Implementation Of Basel Research Articles

Profitability Determinants of Non-bank Financial Institutions under Basel Regulations: Evidence from a Frontier Market

This article examines the impact of firm-specific and macroeconomic variables on non-bank financial institution (NBFI) profitability in Bangladesh undertaking a gradual implementation of Basel III regulatory standards. One-step difference generalized method of moments (GMM) model is applied on a dataset comprising 15 NBFIs listed on the bourse of Dhaka Stock Exchange (DSE) Limited with a time span of 9 years ranging from 2011 to 2019. In this study, NBFI profitability is measured by return on asset (ROA) and return on equity (ROE). The results of the panel data analysis demonstrate that capital adequacy ratio (CAR), non-performing loans (NPL), gross domestic product (GDP) and inflation (INF) affect NBFI profitability negatively whereas debt to equity ratio (DER) and cost of funds (COF) have a statistically significant and positive impact on the same. The findings of this study are of the essence for policymakers, regulators, investors and other stakeholders in the financial market.

Quantitative Analysis of the Impact of Basel II Accord on Greek Banks: The Application of IRB Approach

In this paper, after conducting a series of alternative scenarios for various factors, we examine the implementation of Basel II capital adequacy rules on Greek Banks, according to the Internal Rating Based Approach (IRB), introduced by Basel II Accord. The IRB approach allows the development and use of models measuring the three main risks (credit, market, and operational). However, up to now, the researches that have been examined these risks for Greek Banks are very limited, and the impact of adverse events on the loan portfolio of the Greek Banking System has not yet been satisfactorily evaluated. In this empirical study, the Greek Banks are clustered into three separate groups, in particularly large, medium, and small size. The model formed provides information for supervisory reasons as for the level of capital maintained, depending on the nature of activities and risks taken by a Bank. The results show that the IRB approach is more appropriate for larger Banks, which can invest in risk management and maximize profit to risk ratios. For Banks with lower capital, this methodology could entail high risks. From the study, it was, also observed that retail portfolios and mortgage portfolios are favored due to credit risk, a benefit that is attributed to risk dispersion and collaterals (mortgages).

THE CURRENT STAGE OF BASEL III APPLICATION AND ITS CONSEQUENCE ON FINANCIAL STABILITY: EVIDENCE FROM KOSOVO

The study aims to explore the divergences around the implementation of the Basel III agreement, since this agreement is considered the core of the international regulatory response to the financial crisis, setting the strictest criteria for capital structure and risk assessment. This paper explains the current level of legislation that applies in Kosovo, as well as possible divergences with the criteria set by Basel III. It is argued that the national authority, explicitly the CBK, to decide on the implementation of Basel III, had to agree on three aspects and potentially conflicting between them: the stability of the banking sector, competition, and care for economic growth. Finally, the study concluded that Kosovo is implementing Basel III regulations with greater ease and attention, contributing to banking sector stability, competitiveness, and economic growth.

Changes in New Private Law of the Czech Republic and Implementation of Basel III

Competition in the financial market puts currently new requirements for cost reduction on financial institutions. Available sources of cost reduction are seen i.a. in minimizing legal risks, which can reduce the uncertainty associated with enforcement and interpretation of legal acts, treaties and regulations in the field of contractual obligations. In this regard, banks in the Czech Republic are looking for new ways to reduce costs in the ongoing implementation of Basel II and preparation for implementation of Basel III. The central problem to which attention is focused is to ensure the required level of capital adequacy. This is conditioned i.a. by their risk management system. Capital adequacy may affect credit risk substantially. Besides others, the level of credit risk may be affected to a considerable extent by application of hedging instruments. This paper presents conclusions of the executed comparison of the existing and new private law provisions in the Czech Republic and, based on that, draws new opportunities and difficulties for banks in managing their credit risk and capital adequacy. The focus is only on the hedging instruments that may affect the activities of banks in a significant way.

Implementation of Internal Capital Adequacy and Assessment Process in Vietnamese Commercial Banks

The internal capital adequacy and assessment process (ICAAP) was first introduced in the second pillar of Basel II in 2004 to offset the deficiencies of Basel I and capital adequacy regulations in the first pillar of Basel II. This process is aimed at identifying and measuring risks generated in banks’ activities, and then provides the requirements for internal capital levels and methods to raise capital to deal with these risks. In fact, the implementation of Basel II and ICAAP in Vietnamese commercial banks has attained notable achievements, but it also revealed some major weaknesses. The purpose of this research is to evaluate the implementation of ICAAP in Vietnamese commercial banks in eight components of the ICAAP addressed by Basel II using the survey method and then to simulate the implementation of ICAAP in a Vietnamese commercial bank. From the facts and the simulation of the ICAAP framework in this study, the authors offer some suggestions for Vietnamese commercial banks to implement ICAAP effectively in their banking operations.

“Sub-debt trap”: a real effect of an ill-design adoption of basel accord in the Bangladeshi banking industry

PurposeThe purpose of this paper is to investigate the impact of basel accord on the Bangladeshi bank performance including Islamic banks and the role of subordinated debt (sub-debt) as basel regulatory capital (BRC).Design/methodology/approachThe authors conducted the empirical investigation by adopting a quantitative approach and using the secondary data available in the annual reports of the sample banks between 2009 and 2018. This paper develops an econometric model to compare and analyze the regression result under two states of capital-to-risk adjusted assets ratio (CRAR) with sub-debt and CRAR without sub-debt. This paper analyzes the impact of sub-debt in the largest Islamic bank for the year 2007 as a case study for endorsing the findings.FindingsThis paper finds that CRAR has positive alignments with return on equity (ROE) and cash dividend when sub-debt is considered as Tier 2 capital. This paper observes that the huge bad loan write-off supports to downsize the asset size thus temporarily enhance the return on assets (ROA). In a nutshell, sub-debt gives banks an ill incentive to disburse steady cash dividends instead of injecting genuine equity capital, encouraging them to take more credit risk. In fact, more private commercial banks (PCBs) issued huge sub-debts between 2009 and 2018 under a unique arrangement, which the authors termed as the “sub-debt trap.”Research limitations/implicationsThis paper draws policy implications for the banking regulator to identify and rectify a systemic problem of the “sub-debt trap” which hinders the regulatory purpose from the implementation of basel accord II and III. A limitation of this study is the authors shed analytical light on Bangladeshi banks, i.e. it a single country analysis which may not be generalized to other developing countries except matching with a similar context.Originality/valueThe paper contributes to accumulating empirical studies on the effectiveness of basel accord implementation in developing countries. In most of the developing countries, where institutional loopholes are a major concern, the research provides evidence that how weak institutional settings are largely responsible for harvesting the potential benefit from micro-prudential regulation such as the basel accord. To shed analytical light on developing country context, the study document that sub-debt has been instrumentalized to maintain minimum capital ratio and banks managers tends more focus on improving ROE instead of ROA. The findings of the study are supportive to other developing countries where sub-debt considered as BRC and issued through private placement. To the best of the authors’ knowledge, it is the first attempt to cast doubt on the impact of sub-debt as a BRC, given the uniqueness of the Bangladeshi banking industry, on the PCBs including Islamic banks.

The Power of Delay: Banking System Structure and Implementation of the Basel Accords

AbstractRecent developments in the international banking system, especially the 2007–9 crisis and subsequent wave of postcrisis regulation, have drawn increasing attention to the structural power of banks and banking systems. States need a functioning financial system to ensure the overall health of their economies, so states must shape policy to protect their financial firms. National financial systems may be dominated either by banks or by capital markets. In states where banks dominate provision of capital, states must shape policy to protect their banks because of their structural importance, independent of any lobbying or other direct action on the part of banks to exercise instrumental power. The entangling of structural and instrumental power means studying differences in structural power requires either careful case-study work or cross-national comparison of responses to a common shock. The implementation of the 2011 Basel III Accords provides just such an opportunity. This article offers a quantitative analysis of a new dataset of implementation of Basel III components in the Basel Committee on Banking Stability member states from 2011 to 2019 and demonstrates the structural power of banks in bank-based systems to accelerate implementation of favorable policies and slow implementation of unfavorable ones.

The implication of banking regulation on bank business model: evidence from the ASEAN countries

Purpose The purpose of this paper is to examine to what extent is the impact of Basel II adoption on bank business models in the emerging market of selected ASEAN member states. Design/methodology/approach To evaluate the impact of the Basel II regulation on banking business models, a difference-in-differences estimation approach is used. This study defines bank business models using diversification index of a modified Herfindahl–Hirschman Index. Findings The findings suggest that the Basel II framework only affects banks’ income diversification, while there is no evidence that it leads to funding and asset diversification. Under the Basel II accord, banks have adjusted their business models by diversifying their sources of income to avoid the obligation for keeping more capital; in contrast, a less developed financial market structure and a dependency on customer deposits are creating difficulties for banks in diversifying their funding and asset structure. Research limitations/implications The banking sample are taken only from ASEAN countries. Practical implications The findings provide important implication on the regulatory perspective, which is the implementation of Basel II framework induces higher intensity for the use of non-interest income activities. Including in these activities are trading and derivatives. Accordingly, the financial authorities should take with care the use of trading and derivatives products in the banking industry which is already embedded in current Basel framework, the Basel III Accord. Originality/value The paper provides direct evidence on the impact of Basel II on bank business models in the emerging markets of ASEAN banking sectors.

Basel III in India: a double-edged sword

PurposeThis paper aims to develop a holistic understanding of the state of implementation of the Basel III regulation in India. It offers essential insights related to its impact on the macroeconomy, non-performing assets, capital flows and modifications required for the Indian banking sector. Another central aspect of this study is the identification of challenges faced by bankers in implementing Basel III in India.Design/methodology/approachA survey was conducted with the help of a well-structured close-ended questionnaire. It was based on six themes identified after a comprehensive review of the literature. Seven experts validated the construction of the questionnaire. A total of 18 responses (42.8%) were received.FindingsThe findings substantiate the importance of Basel III regulations. Although high costs and roadblocks are involved in its implementation, yet, the benefits are notable. Banking experts sense the necessity to modify the Tier 1 ratio, risk-weights and ratings. It is felt that credit ratings will impact the capital and investment flows received by India.Research limitations/implicationsThe number of responses limits the ability to conduct several statistical tests.Practical implicationsThe findings support the industry’s view that Basel III focuses more on industrialized countries and that many emerging countries lack the technology and infrastructure to implement it.Originality/valueSince the implementation of Basel, the norm is a continuous process; the findings provide vital insights to regulators and academicians focusing on the Indian banking sector about its current state to aid in developing a future roadmap. This paper delivers important values as follows: a holistic view of banking experts on Basel III in India, required modifications, its impact and future scope of research in this area.

Basel regulatory capital formula revised

Credit capital requirement is a key component of Basel implementation to assess a bank’s capital adequacy. Under the Internal Rating-Based approach, some risk parameters, including Asset Correlation, are implicit assumptions that cannot be observed directly. While some heuristic formulae of Asset Correlation for different business segments are provided by Basel, they may not be fully consistent with each bank’s loss experience and thus may cause systematic underestimation of banks’ capital requirement. To address this issue, we derive an equivalent capital formula in such way that the unobservable Asset Correlation is replaced by an observable and well-understood parameter called Default Volatility, which can be calibrated based on banks’ historical loss experience. This new approach simplifies parameter estimation process without requiring additional data, as well as making risk analysis such as stress testing more credible.

Impact of Bank Capital and Monetary policy on Lending Behavior of USA Banking Sector Before and After Global Financial Crises

This study investigates the impact of bank capital, capital structure and monetary policy on the lending behavior of USA banks before and after global financial crises. For this purpose, sample data is collected from the annual reports of top ten banks of USA from 2001 to 2017. A panel unit root is applied to check the stationarity of variables. In order to explain the impact of bank capital, capital structure and monetary policy on lending behavior of USA banks, fixed effect and random effect model have been used. The sample data has been divided into two sets. First data set is taken from 2001 to 2008 before financial crises. Second data set is taken from 2009 to 2017 after financial crises and all above tests have been applied on these data sets. Furthermore, in order to measure the lending behavior three types of lending have been selected lending to consumers, lending to real estate and lending to commercial & industrial sector of USA banks. In order to get the better picture of lending behavior of USA banks before and after financial crises: paired sample T-test has been applied on the data of lending before and after financial crises. Results of paired sample T-test showed there is significant difference in lending to consumers, lending to commercial & industrial sector and lending to real estate before and after financial crises of USA banks because of the implementation of Basel III. So, we accept the alternative hypothesis for our second research question. Findings suggested that impact of bank capital, capital structure and monetary policy has significant impact on the lending behavior before and after the global financial crises with the positive change of sixteen percent in R-squared value. So, we accept the alternative hypothesis for our first research question. The results of coefficients shows that before financial crises (2001 to 2008) discounted interest rates have more significant impact on the lending made to consumers but after the global financial crises (2009 to 2017) discounted interest rates, capital structure and tier 1 capital ratio have more significant impact on the loan made to consumers. The results of coefficients shows that before the financial crises (2001 to 2008) discounted interest rates have more significant impact on the loan made to commercial and industrial sector but after the global financial crises (2009 to 2017) discounted interest rates, capital structure and tier 1 capital ratio have more significant impact on the loan made to commercial and industrial sector. The results of coefficients shows that before financial crises (2001 to 2008) discounted interest rates have more significant impact on the loan made to real estate but after the global financial crises (2009 to 2017) discounted interest rates and capital structure have more significant impact on the loan made to real estate. Findings of our study are aligned with Swamy (2015), who investigated the impact of bank capital on lending spreads and found that increase in capital ratio of banks would also increase their lending spreads. Our results are also matched with the findings of (Kosak et al., 2015), those concluded that capital structure significantly affect the loan growth of banks. Our results are also aligned with Chami & Cosimano (2010), they found that change in monetary policy due to Basel Accord would lead to a change in bank capital and bank loans.

Factors influencing the implementation of Basel III: An empirical analysis of the UAE banks

Basel III accord was introduced in 2010 to support banks facing the sever effect of the 2007–2008 financial crisis in terms of liquidity and capital adequacy. The importance of this paper stems from the investigation of the implementation of this Accord in the UAE, and what are the reasons behind the effective implementation. While some previous studies on the UAE have examined Basel Accord, no studies have so far examined the effective implementation of Basel III. In this study, a modified questionnaire was used, a total of 90 bank senior managers responded to the questionnaire and their responses were used to answer the research questions and hypotheses. The results of the regression analysis support the hypotheses proposing a significant positive relationship between implementation effectiveness and expected benefits and availability of resources needed. The results of the analysis did not support the influence of the variables of awareness, the role of management, and the role of the central bank. Based on the findings of this study, three recommendations were made. First, to promote the effective implementation of the Basel Accords in the UAE’s banking sector. Second, banks should review current implementation processes and plans to ensure that employees understand the requirements for implementing Basel III. And third, the UAE Central Bank should be more involved in setting a framework for implementing regulations to ensure the effective implementation of Basel III.

Risk-sensitive Basel regulations and firms’ access to credit: Direct and indirect effects

This paper examines the impact of risk-sensitive Basel regulations on debt financing of firms around the world. It investigates how firms cope with the impact through adjustments to their financing sources and capital investments. We find that the implementation of Basel II regulations is associated with reduced credit availability for lower-rated firms. Such firms mitigate the shortage in bank credit through increased reliance on accounts payable, lower payouts to shareholders, and reduced capital investments. The impact of the capital regulation is lower in countries that rely on the internal ratings-based approach. The key results are robust to controls for banking crises, bank-specific controls, and the inclusion of loan-level information. The findings of this paper substantially contribute to the understanding of the real effects of risk-sensitive bank capital regulations.

CURRENT CREDITING INSTRUMENTS INFLUENCING INVESTMENT CLIMATE IN UKRAINE

The article investigates modern approaches to define the concept of investment climate. The latter is considered to remain unfavorable in Ukraine, although there are some positive changes in this direction. The factors which determine the state of investment climate are identified and structured in this paper. They include social, institutional, economic, integration and man-made ones. The key instruments which might influence the investment climate of Ukraine are determined. It is underlined that their effective use will improve the state of investment climate in the country nowadays.
 The change of investment position of Ukraine in the world’s top rankings is underlined. According to the most authoritative Ease of Doing Business ranking, the rate of Ukraine is 71st at the beginning of 2019. Ukraine has considerably improved its rate recently. The most significant changes have been observed in the field of customs policy whereas the most problematic one is the bankruptcy procedures.
 The research of the current state of investment activity in Ukraine has revealed an increase in the inflow of foreign direct investments, although their size compared to the needs of the real sector of the economy is still insignificant. The factors constraining the investment activity in Ukraine are formulated.
 The usage of the relevant crediting instruments influencing the investment climate of Ukraine in order to improve it and to increase the activity of domestic and foreign investors is suggested. It is proved that tax, budgetary and crediting instruments of currency regulation are currently the most essential. Positive influence of currency liberalization on the investment climate of Ukraine is revealed. The legalization of crypto currency operations is recommended. It is also necessary to implement modern electronic accounting methods (blockchain technology) into financial practice and accelerate the implementation of Basel III international standards.
 In Ukraine the legalization of cryptocurrencies will lead to a GDP growth, development of the new ways of running banking business and investment activity encouragement.

The Long-Term Effects of Capital Requirements

We build a stylized dynamic general equilibrium model with financial frictions to analyze costs and benefits of capital requirements in the short-term and long-term. We show that since increasing capital requirements limits the aggregate loan supply, the equilibrium loan rate spread increases, which raises bank profitability and the market-to-book value of bank capital. Hence, banks build up larger capital buffers which (i) lowers the public losses in case of a systemic crisis and (ii) restores the banking sector’s lending capacity after the short-term credit crunch induced by tighter regulation. We confirm our model’s dynamic implications in a panel VAR estimation, which suggests that bank lending has even increased in the long-run after the implementation of Basel III capital regulation.

Suggestions on the implementation of Basel III under the COVID-19

Affected by the sudden outbreak of COVID-19 in early 2020, the global economic recession and financial fluctuations have had a huge impact on the asset quality and daily operations of banks, and also challenged the banks to support the recovery of the real economy. In order to maintain the stability of the global banking industry and the recovery of the economy, the Basel Committee delayed the implementation of Basel III standards for one year at the end of March 2020, and further strengthened the supervision of the global banking industry. This paper attempts to show that the implementation of Basel III under the COVID-19, and then put forward suggestions for the next step of implementation.

The real impact of ratings-based capital rules on the finance-growth nexus

We investigate whether ratings-based capital regulation has affected the finance-growth nexus via a foreign credit channel. Using quarterly data on short to medium term real GDP growth and cross-border bank lending flows from G-10 countries to 67 recipient countries, we find that since the implementation of Basel 2 capital rules, risk weight reductions mapped to sovereign credit rating upgrades have stimulated short-term economic growth in investment grade recipients but hampered growth in non-investment grade recipients. The impact of these rating upgrades is strongest in the first year and then reverses from the third year and onwards. On the other hand, there is a consistent and lasting negative impact of risk weight increases due to rating downgrades across all recipient countries. The adverse effects of ratings-based capital regulation on foreign bank credit supply and economic growth are compounded in countries with more corruption and less competitive banking sectors and are attenuated with greater political stability.

Bank regulation and systemic risk: cross country evidence

Using data for banks from 65 countries for the period 2001–2013, we investigate the impact of bank regulation and supervision on individual banks’ systemic risk. Our cross-country empirical findings show that bank activity restriction, initial capital stringency and prompt corrective action are all positively related to systemic risk, measured by Marginal Expected Shortfall. We use the staggered timing of the implementation of Basel II regulation across countries as an exogenous event and use latitude for instrumental variable analysis to alleviate the endogeneity concern. Our results also hold for various robustness tests. We further find that the level of equity banks can alleviate such effect, while bank size is likely to enhance the effect, supporting our conjecture that the impact of bank regulation and supervision on systemic risk is through bank’s capital shortfall. Our results do not argue against bank regulation, but rather focus on the design and implementation of regulation.

Особенности имплементации принципов Базеля III в банковское законодательство Российской Федерации

The Russian Federation has formed the foundation for the full implementation of Basel III recommendations in the Russian banking system. However, this process is not yet complete, due to both subjective and objective reasons. The article analyzes the objective reasons for the postponement of the full implementation of the Basel III principles due to the COVID-19 pandemic. The features of the introduction into Russian practice of procedures and approaches for calculating the indicator and ratio of short-term liquidity, as well as assessing operational risks. On the basis of the analysis carried out, recommendations for improving banking legislation are given.

Qualitative Assessment of Basel III Liquidity Standards and its Application in the UAE

The Basel Committee for Banking and Supervision (BCBS) introduced two key liquidity ratios to strengthen the short- and long-term liquidity positions of the banks around the globe. These ratios were designed to achieve two key distinct objectives. Firstly, to encourage banks' short-term resilience to the liquidity risks by ensuring there are sufficient high-quality liquid assets to survive a significant stress which may last for 30 days. Calculation of this ratio is called as Liquidity Coverage Ratio (LCR). Secondly, to promote bank resilience over a longer time horizon, at least annually, by creating additional incentives for banks to fund their activities with more stable sources of funding. This led to creation of Net Stable Funding Ratio (NSFR). While these structural ratios are mostly quantitative, the underlying factors that are needed to calculate these ratios include qualitative factors as well. The paper analyzed the implementation of Basel III standards for the banking sector in the UAE. In particular, the timelines specified by the Central bank of the UAE and its implementation by the Domestic-Systemically Important Banks (D-SIBs) in the UAE was tracked by this paper. The study found a disconnect between the disclosure requirements by Basel III and disclosure made in the published annual financial statements of the banks. The study also discussed the extent of disclosures made by the D-SIBs and how relevant disclosures may improve the transparency of the liquidity risk management of the bank.
 JEL Classification Codes: E58, G32, G38.