the rising presence of private and foreign players in the country's life insurance sector. On the flip side, the Indian life insurance sector experienced severe setbacks in terms of low profits and negative investment yield post 2007-08 owing to the contagion effects of the global financial crisis that erupted in U.S. during the year 2007-08. At the same time, the liberalization of the country's life insurance sector has further raised concerns for the life insurers in ensuring financial soundness for timely payment of assured returns to the policyholders' besides protection of the policyholders' interests. The present study provided an assessment of the financial soundness of 18 life insurance firms in India during the post-deregulation study-period from 2008-09 to 2014-15 in the backdrop of the U.S. financial crisis. In this regard, the ratio-based CARAMELS framework was used in line with the financial soundness indicators (FSIs), as proposed by the researchers of the World Bank and International Monetary Fund (IMF). The present study pointed out the impressive performances of the private life insurers in overpowering the dominance of the state-owned LICI, besides highlighting the contagion effects of the global financial crisis on the country's life insurance sector.

Luxembourg

This Technical Note reviews the stability of Luxembourg’s financial system. The financial soundness indicators for Luxembourg’s financial system, which plays a key role in the intermediation of financial capital, have remained relatively robust in recent years. Household stress test results suggest that households’ solvency would be significantly affected by a drop in income and housing prices and a rise in unemployment. Bank liquidity displays broad resilience, but would be weakened should wholesale funding dry up or funding stress emerge in foreign currencies. Banks were found to be less vulnerable to direct contagion risk through bilateral exposure; however, most banks have considerable cross-border exposure.

Bayesian analysis of working capital management on corporate profitability: evidence from India

PurposeDecisions pertaining to working capital management have pivotal role for firms’ short-term financial decisions. The purpose of this paper is to examine impact of working capital on profitability for Indian corporate entities.Design/methodology/approachBoth classical panel analysis and Bayesian techniques have been employed that provides opportunity not only to perform comparative analysis but also allows flexibility in prior distribution assumptions.FindingsIt is found that longer cash conversion period has detrimental influence on profitability. Financial soundness indicators are playing significant role in determining firm profitability. Larger firms seem to be more profitable and significant as per Bayesian approach. Bayesian approach has led to considerable gain in estimation fit.Practical implicationsObserving the highly skewed distribution of dependent variable, Multivariate Student t-distribution has been considered along with normal distribution to model stochastic term. Accordingly, Bayesian methodology is applied.Originality/valueAnalysis of working capital for firms has been performed in Indian context. Application of Bayesian methodology is performed on balanced panel spanning from 2003 to 2012. As per author’s knowledge, this is the first study which applies Bayesian approach employing panel data for the analysis of working capital management for Indian firms.

Factors Influencing Financial Soundness Indicators in Shipping Companies

Factors Influencing Financial Soundness Indicators in Shipping Companies

Jordan Banks Financial Soundness Indicators

<p><em>The aim of this research paper is to examine the Jordanian banks using financial soundness indicators. This is to establish if Jordanian banks were affected because of the 2007/2008 financial crisis and determine the underlying reasons. The research paper was conducted on 25 banks in Jordan listed in the countries securities exchange. The research methodology used consisted of examining the banks financial records in order to derive four crucial Basel III ratio such as the capital adequacy ratio, the leverage ratio, the liquidity ratio and finally the Total Provisions (As % Of Non-Performing Loans) %. The results revealed that out of the four hypotheses under examination Jordan Banks do not meet Basel financial Indicators for Capital Adequacy Ratio, Jordan Banks does not meet Basel financial Indicators for Liquidity Ratio , Jordan Banks do not meet Basel financial Indicators for Leverage Ratio and Jordan Banks do not meet Basel financial Indicators for Total Provisions (As % Of Non-Performing Loans) ratio. Only one hypothesis was accepted based on the research outcomes. The rest of the hypothesis was rejected since the average trend line did not go below the Basel III required ratio level. The general outcome of the research revealed that Jordanian banks were not affected significantly by the financial crisis.</em></p>

Indian Life Insurance Market and Corporate Performances: A Study of Selected Firms

In the pre-reform era, Life Insurance Corporation of India (LICI) dominated the Indian life insurance market with a market share close to 100 percent. But the situation drastically changed since the enactment of the IRDA Act in 1999. At the end of the FY 2012-13, the market share of LICI stood at around 73 percent with the number of players having risen to 24 in the countrys life insurance sector. One of the reasons for such a decline in the market share of LICI during the post-reform period could be attributed to the increasing competition prevailing in the countrys life insurance sector. At the same time, the liberalization of the life insurance sector for private participation has eventually raised issues about ensuring sound financial performance and solvency of the life insurance companies besides protection of the interest of policyholders. The present study is an attempt to evaluate and compare the financial performances, solvency, and the market concentration of the four leading life insurers in India namely the Life Insurance Corporation of India (LICI), ICICI Prudential Life Insurance Company Limited (ICICI PruLife), HDFC Standard Life Insurance Company Limited (HDFC Standard), and SBI Life Insurance Company Limited (SBI Life), over a span of five successive FYs 2008-09 to 2012-13. In this regard, the CARAMELS model has been used to evaluate the performances of the selected life insurers, based on the Financial Soundness Indicators (FSIs) as published by IMF. In addition to this, the Solvency and the Market Concentration Analyses were also presented for the selected life insurers for the given period. The present study revealed the preexisting dominance of LICI even after 15 years since the privatization of the countrys life insurance sector.

Pilot Project on Concentration and Distribution Measures for a Selected Set of Financial Soundness Indicators

This paper reports the main findings of a pilot project launched in July 2014 by the IMF’s Statistics Department to test augmenting the IMF’s financial soundness indicators (FSIs) with concentration and distribution measures (CDMs) to capture tail risks, concentrations, variations in distributions, and the volatility of indicators over time that simple averages can miss. Volunteer participants reported a trial set of CDMs to assess analytical usefulness and identify concerns such as confidentiality and reporting burden. The results of the pilot suggests that CDMs can help detect financial sector risks, justifying the additional reporting burden but that further input from participating countries and potential data users should be sought; indeed further refinement of the reporting requirements and the CDMs themselves may be needed.

Pilot Project on Concentration and Distribution Measures for a Selected Set of Financial Soundness Indicators

Pilot Project on Concentration and Distribution Measures for a Selected Set of Financial Soundness Indicators

ПОРІВНЯННЯ ФІНАНСОВОЇ СТІЙКОСТІ БАНКІВСЬКИХ СИСТЕМ КРАЇН ЄВРОПИ

У статті здійснено порівняння фінансової стійкості банківських систем країн Європи на основі застосування найбільш вживаних підходів до оцінювання її рівня; визначено основні тенденції зміни рівня фінансової стійкості банківських систем в даних країнах протягом останніх років; проаналізовано поточні заходи з боку державних органів та регуляторів в країнах Європи, спрямовані на підвищення рівня фінансової стійкості банківської системи.

A Study on Decentralization to Inspect for Financial Soundness Indicators in the Evaluation of Local Government

A Study on Decentralization to Inspect for Financial Soundness Indicators in the Evaluation of Local Government

Banking Soundness Indicators and Sovereign Risk in Time of Crisis: The Case of the European Union

AbstractThis study examines the impact of the soundness of the banking sector on sovereign risk of EU member countries during the financial crisis using a selection of financial soundness indicators (FSIs) and the sovereign ratings of the three main rating agencies. Unlike previous literature that typically focuses on the ability of FSIs to foresee banking crises, we estimate ordered response models to assess the power of these indicators to explain sovereign risk. Our results show that evaluations made by the rating agencies are related to the lagged values of core FSIs such that an improvement in these indicators leads to improvements in upcoming sovereign ratings. Hence, reinforced banking soundness would reduce the sovereign risk. Accordingly, governments, supervisors and central banks should pay close attention to the evolution of certain FSIs related to the banking sector, in addition to other variables that have traditionally been taken into account in analysing sovereign risk.

Determinants of nonperforming loans in the Southern Mediterranean countries

The main aim of this paper is to examine the determinants of financial soundness indicators (non-performing loans) of the banking system. There are several factors that lead to the growth or decline of non-performing loans, such as macroeconomic variables. This study uses a sample of six out often countries of the Southern Mediterranean (Tunisia, Morocco, Egypt, Lebanon, Jordan and Turkey) that were analyzed over the period of 2000 to 2012. Our result shows that the non-performing loans negatively depend on the nominal exchange rate, the consumer price index and the gross capital formation.

Effective regulatory regimes: a comparative analysis of GCC financial regulators

Purpose– The purpose of this study is to investigate the effects of the global financial crisis on Gulf Cooperation Council (GCC) bank regulation and the impact on the region and the policies adopted by the regulators to avoid financial panic and contagion.Design/methodology/approach– The author examines GCC countries’ financial soundness indicators in terms of capital adequacy, non-performing loans and provisioning rates, including central bank liquidity support, deposit guarantees, capital injections and monetary easing and policies to mitigate risk assessment, and the monitoring and elimination of practices promoting excessive risk. GCC compliance regimes through multinational organizations and the exposure of the region to cross-border financial linkages to test for financial soundness are assessed.Findings– Overall, results indicate that comprehensive regulatory oversight exists in the GCC in conformity with international standards, and Basel capital adequacy requirements, and that the GCC regulators have acted prudently to establish high coverage in all measures but that gaps exit concerning cross-border surveillance and a need for imposition of capital surcharges on banks deemed high systemic risk. The supervision of Islamic financial institutions and a lack of inter-GCC liquidity support mechanism for this segment are highlighted.Practical implications– The paper shows that the GCC regulators need to address cross-border surveillance, as local banks branch internationally and foreign banks operate in the region.Originality/value– The author is not aware of any similar work that compares the regulatory policies of the GCC.

A Macroprudential Framework for Monitoring and Examining Financial Soundness

This paper describes concepts and tools behind macroprudential monitoring, and the growing importance of macroprudential tools for assessing the stability of financial systems. This paper also employs a macroprudential approach in examining financial soundness and identifying its determinants. Using data from selected developing economies in Asia, South America, and Europe, as well as selected economies from the developed world, panel regressions are estimated to quantify the impacts of the major influences on key financial soundness indicators, including capital adequacy, asset quality, and earnings and profitability.