Microprudential Regulation Research Articles

Intraday liquidity risk: based on microprudential and macroprudential regulatory perspective

ABSTRACT This paper addresses the effectiveness of current regulations on intraday liquidity risk through a comprehensive analysis using network structure and payment flow characteristics of China’s large-value payment system. Utilizing simulation and econometric methods, it examines the factors influencing the upper limit of liquidity levels required by payment system participants to satisfy real-time gross settlement (RTGS) and its tail distribution. The results of the study show that: (1) in a network topology, the characteristics of a node significantly affect its demand for intraday liquidity and its exposure to intraday liquidity risk; (2) microprudential regulation based only on individuals not only fails to achieve macroprudential regulatory objectives, but also fails to realize individual microprudential regulatory objectives, and at the same time, it reduces the efficiency of liquidity use; (3) reallocating intraday liquidity among participants based on systemic effects not only saves liquidity overall, but also achieves the macroprudential regulatory objective of liquidity at a high probability level. This study provides valuable theoretical and practical insights for regulators and financial managers, emphasizing the importance of effective regulation to prevent the evolution of intraday liquidity risk into systemic risk.

Interest Rate Risk and Cross-Sectional Effects of Micro-Prudential Regulation

Interest Rate Risk and Cross-Sectional Effects of Micro-Prudential Regulation

The ontology of financial markets and the policy paradigm of financial regulation

ABSTRACT This study aims to discern the ontological assumptions of the financial regulatory paradigm to clarify the meaning of a paradigm shift and the significance of the macroprudential turn in global financial regulation. An ontological understanding of financial markets is a key requirement to understand the hard core assumptions of the financial regulatory paradigm because the conflation of distinct ontologies makes it impossible to maintain the internal coherence of the financial regulatory paradigm. In terms of the ontological assumptions of the financial regulatory paradigm, the macroprudential turn in global financial regulations after the 2008 financial crisis fell short of leading to a paradigm shift in global financial regulation since it brought about an explanatory rather than ontological change. Macroprudential ideas rejected the explanatory reductionism of existing microprudential regulation without abandoning its ontological individualism.

PENGERTIAN, RUANG LINGKUP PERBANKAN, TUJUAN, LATAR BELAKANG, PRINSIP DAN SEJARAH PERBANKAN SYARIAH DI INDONESIA

In the era of Law Number 10 of 1998, banking law policies in Indonesia adhered to a dual banking system. Research using qualitative methods in the library (library research). Sharia Banking aims to support the implementation of national development in order to improve justice, togetherness, and equal distribution of people's welfare. The legal basis for bank operations using the sharia system. The history of banking in Indonesia is actually the forerunner of conventional banking. This history began when Indonesia was colonized by the Dutch. At that time, there was already a bank called Bank Couranten Bank Van Leening. The bank's aim was to shoot and manage VOC finances. The Islamic bank that first appeared or stood in Indonesia was Bank Muamalat Indonesia. The principles of Islamic banking that are in accordance with Islamic law include the absence of elements of joy, maysir, gharar, and buying and selling of illicit goods. OJK's role in regulating and supervising banks is very broad in terms of microprudential regulation and supervision.

Required Capital for Long-Run Risks

One of the objectives of the recent microprudential regulation is to separate the computation of required capital for short-run and long-run risks. This paper provides a coherent framework to define, compute, and update these components. The approach is developed in greater details in the context of the transition to low-carbon economies. A numerical example is given.

Micro-Prudential Regulation and Loan Monitoring

We evaluate the value of loan monitoring systems for a bank controlled by a micro-prudential regulator. We investigate dynamic systems (an information channel that generates information flow about quality) and static systems (where the lender receives a single signal about loan quality). We find that dynamic systems carry a regulatory charge that dominates the benefit of the systems and are therefore unprofitable, whereas static systems have positive value. Specifically, lenders can profitably dismantle their dynamic systems and instead turn to static monitoring systems. The model reveals, therefore, a potential weakness of micro-prudential regulation.

The real effects of capital requirements and monetary policy: Evidence from the United Kingdom

We examine how changes in capital requirements and monetary policy shocks affect corporate investment during a credit boom. Our empirical analysis uses data on SMEs in the UK between 1998 and 2006, a period when monetary policy and microprudential regulation were set by independent institutions. We find that an increase in bank-specific capital requirements led to a contraction in corporate debt and investment, but only for firms with short bank relationships. This suggests that relationships between firms and banks are crucial for the transmission of regulatory shocks. Long relationships also attenuate the impact of monetary policy shocks, but to a smaller degree than for capital requirement changes. We also find that the two policies do not dampen or amplify the effect of each other, but their effects vary with the size of banks’ capital buffers and the creditworthiness of firms.

“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.

China’s long march towards the twin peaks model of financial regulation

ABSTRACT This article traces the evolution of China’s financial regulatory system, and its trend towards what could be referred to as a ‘quasi-Twin Peaks’ model. It then outlines the ongoing challenges with the current sector-based framework, including regulatory competition, regulatory arbitrage and inconsistent regulatory mandates. It then proposes a pathway by which China could adopt a true Twin Peaks model. Finally, the article outlines recent developments in consumer protection, and draws parallel with developments in two Twin Peaks jurisdictions: the UK and South Africa. The article concludes by arguing that the adoption of an overarching framework for consumer protection in banking products and payment services underscores the need for a unified framework that applies to all products and services in the financial sector, including those administered by the CSRC in the securities sector. It also highlights the benefits of separating market conduct and consumer protection regulation, from macro-prudential and micro-prudential regulation, and provides additional support for the argument that the ultimate destination to which China should march, is the Twin Peaks model of financial regulation. This would be in line with the emerging direction of China’s regulatory agency reform, and would better accommodate ongoing financial innovation and cross-sector cooperation and integration.

Are house prices overvalued in Spain? A regional approach

The collapse of the Spanish housing market during the global financial crisis highlighted the dire consequences of house price overvaluation on the real economy and the banking sector. In this paper we evaluate whether real house prices in Spain are justified by their long-run fundamentals, such as per capita real income, unemployment rate and population density. We account for heterogeneous provincial developments by using a regional dataset with an extended time span. We show that house prices were overvalued in most Spanish provinces in 2007, at the peak of the housing sector expansion, but there was substantial regional heterogeneity. By contrast, we find evidence that real house prices have been undervalued in most provinces in recent years. As overvaluation is mostly explained by high household leverage and the business cycle, it should be addressed with macro- and micro-prudential regulation of the banking system to prevent excessive credit growth.

Debt Expansion as “Relief and Rescue” at the Time of the Covid-19 Pandemic: Insights from the Legal Theory of Finance

Debt Expansion as "Relief and Rescue" at the Time of the Covid-19 Pandemic:Insights from the Legal Theory of Finance Iris H-Y Chiu (bio), Andreas Kokkinis (bio), and Andrea Miglionico (bio) I. Introduction The outbreak of the Covid-19 pandemic has led to a public health crisis of widespread contagion. As such, lockdowns have been imposed in many countries to limit face-to-face social interaction, thereby severely impacting economic activity and workplaces.1 The United Kingdom (UK) was "locked down" between March 23 and July 4, 2020, which resulted in the freezing of business activity for many sectors, such as brick-and-mortar retail (except groceries and pharmacies), travel and leisure, restaurants, public services, and service-based industries affected by social distancing such as transport, work-sharing facilities, leisure, hospitality, etc. Although many sectors have reopened since early July, the risks to public health have not subsided and emergency local lockdowns are being reimposed.2 It is estimated that economic output has been reduced in the UK by at least 20% compared to the [End Page 29] same period last year.3 Gross domestic product was reduced by 9.5% in the United States (US) in the second quarter of 2020.4 The financial implications of economic lockdown in so many sectors were immediate, as the corporate sector is heavily financialized.5 The freezing of business activity in hard-hit sectors has implications for their cash flow, servicing of debt, solvency, and market-valuation and credit-rating assessments. The economic woes for corporations inevitably affect households as redundancies have been gradually announced6 and wider macroeconomic uncertainties affect household income and welfare.7 Besides public finance packages for emergency help, such as furloughing8 and paycheck protection,9 policy makers have turned to private-sector finance to alleviate the financial stress and hardships caused to households and corporations during the pandemic. Private-sector finance is being relied on—to a significant extent, but not [End Page 30] exclusively—to meet the policy goals of "relief" and "rescue." "Relief" refers to the policy goal of giving corporations and households temporary release from the pressures of debt which would be exacerbated in the weak economic conditions during the pandemic. "Rescue" refers to the policy of facilitating the access of corporations to finance to keep them afloat in relation to expenses, losses, and shoring up capital for the future. The upshot of relief and rescue policies is that debt expansion, or the carrying of increased debt burdens for corporations and households, has been adopted as a key policy response to the financial woes of corporations and households during the pandemic. These policies are not dissimilar to those undertaken in many countries.10 The legal implementation of relief and rescue policies in the US, UK, and European Union (EU) involves legal and regulatory suspensions to facilitate a level of debt expansion that would normally have been limited by the operation of microprudential regulation for lenders and contractual constraints in debt arrangements. Further, the legalization of extraordinary fiscal and monetary policies has been carried out. This episode reflects how law and regulation have been made elastic in order to address crisis management and social needs.11 Reis and Vasconcelos argue that such elasticity is institutionally supported based on the expected macroeconomic behavior of agents in markets.12 Empirical evidence also offers support for the ex post efficiency and welfare effects of certain suspensions, particularly in private law agreements such as debt moratoria.13 Carruthers characterizes contractual suspensions as "financial decommodification," which is necessary when markets are temporarily dysfunctional.14 We situate the policies for relief and rescue within the theorization of legal elasticity in Pistor's legal theory of finance.15 This theorization, [End Page 31] drawn largely from observations during the global financial crisis of 2007-09,16 offers a path for structural reforms in law and regulation as part of post-crisis management.17 In particular, such theorization allows us to critically query the alleged temporary nature of the legal and regulatory suspensions during the pandemic. The theoretical insight drawn is that legal elasticity is often more structural in nature and will have to continue to apply to mitigate...

Comments on A Framework for Regional Banking Regulation in ASEAN

October 01 2020 Comments on A Framework for Regional Banking Regulation in ASEAN Author and Article Information Online Issn: 1536-0083 Print Issn: 1535-3516 © 2020 by the Asian Economic Panel and the Massachusetts Institute of Technology2020Asian Economic Panel and the Massachusetts Institute of Technology Asian Economic Papers (2020) 19 (3): 126–127. https://doi.org/10.1162/asep_a_00793 Cite Icon Cite Permissions Share Icon Share Twitter LinkedIn Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Search Site Citation Comments on A Framework for Regional Banking Regulation in ASEAN. Asian Economic Papers 2020; 19 (3): 126–127. doi: https://doi.org/10.1162/asep_a_00793 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu nav search search input Search input auto suggest search filter All ContentAll JournalsAsian Economic Papers Search Advanced Search Miaojie Yu, Peking University: This paper analyzes ASEAN banking regulation by applying the supervisory and regulatory framework of the European Union, which has a more advanced integrated financial system. The comparison focuses on four issues---microprudential regulation, macroprudential regulation, resolution capacity and deposit insurance, and financial safety net for liquidity support---and comes up with detailed recommendations for each issue that are innovative and practical. For example, one suggestion is that the ASEAN+3 Macroeconomic Research Office (AMRO) could perform the same functions of the EU Financial Stability Board in coordinating each national supervisory agency, and being a focal point for integrated supervision. To be specific, this paper adds value to the literature on regional financial integration and regulation in four major dimensions. It extends the literature by covering developing countries that have less-developed financial markets and legislation systems than the EU. Both EU and ASEAN are usefully compared on the four aspects... You do not currently have access to this content.

A Framework for Regional Banking Regulation in ASEAN

This paper argues that there is a role for regional-level institutions of banking regulation in the ASEAN region. This is particularly important in an environment of increasing financial integration and harmonization, including exposures to shocks from volatile capital flows and cross-border banking institutions. The paper examines four aspects of financial regulation: microprudential regulation, macroprudential regulation, resolution capacity and deposit insurance, and a financial safety net. The paper argues that EU regional banking regulation provides a useful reference point, but the lower degree of credit market openness in ASEAN implies that a more nuanced approach can be adopted, and makes specific recommendations.

Sustainability and Systemic Risk - A Conference Report

On 15 June 2020, Eva Micheler (LSE Law), Jon Danielsson (LSE Finance) and Jean-Pierre Zigrand (LSE Finance) organised a conference at the Systemic Risk Centre at the London School of Economics entitled 'Sustainability and Systemic Risk'. The concept of sustainability discourages companies from focusing only on short-term gains and encourages them to integrate the long-term environmental, social and human impact into their decision making. The hope is that business can generate profit while also benefitting or, at the very least, not harming planet and people. The conference explored how sustainability has been incorporated into corporate law and regulation. In the area of corporate law, the concept of stewardship now integrates ecological and social factors. There is also a new focus on corporate purpose. Climate change and other environmental risks have become recognised as factors that can have implications for systemic risk. Sustainability has thus been added into macro- and micro-prudential regulation as well as monetary policy. With investors displaying a greater interest in sustainable financial products, the problem of green-washing has emerged. Financial regulators are currently attempting to address this issue. Corporate law and regulation have come a long way from focusing entirely on financial return to now integrating wider aims into their remit. Sustainability has truly arrived. We cannot however say at this point how much this integration of sustainability into business decisions will achieve for the wider aims it is designed to serve. For example, measuring non-financial impact can cause substantial problems for the social enterprises and charities. Time will tell to what extent profit can be aligned with planet and people. The sections below contain a summary of the contributions made at the conference.

Incentive Compatible Relationship between Ermii and Close-Cooperation in the Banking Union: The Case of Bulgaria and Croatia

The ambition to expand participation in the European Banking Union was to allow the outs to enter in to cooperation, however, it did not include the simultaneous joining of ERM II. Focusing on the cases of Bulgaria and Croatia, this paper attempts to respond to a number of questions: What is the rationale behind the double requirement of having to simultaneously apply to become a member of the ERM II and to prepare to become a member of the Banking Union via rule based close mechanism of coordination between the EU non-euro area NCAs and the ECB? Does the integration of cooperation countries' banking systems with the euro area banking systems support the decision to join ERM II and opting-in to the SSM? Do the existing close arrangements guarantee greater coordination of resource-allocating decisions on prudential supervision and improved internalization of financial stability decisions? What are the advantages of the preparation to become a full member of the euro area and the SSM (e.g. coordination of macro and micro-prudential regulation; coordination of micro-prudential supervision and bank resolution)? It is evident from the research undertaken in this paper that there are clear benefits from cooperation for the respective Member States whose domestic currencies are already linked to the euro in view of the dominant position eurozone banks have in their respective domestic markets.

The Impact of Prudential Regulation on Jordanian Banks Liquidity

Regulation of the financial sector is major aspect of consideration by the regulating authority, since financial sector highly influences the performance of the entire economy. The Global Financial Crises underlined the importance of liquidity management,when the credit crisis led to a liquidity crisis. Thus, Jordanian regulatory authorities are trying to achieve and maintain the financial stability by assessment of the banks’ financial condition and through regulations that ensure the stability and prevent failures that can occur under adverse circumstances. The study aim to analyze the impact of a prudential regulation on the Jordanian Banks liquidity. The specific objective in this case is; to determine whether the current prudential regulation enhance the banks liquidity in Jordan, or financial regulation still need additional updates. This study examines the impact of both Microprudential and Macroprudential regulation on Banks Liquidity Ratio, within the context of the Jordanian Banking Sector. To carry out the analysis, managed to collect the annual data for 12 listed during the period 2005-2018 with data arranged in the form of a panel, by using Random Effect Approach Regression, and compared the bank liquidity ratios during period before and after Global Financial Crisis (2008).The results indicate that Macroprudential tools have positive significant impact on Banks Liquidity Ratio, while micro is not. The main conclusions from this research indicate that while liquidity requirements tend to reduce liquidity risk, it appear to be more costly to comply with, reduced bank liquidity, and the banking sector still need additional Regulation updates to enhance banks Liquidity.

МЕЖДУНАРОДНАЯ СИСТЕМА УПРАВЛЕНИЯ ЭКОНОМИЧЕСКОЙ БЕЗОПАСНОСТЬЮ БАНКОВСКОГО СЕКТОРА

The article discusses the most pressing issue of ensuring the economic security of the banking sector through international management systems. The authors analyze the protection of banks and the banking system from external and internal factors. Russia's transition from Basel-1 to Basel-3 directly had a beneficial effect on the stability of the banking system during the crisis. The reforms proposed by the Basel Committee, in turn, are aimed directly at strengthening microprudential regulation. It is proposed to highlight two factors that will have a positive effect on the Russian banking system with the adoption of Basel-3. The article will be of interest to economists working in the banking sector.

Макроэкономическая стабильность и микропруденциальное регулирование внешнего корпоративного долга России

Макроэкономическая стабильность и микропруденциальное регулирование внешнего корпоративного долга России

Стресс-тестирование в системе аутогенного кризиса

The paper presents a conceptually new direction in ensuring the long-term sustainable development of organizations — an autogenic crisis and a mechanism for its preparation — stress testing. The thesis that the crisis is a manifestation of the third law of Hegelian dialectics — “the negation of negation” is advanced. It is concluded that the crisis is a violation of the previous equilibrium (stability) and at the same time, the potential for transition to a new equilibrium (new stability), i.e. a crisis state serves as a way of moving an object from a previous state, through disintegration and conflict, to a new state. To remove contradictions and imbalances, the author proposes to initiate a managed (autogenic) crisis by the top leaders of the organization. Autogenic crisis allows you to update, reboot the system and move to a new level of stability. To prepare for an autogenic crisis and identify underlying problems in the early stages, the author proposes to use a diagnostic tool such as stress testing in the framework of macro- and microprudential regulation. The article outlines ways to solve the tasks and determines the directions for the further development of stress testing and prudential policy in industry.

Micro-Prudential Regulation and Banks' Systemic Risk

This paper investigates how countries' micro-prudential regulatory regimes are related to banks' systemic risk. We use a bank-level systemic risk indicator that can be decomposed into a bank's individual risk and its systemic linkage. To proxy the strictness of a country's regulatory regime, we employ World Bank survey data.