Management Of Financial Institutions Research Articles

Board Independence, Risk Management and Financial Performance of Financial Institutions in Bangladesh

The main purpose of this study is to examine the relationship of board independence with Risk Management and Financial Performance of listed Financial Institutions in Bangladesh. This study considers 53 financial institutions listed in Dhaka Stock Exchange with the data of year 2014. Results of this research show that the relationships of board independence with risk management and financial performance of financial institutions are insignificant. These findings suggest the possible inefficient role of independent directors of the financial institutions for better risk management and financial performance. The important implications of this study is to enhance the understanding of policy makers, regulators and managers about the role independence directors in improving the performance of financial institutions in Bangladesh which, in turn, assists them to set appropriate rules and regulations to improve the efficiency of independent directors as well as the overall corporate governance practices in Bangladesh.

Robust portfolio decisions for financial institutions

The present paper aims to study a robust-entropic optimal control problem arising in the management of financial institutions. More precisely, we consider an economic agent who manages the portfolio of a financial firm. The manager has the possibility to invest part of the firm's wealth in a classical Black-Scholes type financial market, and also, as the firm is exposed to a stochastic cash flow of liabilities, to proportionally transfer part of its liabilities to a third party as a means of reducing risk. However, model uncertainty aspects are introduced as the manager does not fully trust the model she faces, hence she decides to make her decision robust. By employing robust control and dynamic programming techniques, we provide closed form solutions for the cases of the (ⅰ) logarithmic; (ⅱ) exponential and (ⅲ) power utility functions. Moreover, we provide a detailed study of the limiting behavior, of the associated stochastic differential game at hand, which, in a special case, leads to break down of the solution of the resulting Hamilton-Jacobi-Bellman-Isaacs equation. Finally, we present a detailed numerical study that elucidates the effect of robustness on the optimal decisions of both players.

Comprehensive Credit Risk Management of Policy Export Credit Insurance Institutions

In the context of the turbulent international political situation, the uneven development of social development and the stagnation of economic development in recent years, China's promotion of foreign trade and economic transformation and upgrading and the “Belt and Road” strategy are necessary to pay more attention to the research and control of export credit risks, so policy exports is particularly urgent and important for credit insurance institutions to conduct research on credit risk control activities in support of the “going out” process of Chinese goods and capital. At the same time, unlike general commercial financial institutions, the starting point and foothold of credit risk management of policy financial institutions should be “maximizing social benefits” rather than the “maximum economic benefits” of traditional risk management theories. The target set of the risk management system of the export credit insurance institution is repositioned. Therefore, this paper attempts to sort out the research results of the existing policy-oriented export credit institutions, and from the perspective of comprehensive risk management, through the analysis of the characteristics and difficulties of the credit risk management of policy-oriented export credit insurance institutions, the company builds a comprehensive credit risk management system. The ideas and structure are discussed, and preliminary suggestions are put forward on the basis of this, in order to provide reference for the company to further improve the comprehensive risk management system.

IDENTIFICATION OF THREATS TO FINANCIAL INSTITUTIONS’ ECONOMIC SECURITY AS AN ELEMENT OF THE STATE FINANCIAL SECURITY REGULATION

Government structures should start financial security regulation at the macro-level with the definition of a list of threats, which impact on participants in the financial market can destabilize their activities and lead to negative trends in the financial system functioning and development. The state of financial security of a country depends on the level of economic security in its financial sector. Unstable and unprofitable work of financial institutions poses a threat to the state financial security because it means the inability to fully meet the financial interests of the population and business structures. Therefore, it is important to establish a list of factors that can have a negative impact on their economic security level. Purpose. The research objective is to establish a list of external, hybrid, and internal threats to financial institutions’ economic security for the purposes of regulating the state of financial security of the state. Methodology. For obtaining scientific results, the monographic method and the method of theoretical generalization were used in the article. On the basis of research materials of such scientists as Baranovsky O., Bovsunovsky G., Vovchenko R., Gladkikh D., Furman V., Gallagher H., Makmakhon V., Morrow R., De Oliveira I. S., Stickings A., Elliot D., Matanda E., Adrian T., Liang N. we systematized a list of hybrid and internal threats to financial institutions’ economic security. In the paper, we used analysis techniques to establish trends in the number of bank and non-bank financial institutions in Ukraine during the last four years (2014, 2015, 2016, 2017). A list of internal threats to financial intermediaries’ economic security has been generated while using information, obtained through comparing data from the survey and questionnaire of respondents – experts in the field of financial institutions economic and financial security management. Top management representatives of various types of professional financial market participants were interviewed during 2015, 2016, 2017; their answers have been analysed and the most significant threats to the normal functioning of the financial sector, and hence to the state financial security, have been identified. Results of the survey. It is established what threats to financial institutions economic security, and as a consequence, to the state financial security, can be called traditional ones. Hybrid threats to the Ukrainian financial market and its participants are systematized. The internal threats to the economic security of financial institutions are specified. Thus, the range of threats to the state financial security, the origin of which is the professional activity of economic entities in the financial market, is found out. Practical implications. Today, financial institutions are characterized by a large number of traditional and new threats to economic security, which they should learn in order to cope with because without this action their stable work will be impossible and it will also reduce the level of the country financial security. The list of threats found in the study can be used as an informational basis for the development of state strategies for ensuring the financial security of the state over the next five years. Value/originality. For the first time since gaining independence, Ukraine is experiencing a period of financial instability associated with military actions and the crisis of political power. To traditional threats to economic and financial security at the micro and macro levels, their new variations are added. They can only be detected in a timely manner by an expert in the field of security science and by a specialist in the practice field of managing a financial institution. The result of this study is a synergy of theoretical and practical specialists’ efforts towards the search for effective approaches to the regulation of the state financial security through the threat-oriented management of financial institutions.

Institutional framing and financial inclusion

Purpose The purpose of this paper is to establish the mediating effect of financial literacy in the relationship between institutional framing and financial inclusion among poor households in Uganda with a specific focus on Mokono district. Design/methodology/approach The study adopted a cross-sectional design. Data were analyzed using structural equation modeling (SEM), which adopted Analysis of Moment Structures to test for mediating effect of financial literacy in the relationship between institutional framing and financial inclusion. Findings The results revealed that financial literacy had a partial mediating effect in the relationship between institutional framing and financial inclusion. Furthermore, the results indicated that while institutional framing has a direct effect on financial inclusion, it also exerts an indirect effect through financial literacy. This supports the argument that institutional framing that structure the way how poor households interpret, evaluate, comprehend and make sound financial decisions and choices, is enhanced by knowledge and skills acquired through financial literacy by poor households. Research limitations/implications This study has been limited by adopting only cross-sectional design and quantitative research approach, therefore ignoring longitudinal design and qualitative research approach. Besides, the study uses SEM bootstrap approach and ignores MedGraph method, which is also recommended for testing mediation. Practical implications Since the results suggest that institutional framing of poor households are partially enhanced by financial literacy to increase financial inclusion, policy makers, practitioners and managers of financial institutions should ensure extending financial literacy programs closer to the poor in order to expand the scope of financial inclusion beyond the current sphere. Indeed, financial literacy programs will boost cognitive abilities of poor households resulting into better financial decisions and choices and, hence increase in demand and consumption of financial services. Originality/value The study significantly generates empirical evidence by testing the mediating role of financial literacy in the relationship between institutional framing and financial inclusion using SEM bootstrap approach. The study portrays the influential partial effect of financial literacy in enhancing institutional frames of poor households in order to cause improvement in financial inclusion. Indeed, financial literacy programs that entail acquisition of financial knowledge and skills boost cognitive abilities of poor households to easily interpret, evaluate, comprehend meanings, and take correct decisions and actions on financial matters. The mediating effect of financial literacy in the relationship between institutional framing and financial inclusion seems to be lacking in literature and theory. Thus, the paper is the first to relate the influential partial effect of financial literacy in the relationship between institutional framing and financial inclusion among poor households, especially in a developing country context.

Comparative Analysis of Internal Control System in USA, Japan and Korea

The internal control system is an essential process to maintain and manage an organization. It helps an organization achieve its goal by containing risks that might affect its accomplishment of the goal. The system is considered increasingly important as it is a fundamental procedure to protect a company’s asset by detecting and preventing irregularities and malpractices. This research compares and analyzes laws and regulations pertaining to internal control systems in the U.S., Japan, and Korea and their key elements. The research result is as described below. The U.S. was the first country to establish laws and regulations on corporate internal controls in order to improve its law enforcement and public disclosure guidelines. The U.S. Securities and Exchange Commission (“SEC”) played a leading role in establishing the Foreign Corrupt Practices Act (“FCPA”) to prevent accounting irregularities of the U.S. companies. The Model Business Corporation Act (“MBCA”) provides basic guidelines of internal controls and stipulates that the board of directors meeting shall be responsible for building and operating the internal control system. Moreover, the Act practically enforces practical control over companies in the U.S. by stipulating compulsory internal control (including com- pliance issues) in the listed company manuals of the stock exchange. After that, Sarbanes-Oxley Act (“the SOX Act”) was established to have management and external auditors responsible for internal control in a stronger and stricter manner. The SOX Act provides regulations on accounting, corporate governance, and audit, encompassing all three areas of internal control covered in Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) report. Japan introduced regulations on establishment of the internal control system in its Corporate Act of 2005. Afterwards, due to the unlawful acts of Japanese companies, articles and provisions concerning internal control system were stipulated in the Financial Instruments and Exchange Act (“FIEA”). In particular, establishment of the internal control systems is a legal requirement in Japan’s Corporate Act. According to the Act, every large company in the country shall establish an internal control system and issue a public disclosure on the operational result of the system. Where the operation is considered inappropriate, the system shall face an audit. Japan’s Corporate Act categorizes companies in three major groups; companies with board of directors meeting, those without the board, and other companies with committees. It is to specify the responsibility of directors for internal control. The enforcement decree of the Corporation Act specifies matters concerning the compliance management system, for instance directors’ performance of duty shall be in compliance with laws, regulations, and the articles of incorporation. Moreover, FIEA regulates internal control only in terms of corporate accounting, such as reliability of financial reporting. Hence, the definition of internal control suggested by the Corporation Act and FIFA is different from each other and the discrepancy has led to some controversies. Japan reckons internal control as an integrated framework, similar to as suggested by the COSO report of the U.S. issued in 1992. In line with the context of the COSO report, Japan is trying to reflect circumstances of local companies in its legal system. As such, there are some differences in the relevant laws of the U.S. and Japan. The SOX Act of the U.S. largely focuses on financial reporting in regard of internal control, while internal control function is dependent on the monitoring of the board of directors. However, Japan’s Corporate Act mandates large companies and companies with committees to make financial reports on their internal control system as well as ensures the companies lawfully and efficiently perform their business. Korea has broader regulations about internal control in finance related laws including the Financial Investment Services and Capital Markets Act and the Act on External Audit of Stock Companies. Finance related laws already have articles about internal control standards and compliance officer system. But it was only April 2011 that the Commercial Act of Korea stipulated compliance control standards and compliance officer system. Hence the Act includes only compliance control standards, not internal control standards for companies. To establish the internal control system, a clear definition on internal control organizations shall be established to ensure independence of their status and duties. In addition, an effective internal control system has to be installed, including internal control criteria. At the same time, the management of companies and financial institutions should have strong commitment to actively establish and operate the internal control system. This research limits its study scope to comparison and analysis of internal control related regulations and key factors in the U.S., Japan, and Korea and suggests indications from the analysis result. A following research will provide an empirical study based on the result of this research.

Elicitability and backtesting: Perspectives for banking regulation

Conditional forecasts of risk measures play an important role in internal risk management of financial institutions as well as in regulatory capital calculations. In order to assess forecasting performance of a risk measurement procedure, risk measure forecasts are compared to the realized financial losses over a period of time and a statistical test of correctness of the procedure is conducted. This process is known as backtesting. Such traditional backtests are concerned with assessing some optimality property of a set of risk measure estimates. However, they are not suited to compare different risk estimation procedures. We investigate the proposal of comparative backtests, which are better suited for method comparisons on the basis of forecasting accuracy, but necessitate an elicitable risk measure. We argue that supplementing traditional backtests with comparative backtests will enhance the existing trading book regulatory framework for banks by providing the correct incentive for accuracy of risk measure forecasts. In addition, the comparative backtesting framework could be used by banks internally as well as by researchers to guide selection of forecasting methods. The discussion focuses on three risk measures, Value at Risk, expected shortfall and expectiles, and is supported by a simulation study and data analysis.

A Revised Basel Framework for Coop Banking Institutions Operating in North America

In this research report, we examine the impact of the economic inefficiencies imposed on Credit union through the Basel III accord Credit Unions play a crucial role in the economy as financial intermediaries, more importantly. The Basel committee on banking supervision published the Basel Accords to provide a framework --consistent and appropriate regulation of capital adequacy, liquidity and risk management in financial institutions. The Basel Accords are major steps forward towards more resilient banking operations, however, there are a number of significant problems and challenges for experienced by coop banks and credit unions in North America. The development of a revised Basel framework for Coop Banking institutions and credit unions could pave the way to a more effective and efficient banking environment for credit unions and Coop members, which could lead to the improvement of financial stability and economic growth.

Towards a Goal Programming Methodology for Constructing Equity Mutual Fund Portfolios

The evaluation of the performance of mutual fund [MF] portfolios has been a very interesting research topic not only for researchers, but also for managers of financial, banking and investment institutions. In this paper, a multicriteria decision aid framework is proposed for the construction of MF portfolios. The proposed methodology is based on a Goal Programming approach to determine the proportion of each MF in the constructed portfolios. This methodology is applied on a sample of Indian MFs over the period 2007-2006 with encouraging results.

EFFECT OF OWNERSHIP STRUCTURE ON PERFORMANCE OF FINANCIAL INSTITUTIONS

Purpose: The purpose of the study was to examine the effect of ownership structure on performance of financial institutions.Methodology: The study used explanatory research design. The study used stratified random sampling to select respondents from target population comprising of managers of 46 commercial banks, 52 Micro Finance institutions (MFIs) and 200 SACCOs and a sample size of 239 respondents obtained. Data was collected using questionnaires. Descriptive statistics was presented, while inferential statistics was done using Pearson product moment correlation.Results: Risk monitoring [r = .206, p<.05] had a positive relationship performance of financial institutions. The more there was risk monitoring the higher the performance of financial institutions. A proper risk monitoring practices was used to ensure that risks are in line with financial institution's management goals in order to uncover mistakes at early stages. The risk monitoring had positive relationship on performance of financial institutions (P<0.05). The null hypothesis (HO4) stating that there is no significant effect of risk monitoring on the performance of financial institutions was rejectedUnique contribution to theory, practice and policy: The Central Bank of Kenya and Sacco’s Regulatory Authorities as regulators should make considerations due to the complexity of the financial sector nowadays makes it necessary before any policy analysis should rely upon different indicators and mainly upon those that reflect the whole reality of the industry performance and explicitly consider and carefully impose some regulations that consider different characteristics of ownership structure of financial institutions and the level of risk tolerance. The policy implications might be different across different types of financial institutions. Consider establish effective and efficient risk analysis mechanisms that will assist financial institutions ascertain their risk earlier.

Compliance meets human resources: Monitoring competence and integrity

The financial crisis has created a new interest among regulators in the individual responsibilities of senior managers of financial institutions. In the UK, this has led to the creation of a new senior management regime for banks and insurance companies in which managers can face individual sanctions, including fines, if they have not taken reasonable steps to prevent regulatory breaches. This has led in turn to an interest in using human resources (HR) documentation and techniques to further compliance. It is unlikely, however, that firms will use HR documentation such as appraisals as the basis of compliance monitoring and sanctions against individuals. This is partly because of privacy rules and other legal safeguards for individuals, and partly because such monitoring can lead to a culture of fear and suspicion that encourages secretive behaviour. Instead, firms are more likely to support senior management responsibility through the more positive use of HR techniques, including: ●● creating clear lines of individual accountability; ●● testing these lines through the use of regulatory case studies and root cause analysis; ●● reinforcing these responsibilities through established appraisal processes; ●● promoting better culture through better incentives, enhanced corporate governance, and the use of more sophisticated approaches to analysing and understanding behaviour within organisations and ●● promoting a greater capacity for compliant and ethical behaviour through a recruitment policy that is more focused on diversity and social sensitivity within the workforce.

熊倉修一著, 『日本銀行のプルーデンス政策と金融機関経営-金融機関のリスク管理と日銀考査-』, 白桃書房, 2008年, viii+229頁

熊倉修一著, 『日本銀行のプルーデンス政策と金融機関経営-金融機関のリスク管理と日銀考査-』, 白桃書房, 2008年, viii+229頁

The Predictive Power of the Implied Volatility of Interest Rates: Evidence from USD, EUR, and JPY Swaption

This is the first article to analyze the predictability of implied volatility based on swaption for the major currencies U.S. dollar (USD), Euro (EUR), and Japanese yen (JPY). Managing interest rate risk is of huge importance for risk management in financial institutions, and swaption is an over-the-counter contract and well-used instrument that enables us to test whether the option contains the information required to predict future realized volatility. The result shows that implied volatility has greater power to predict future realized volatility than the GARCH prediction or HV (historical volatility) for the USD and EUR, which is consistent with the equity or futures options markets. However, the GARCH forecast and HV have stronger predictive power for JPY because of the lack of liquidity. <b>TOPICS:</b>Interest-rate and currency swaps, currency, developed

Random orthogonal matrix simulation with exact means, covariances, and multivariate skewness

We develop a simulation algorithm that generates multivariate samples with exact means, covariances, and multivariate skewness. If required for financial applications, absence of arbitrage can be ensured. Potential applications include the simulation of risk factors for the risk management of financial institutions. We use the Kollo measure of multivariate skewness, which is more informative for these applications than the Mardia skewness previously used in this context.

Trust in financial services: the influence of demographics and dispositional characteristics

So far, very little attention has been paid to examining consumer perceptions of trust from an interdisciplinary perspective. The purpose of this study is to examine how consumer trusting belief and disposition to trust within the financial services sector vary on the basis of individual demographic differences in trust. The research provides new insights into how consumers with higher dispositional trust have higher institutional trust and higher trusting belief and how consumers’ trusting belief significantly differs according to their demographic background in terms of age, marital status, ethnicity and gross annual income. The findings offer useful insights for the managers in financial institutions to carefully consider the impact of the influence of these individual differences on consumer behaviour in order to serve the needs of consumers in their target market and be able to design financial products and develop trust building strategies to attract and retain them. They also call for the action of the regulators and the financial institutions to play their part in building strong institutional systems that contribute to engendering higher levels of consumer trust.

IT benefits management in financial institutions: Practices and barriers

The adoption of Benefits Management (BM) is important to ensure that information technology (IT) projects add value to the organization; however, the literature still lacks empirical evidence about how organizations are adopting IT BM. The aim of this study is to further investigate how IT BM is adopted in Brazilian financial institutions. A multiple case study approach was implemented at four leading financial institutions in Brazil by means of interviews, document analysis and a survey of 186 IT professionals. The study identified six practices affecting the adoption of IT BM (bonuses are linked to benefits, PMO is responsible for developing an organisational BM process, Net Present Value is used for selecting projects, goals are set before approval, executive committee approves projects, benefits are measured after deployments) and seven barriers to its adoption (difficulty adopting BM in agile projects, benefits are difficult to quantify, process is slow and bureaucratic, controlling costs/benefits are non-mandatory activities, lack of knowledge of BM, difficulty using techniques, resistance to new controls), some of which are newly identified. Finally, an action plan to resolve these issues is presented.

Posouzení modelů odhadu tržního rizika s využitím DEA přístupu

Measuring and managing of financial risks is an essential part of the management of financial institutions. The appropriate risk management should lead to an efficient allocation of available funds. Approaches based on Value at Risk measure have been used as a means for measuring market risk since the late 20th century, although regulators newly suggest to apply more complex method of Expected Shortfall. While evaluating models for market risk estimation based on Value at Risk is relatively simple and involves so-called backtesting procedure, in the case of Expected Shortfall we cannot apply similar procedure. In this article we therefore focus on an alternative method for comprehensive evaluation of VaR models at various significance levels by means of data envelopment analysis (DEA). This approach should lead to the adoption of the model which is also suitable in terms of the Expected Shortfall criterion. Based on the illustrative results from the US stock market we conclude that NIG model and historical simulation should be preferred to normal distribution and GARCH model. We can also recommend to estimate the parameters from the period slightly shorter than two years.

A data analytics framework for key financial factors

PurposeThe purpose of this paper is to identify a subset of key financial ratios and factors that provide the best discriminating power to distinguish between creditworthy companies (CWCs) and less creditworthy companies (LCWCs) in the USA with the proposed method.Design/methodology/approachA proposed framework of Bisection Method Based on Tabu Search + Support Vector Machines (BMTS + SVM) is used to select subset of financial ratios from a pool of candidate ratios. The selected ratios and their corresponding financial factors are considered as the key financial ratios and factors that provide the best discriminating power to distinguish between CWCs and LCWCs. The authors collected financial data for the US companies and then identify the key financial ratios and factors which the selected key financial ratios belong.FindingsIt is found that the four selected financial ratios from the proposed method and eight financial ratios which are used by Standard & Poor for their credit-rating system can be attributed to the same four financial factors, namely, cash flow factor, profitability factor, solvency factor and leverage factor. This result lends support that the proposed method can be applied to identify key financial factors to differentiate CWCs and LCWCs.Practical implicationsThis study provides a tool for managers in financial institutions to gain better understanding about the credit risk of their applicants by focusing on a parsimonious model with fewer ratios in the key financial factors. In addition, companies that attempt to borrow money from financial institutions can also use these key financial ratios and factors as reference to attain clearer vision on what are the most important factors for being considered a creditworthy company and thus develop specific strategies to improve their financial performance.Originality/valueBased on data analytic techniques, this paper identifies key financial ratios and factors for examining the creditworthiness of US companies with the proposed framework using BMTS + SVM method.

Risk governance, structures, culture, and behavior: A view from the inside

AbstractManuscript TypeEmpiricalResearch Questions/IssuesRisk governance (emphasizing internal structures and risk culture) is a relatively new approach to the governance of financial institutions that is being widely adopted in the industry. Due to obvious assessment challenges, to date no evidence exists regarding the effectiveness of risk structures nor the status of risk culture in financial institutions. We therefore investigate the extent to which bank employees view risk structures as effective and risk culture as favorable. We also investigate how risk structures and risk culture together influence risk behavior.Research Findings/InsightsRisk structures were typically rated as effective with the exception of remuneration. Risk culture varied at the business unit level as well as by firm and country. Senior leaders tended to have a rosier perception of risk culture than staff generally. Favorable risk culture together with effective risk structures was associated with high levels of desirable and low levels of undesirable risk behavior.Theoretical/Academic ImplicationsThe study provides a window into internal bank governance using a novel survey methodology. Many governance papers rely exclusively on external measures of governance; these do not guarantee effective internal risk governance.Practitioner/Policy ImplicationsFurther managerial and supervisory attention should be paid to ensure that culture and remuneration structures support risk management in financial institutions. As risk culture varies at the local level, it should be measured and managed at the local level. Senior leaders cannot rely on their own perceptions but should rely instead on independent assessments of risk culture.

Awareness of Knowledge Management in Nepalese Financial Institutions

Knowledge Management (KM) is one of the buzzwords prevailing in the management circles. It is seen as a tool which can create a strategic impact. Organizations which are unaware of knowledge management (KM) and its concepts are considered illiterate in business context. In order to thrive in this turbulent market, an organization must be familiar with all concepts pertaining to its intellectual assets, i.e. Knowledge, and all other activities involved in managing its intangible assets, i.e. KM through various practices, suitable strategy and processes,. Banks and financial institutions as drivers of economic growth play a major role in prosperity and innovativeness of almost all countries worldwide. The main objective of this study is to identify the awareness of knowledge management in financial institutions of Nepal. In this study, samples of 385 respondents were selected randomly from four different types of financial institutions of Kathmandu, Nepal. The statistical analysis was done to draw the conclusion. The results clearly show that the level of KM awareness amongst Nepalese financial institutions is medium in which some companies understand the principles of KM but they observe many challenges and difficulties in pursuing KM implementation. Finally, this paper concludes that those institutions which are aware of the basic concepts and principle of KM can effectively manage knowledge resources; are more innovative and have better performance than others who do not takes this factor into account.Journal of Advanced Academic Research, Vol. 3, No. 3, 2016