Prudential Measures Research Articles

Article: The Systemic Importance of Asset Managers: A Case Study for the Future of SIFI Regulation

The nexus between financial stability and the asset management industry remains understudied. I question whether asset managers and/or investment funds could be systemically important, and if so, how financial regulation in the EU and US should cope with this. From a review of the available economic literature and policy standpoints, it emerges that asset managers and the funds that they manage can create systemic risk through fire sales. While in some cases nonbanks can be designated as systemically important under EU and US law, asset managers and investment funds do not fit well in this framework. Consequently, the current rules, concerning both designation and subsequent regulation, fall short. Instead, a simple designation rule could directly address the way in which asset managers can cause or amplify systemic risk. Regulation and supervision should equally address this fire sale risk. I propose a market-based prudential measure, complemented by centralised supervision, that does so. The case of systemically important asset managers shows that current SIFI regulation does not sufficiently account for the systemic risks that can and will be caused by nonbank financial institutions. I therefore advocate a rethink, such that it has a wider institutional scope but more accurately addresses sectoral differences. Financial stability, systemic risk, systemically important financial institutions, nonbank financial institutions, asset management, investment funds, SIFI regulation, fire sales, EU law, US law.

The effects of the EBA's stress testing framework on banks' lending

This paper investigates the impact of the European Banking Authority (EBA)'s supervisory stress tests on bank lending. Using a sample of 282 European banks over the period 2006–2018, we find that stress-tested banks experience higher credit risk and reduce lending for specific loan types. In particular, due to country heterogeneities, we find that the contraction in lending is more pronounced for stress-tested banks in the GIIPS region. Our results also suggest that the elevated credit risk of highly-exposed stress-tested banks can be a driving factor of a reduction in bank lending. Consequently, prudential measures requiring banks to hold higher capital buffers are justified to contain credit risk shocks.

Strengthening banking sector governance: challenges and solutions

This study examines the understanding of banking governance among the sample participants and its effectiveness in achieving significant objectives. The research methodology employed in this study adopts a descriptive and analytical approach, aiming to comprehensively examine the multifaceted phenomenon of corporate governance within the context of private banks. The purpose of this study was to assess the comprehension of banking governance and its effectiveness in achieving important objectives. This investigation was undertaken to gain insights into the current state of banking governance, its implementation, and the challenges it faces. By conducting this research, we aimed to provide a clearer understanding of the issues surrounding banking governance and offer recommendations for improvement and finding solutions. The findings of our study indicate that the sample participants have a clear comprehension of governance as an efficient system. However, we identified significant obstacles in the implementation of governance and its objectives, primarily stemming from legal challenges and the overall environment. We also noted that success for private banks is contingent on meeting governance requirements, but the banking sector faces challenges both internally and externally, which render control systems less effective. Furthermore, we found that the Basel standards for banking supervision, through the implementation of supervision and control procedures, seek to enhance solvency and risk management, along with prudential measures. These findings are crucial as they provide a roadmap for strengthening governance practices in the banking sector, which is vital for its stability and effective operation. By addressing the issues identified in this study, stakeholders can work toward achieving a more robust and effective banking governance framework.Please confirm if the author names are presented accurately and in the correct sequence (given name, middle name/initial, family name). Author 2 Given name: [Kees] Particle [van] Last name [Paridon]. Author 3 Given name: [Bnar Kareem] Last name [Darwish]. Also, kindly confirm the details in the metadata are correct.correct

Measuring Financial Inclusion Index for Developing Countries

This research focuses on the multifaceted realm of financial inclusion within Developing Countries. It unfolds a meticulous exploration by formulating a financial inclusion index based on data extracted from a sample comprising 75 Developing Countries, spanning the period from 2010 to 2018. The index's creation comprises of two distinct stages. In stage one, a principal component analysis is applied to derive sub-indices encapsulating the dimensions of access, utilization of financial services, technological advancements, and infrastructure, drawing from an array of 24 financial indicators. Subsequently, the second stage normalizes values within each dimension, culminating in an overall index through the application of the Euclidean Formula. The findings of this study emphasized the pivotal role of a National Financial Inclusion Strategy in enhancing financial inclusion in each respective country. Customization of these strategies to align with specific economic goals of each nation is paramount. Central to these objectives are primary priorities, which diverge among countries. Notably, countries like Romania, Serbia, and Mauritius place a premium on fostering financial literacy, while others such as Pakistan, Costa Rica, Rwanda, and Guinea emphasize the growth of Small and Medium Enterprises. In contrast, nations like Guatemala, Mauritania, Thailand, and Ukraine concentrate on expanding their financial networks. Furthermore, countries grappling with low levels of financial inclusion attribute this challenge to factors such as deficient financial literacy, the absence of a well-defined financial inclusion strategy, financial constraints, a preference for traditional financial services, and limited awareness surrounding digital innovations. Conversely, nations boasting moderate levels of financial inclusion, yet not progressing towards higher levels, point to the dearth of technological innovation and restricted prudential measures as pivotal stumbling blocks. This comprehensive analysis underscores the necessity of dynamic strategies tailored to individual countries to achieve robust financial inclusion on a global scale.

The impact of supervision on bank risk: empirical evidence from the Tunisian context

PurposeThe purpose of this paper is to examine the impact of supervision on banking risk to determine whether prudential measures taken especially after financial crises are effective in limiting banking risks.Design/methodology/approachThe empirical study focused on 210 annual reports of almost all Tunisian banks during the 2010–2019 period. Banking supervision effectiveness is measured by enforcement outputs (i.e. on-site audits and sanctions). The generalized least squares method of multivariate analysis was used to analyze this study.FindingsThe results show that supervision set up and on-site audits reduce bank risk, while the relationship between sanctions and risk appears to be non-significant. The results still hold after robustness tests by changing the bank's risk-taking indicators.Practical implicationsThis study has important implications for managers and investors in the Tunisian context. In particular, the findings provide microevidence for the impact of supervision in Tunisian banks to reduce their risk-taking. The empirical results have important implications for the decision-making of bank managers and regulators in Tunisia as well as for relevant actors in similar emerging economies.Originality/valueThis study extends the previous literature on supervision by examining the relationship between supervision and banking risk in an emerging country, which has been little explored, Tunisia in particular. Furthermore, this study examines whether supervision reduces risk borne by Tunisian banks, and to the best of the researchers' knowledge, it is one of the pioneering studies of supervision in the Tunisian market. This latter market has different economic, political and social attributes compared to developed countries. So, this paper helps to clarify the impact of supervision enforcement and macroprudential policies. In addition, this paper strongly contributes to the various stakeholders “understanding of the importance and implication of supervision practices. However, since banks tend not to reduce their participation in risky activities to seek higher profits, supervisory policymakers and practitioners should also take a closer look at the composition of banks” investment portfolios to reduce moral hazard and regulatory arbitrage behavior. Empirically, the authors measure supervision by on-site audits and sanctions and examine how they affect bank risk level, which was never approached in Tunisia.

A robust examination of COVID‐19 and country risk: Perspectives from the G10 countries

AbstractThis paper examines the effects of COVID‐19 new infections on the financial sovereign risks in the group of ten (G10) countries. The paper utilises panel least squares regression using monthly data over the period February 2020–July 2021. Two sovereign risk measures are examined: the Spread of Government Bond Yields and Sovereign Credit Default Swap spread. The results of the robustness tests show that the spread of the COVID‐19 has affected the sovereign risks significantly and positively. Contagion risks have been extended to exchanges rates and growth rates of international reserves. This paper offers two contributions. First, the results show robust evidence on the impact of COVID‐19 on country's sovereign risks. Second, the severity of COVID‐19 on country's sovereign risks is further. The empirical results carry policy implications that (a) countries must sustain efforts for safeguarding the evolution of COVID‐19 pandemic since it is hindering country's credit worthiness, thus increasing sovereign risks, (b) the G10 countries are advised to follow the zero COVID‐19 strategy, (c) macro prudential measures have to be implemented along with monetary policies that mitigate the sovereign risks and (d) implement social measures to restore the health system and contain the uncertainty on both economic and social grounds.

Prudential exceptions in international trade and investment agreements. Problems of interpretation and enforcement

This article is devoted to the problems of interpretation of “prudential exception” clauses in international trade and investment agreements. The author examines in what cases the relevant international norms can be applied by states in international disputes, as well as in what cases states can avoid international responsibility if the national measures aimed at preventing financial crisis led to violation of their commitments in the field of trade liberalization and protection of foreign investments. The purpose of the article is to study the scope of rights granted to states by such rules in terms of taking measures aimed at protecting consumers of financial services, ensuring the integrity and stability of the financial system, as well as identifying restrictions on the abuse of such rights. The author makes distinction between “measures taken for prudential reasons” and “prudential measures” and determined procedural and material terms for the application of such exceptions. Author also made recommendations on how to reform the prudential exceptions contained in the Treaty on the Eurasian Economic Union. The author proposes to improve the procedure of considering investment prudential disputes, by transferring the consideration of such disputes to a special commission, the members of which should be representatives of bodies authorized to introduce prudential measures, both from the state from which the investor originates, and from the state in whose territory the investments are made.

Should Poland join the euro area? The challenge of the boom-bust cycle

The article makes references to the existing cost-benefit analyses on adopting the euro in Poland and other new member states of the EU. In general, they considered a decrease in the cost of capital to be among the crucial benefits of adopting the common currency. As a result, the costs of a credit boombust cycle, to which adoption of the euro may lead, were at best underestimated. The authors discussed the possible solutions to mitigate the risk of boom-bust cycles and concluded that although they are conceptually simple, their effective implementation may be difficult, mostly due to political pressures. To overcome the feasibility problem, the power over undertaking macro prudential measures should be delegated to the central bank. Its past performance in stabilising the economy (at least until recently) suggests that it could make a good use of such a power. Furthermore, adopting the euro would resolve the problem of the ‘difficult cohabitation’ of monetary and macro prudential policy that such a delegation would otherwise create.

BANKING SECTOR PERFORMANCE DURING THE COVID-19 CRISIS

This paper analyzes bank stock prices around the world to assess the impact of the COVID-19 pandemic on the banking sector. Using a global database of policy responses during the crisis, the paper also examines the role of financial sector policy announcements on the performance of bank stocks. Overall, the results suggest that the crisis and the countercyclical lending role thatbanks are expected to play have put banking systems under significant stress, with bank stocks underperforming their domestic markets and other nonbank financial firms. The effectiveness of policy interventions has been mixed. Measures of liquidity support, borrower assistance, and monetary easing mod- erated the adverse impact of the crisis, but this is not true for all banks or in all circumstances. For example, borrower assistance and prudential measures exacerbated the stress for banks that are already undercapitalized and/or operate in countries with little fiscal space. These vulnerabilities will need to be carefully monitored as the pandemic continues to take a toll on the world’s economies. Keywords: Bank stock returns, government announcements, liquidity premium, COVID-19 pandemic period.

The Interplay of Macro-Prudential Regulation and Microeconomic Financial Regulation in the European Union in 2011–2014

Though macro-prudential policy is usually aimed at mitigating financial instability, in the European Union it mainly consisted of a discretionary use of old policy tools, such as micro prudential measures, which might have worsened an ongoing financial crisis. Two episodes will be examined: the 2011 special recapitalization of banks and the 2014 Asset Quality Review and stress tests. The metric for the EBA 2011 recapitalization was the ratio of capital to risk-weighted assets. In this exercise, unlike Basel II and III prescriptions, all government bonds had to be accounted for at their current valuation. This feature has not yet been included in any piece of EU legislation and was therefore highly discretionary. Given the falling prices of some European countries’ government bonds, peripheral countries’ banks were in need of more capital. Therefore, they may have reduced credit, especially to SME, or worsened credit conditions. The 2014 stress tests examined the solvency of banks with the same metric and parameters taken from a macroeconomic scenario that was a remake of the 2007–2008 financial crisis. This contrasted with the macroeconomic reality of the time in which a restrictive fiscal policy was affecting firms’ cash flows and hitting, in particular, peripheral countries.

Securing green development: Can Asia-Pacific central banks and financial supervisory authorities do more?

The present paper contains a discussion on how central banks and financial supervisory authorities can foster green development in Asia and the Pacific. It is based on the argument that while fiscal policy has received much attention, central banks and financial supervisory authorities can certainly play a complementary role in accelerating the transition towards low-carbon, climate-resilient economies. Indeed, these institutions are obliged to act as inaction could compromise their mandate to maintain economic and price stability given that climate change poses an emerging risk to the financial system. The first point made in the paper is that approximately half of the Asia-Pacific central banks either have sustainability-oriented mandates or have begun to integrate climate issues into their policy conduct. The following discussion points out that while the region remains at the early stage of implementing green monetary and financial policies, some central banks and financial supervisory authorities are at the forefront in deploying monetary policy tools, prudential measures and broader initiatives to support green finance. To further promote green central banking, having clear guiding principles, effective communication and adequate technical capacity to customize the green approach is critical. Moving forward, these institutions should be mindful of possible unintended, adverse impacts of sustainable central banking, such as interfering with market neutrality, supporting green washing and crowding out green private investments.

Finance, growth and (macro)prudential policy: European evidence

This paper examines the interactions between financial development, economic growth and (macro)prudential policy on a sample of 12 euro area countries. Our main takeaway is that active (macro)prudential policy supports the positive finance-growth nexus instead of disrupting it. These benefits are found to be more likely to materialize during tightening of (macro)prudential policy measures and not during easing. This result is conditional on the ability of (macro)prudential policy to curb excess credit growth and mitigate systemic risk, which would otherwise disrupt the market. Moreover, we assert that when analysing the effects of (macro)prudential policy, it is important to account for the direction of (macro)prudential measures, not just for the frequency at which they are implemented.

Frugality in Business context: South African Small and medium-sized enterprises (SMEs) prudential measures in the face of COVID 19

Frugality in Business context: South African Small and medium-sized enterprises (SMEs) prudential measures in the face of COVID 19

Risks and profitability of microfinance institutions during crisis: empirical insights from an emerging market

The study explores the effects of different financial risks on the profitability of microfinance institutions (MFIs), amid a financial sector crisis. The study uses a pooled cross-sectional quarterly data covering 2016 to 2018 on MFIs in Ghana and a robust ordinary least squares regression. The study found a metamorphosis of the risk management strategies of MFIs. Overall, credit risk, capital risk and liquidity risk management are key drivers of performance. Initially, in 2016 and 2017, only credit risk was driving profits but by the end of the financial sector clean-up in 2018, all the four risk factors were driving performance. Size and asset turnover are other factors driving profitability. The study shows how important risk management is within the period of the financial crisis and how it affects microfinance performance. The findings also show how some prudential measures of the Bank of Ghana may have affected risk management and enhanced performance of MFIs after the financial sector clean-up exercise.

Ethics of vaccination prioritization and compulsory vaccination: An integrative approach

Abstract Vaccine scarcity and availability distinguish two central ethics questions raised by the Covid-19 pandemic. First, in situations of scarcity, which groups of persons should receive priority? Second, in situations where safe and effective vaccines are available, what circumstances and reasons can support mandatory vaccination? Regarding the first question, normative approaches converge in prioritizing most-vulnerable groups. Though there is room for prudential judgement regarding which groups are most vulnerable, the human dignity principle is most relevant for prioritization consideration of both medical and non-medical issues. The second question concerning mandates is distinct from considerations about persons’ individual moral duty to receive vaccines judged reasonably safe and critical for individual and public health. While there is consensus regarding the potential normative support for mandated vaccination, the paternalistic government intervention of vaccine mandates requires a high bar of demonstrated vaccine safety and public health risk. We discuss stronger and weaker forms of paternalism to deal with the Covid-19 pandemic from an “integrative” approach that integrates leading normative approaches. We argue against a population-wide compulsory vaccination and support prudential measures to 1) protect vulnerable groups; 2) focus upon incentivizing vaccine participation; 3) maintain maximum-possible individual freedoms, and 4) allow schools, organizations, and enterprises to implement vaccine requirements in local contexts.

In the face of spillovers: Prudential policies in emerging economies

We examine whether emerging market prudential policies help to reduce the macro-financial spillover effects of US monetary policy. We find that emerging markets with tighter prudential policies face significantly smaller, and less negative, spillovers to total credit from US monetary policy tightening shocks. Reserve requirements and, to a lesser extent, loan-to-value ratio limits appear to be particularly effective prudential measures at mitigating the spillover effects of US monetary policy. Consistent with the bank-lending channel, our findings indicate that domestic prudential policies can dampen emerging markets’ exposure to US monetary policy and the associated global financial cycle, even when accounting for capital controls. These findings suggest they may be a useful tool in the face of international macroeconomic policy trade-offs.

Banking sector performance during the COVID-19 crisis.

This paper examines the impact of financial sector policy announcements on bank stocks around the world during the onset of the COVID-19 crisis. Overall, we find that liquidity support, borrower assistance programs and monetary easing moderated the adverse impact from the crisis, but their impact varied considerably across banks and countries. By contrast, countercyclical prudential measures led to negative abnormal returns in bank stocks, suggesting that markets price the downside risks associated with these policies.

Economic policy responses to the COVID‐19 pandemic and growth of nonperforming loans

AbstractIn this paper, we investigate the relationship between various economic policy responses to the COVID‐19 pandemic (liquidity support, prudential policies, borrower support, asset purchase, and policy rate decisions) and the growth of nonperforming loans (NPLs) in 2020 across 47 economies. Controlling for other relevant determinants of NPLs, our regression analyses show that economies in which policymakers have used prudential and borrower support measures reported significantly slower growth of aggregate NPLs. The prudential measures also confirmed a more robust relationship with NPL reductions compared with borrower support measures. Added to this, non‐mortgage consumer loans are found to be more sensitive than mortgage loans to economic policy responses.

Effective Nursing Practices In The Prevention of Nosocomial (Hospital-Borne Infections)

Nurses are an important part of the any healthcare team who play a unique role in the control of Hospital acquired infections. In treatment centres and hospitals around the world, nosocomial infections are very common causing major risks and complications that even leads to the death of patients. Several preventive measures have been attempted to prevent hospital acquired infections to increase the safety and well-being of the patients. Despite many preventive approaches implemented to reduce the microbial contamination, the infection remains to cause serious complications and increase hospital stay and treatment cost. Effective nursing practices with appropriate control measures have contributed to a substantial reduction in the incidence of hospital acquired pathogens. Nurses can effectively prevent infection from occurring with prudential measures such as “hand hygiene, skin disinfection, wearing masks and gloves to prevent the spread of infection, infusion set change, following standard caution principles, averting inadvertent contact with needle stick, preventing from the exposure to respiratory discharges”. Their practices concerning hygienic environment play a crucial role to assure patients health by controlling the infections.

Impact of Macroeconomic Shocks on the Individual Banks: Case of Madagascar

The successive financial crises have highlighted the interdependence between the financial system and the real economy. Prudential measures to limit the negative repercussions of the financial crisis, through the Basel I and Basel II agreements, have shown their limits and the Basel III agreements have consequently integrated the macro-prudential component which aims to ensure the stability of the financial sector as a whole within the economy. The financial stability assessment tool known as the “stress test” has also been developed in various forms and its application to the financial sector, particularly the banking sector, is strongly recommended by the Bank for International Settlements. Indeed, the purpose of this study is to assess the resilience of the Malagasy banking sector to macroeconomic shocks and to evaluate its impact on the capitalization of the banking system through the macroeconomic stress test tool. To do so, we used a dynamic panel model. Non-performing loan forecasts are used to obtain capital projections at both the banking system and bank levels under adverse scenarios. The results show that most banks were able to hold capital above the minimum regulatory threshold of 8% under Basel III standards. However, only one bank fails to meet the minimum capital adequacy threshold. Non-performing loan forecasts are used to obtain capital projections at both the banking system and bank levels under adverse scenarios.