Prudential Requirements Research Articles

THE EFFECT OF COMPETITION IN THE MARKET OF BANKING SERVICES ON THE STABILITY OF THE BANKING SYSTEM

The increase in the number of banks and the size of banks in the banking system creates problems related to interbank competition and requires constant research. Competition in the banking services market and the factors affecting it required the use of new regulatory tools after the global financial crisis of 2007-2009. In the post-crisis period, establishing strict prudential requirements for bank supervision and ensuring the stability of the banking system became important. Interbank competition and the stability of the banking system, i.e. in the conditions of competition, the risk appetite of banks is high, and the question of financial stability raises more questions. Many analyzes have been carried out on this issue and there are different approaches. In this article, an econometric analysis of the interrelationship between the stability of the banking system and competition in the market of banking services is carried out, and the causes and consequences are evaluated.

Bank resolution and national insolvency law: the case of group financing

Abstract This article explores the complex interplay between bank resolution and national insolvency law, with a specific focus on intra-group financing. We discuss group financial support agreements under BRRD, prudential requirements under the CRR, iMREL under BRRD, and harmonisation of national bank insolvency laws. We conclude that without harmonisation, the dependence of bank resolution on national insolvency laws continues to result in legal diversity and uncertainty, and thus may jeopardise effective resolution.

РЕФОРМИ БАНКІВСЬКОГО СЕКТОРУ В СИСТЕМІ МОНЕТАРНОЇ ПОЛІТИКИ

In the article the efficiency of implementation of reforms in the banking sector in the conditions of crisis is analysed. An analytical study of the implemented measures of reforming the banking sector as a significant component of the country's monetary policy system has been carried out. It is indicated that the banking sector, as the main regulator of the country's monetary policy, keeps the most important blocks of the financial system of the state under absolute control. But at present, the country's economic sector and its banking sector in particular is facing serious threats that require concrete proposals to resolve them. It is specified that the issues of determining the factors and factors that support the country's economy and the search for effective reforms of the banking sector in the monetary policy system are becoming particularly relevant. It is stated that banking crises are an indicator of instability and devaluation of the economy. To avoid their recurrence or mitigate their negative impact, government regulators should develop a mechanism that would strengthen prudential requirements for market participants – financial companies. It is noted that after the reforms of the banking sector of Ukraine in the field of corporate lending in 2016–2017, banks became more willing to provide loans for small amounts, and consequently, the concentration of the loan portfolio decreased. It is noted that the implemented reforms have encouraged banks to pay more attention to the financial condition of debtors, which has allowed to expand access to credit for financially stable clients. It is emphasised that banking sector reform should be the highest priority of the monetary policy system if the country intends to improve and realise its economic growth potential in the coming years. It is concluded that reformation efforts should be aimed at strengthening the supervisory structure, enhancing prudential requirements, increasing transparency of banking operations, management and financial reporting, as well as facilitating the consolidation of fragmented private banks and equalising of the playing field between private and state-owned banks, in particular, given the dominant position of the National Bank and the full guarantee of household deposits in private banks.

Pillar 3 disclosures on ESG risks. First disclosures of Spanish and other European banks

Sustainability-related disclosures are an essential first step towards integrating environmental, social and governance (ESG) risks into the financial system and the wider business world. This article sets out the new European prudential requirements for disclosing such risks, as well as a general comparison of the initial climate-related information reported by significant institutions in the Spanish banking industry and elsewhere in Europe.

Regulatory capital management and available-for-sale securities: Evidence from the Covid-19 pandemic

Using the Covid-19 pandemic as an exogenous shock to banks’ regulatory capital in a difference-in-differences framework, we find evidence consistent with a crisis-induced regulatory capital management through realized gains on available-for-sale securities. In the cross-section, the results are more pronounced, as expected, for non-advanced approaches banks who filter unrealized available-for-sale securities gains or losses from CET 1 capital. Validation tests reveal an increase (decrease) in banks’ CET 1 capital ratio (available-for-sale and held-to-maturity securities holdings) amid the pandemic. By implication, banks tend to exploit the discretion offered by accounting standards and prudential requirements to manage regulatory capital ratios in times of stress.

How Should Crypto Lending Be Regulated Under EU Law?

The collapse of Genesis is the latest in a cascade of failures of crypto lenders. The last year has seen numerous major crypto lenders, such as Celsius, Voyager and BlockFi, going out of business in domino-like fashion. The failures have revealed the vulnerabilities of crypto-market lenders’ business model, most notably the liquidity and maturity mismatches in their loan portfolios, and their markedly weak corporate governance. The present article explores avenues to regulate crypto lending within the framework of EU financial services regulation. It argues that crypto lenders should be taken as falling within the definition of credit institutions under EU law, and thus, as a result, should be subject to the stringent licensing and prudential requirements introduced by the Capital Requirements Directive and Regulation. Prudential regulation is one of the ways that have been suggested for the regulation of crypto-market operators, alongside the investor protection framework. Taking into account that crypto lenders easily operate on a cross-border basis and that prudential regulation is fully harmonized in the EU, we take an EU-wide perspective and focus our analysis on EU law, rather than member state laws. In addition, prudential regulation can deal with any systemic risk issues with which investor protection regulation cannot deal. However, in order to avoid moral hazard and not give investors the false impression that crypto lenders are safe too-big-to fail institutions, we suggest that crypto lenders should not enjoy the full protection of prudential regulations. In particular, they should not be offered lender of last resort support and they should not be allowed to subscribe into a deposit insurance scheme. Even though it is often said that crypto markets pose no risk to the regulated sector due to limited interconnectedness, it should be noted that due to the high leverage of crypto investors, the real risk to the regulated sector comes from the possibility of crypto investors massively liquidating their positions in other asset markets.

DEVELOPMENT OF THE FINANCIAL MARKET OF UKRAINE

The article examines trends and prospects for the development of the financial market of Ukraine. Banks have a significant share of the assets of the entire market and play a significant role in it. State ownership in the banking sector prevails. Credit risk remains the determining factor among other types of risks; however, the recovery of the economy will gradually reduce credit risks. Over the past five years, the number of insurers, pawnbrokers and credit unions has more than doubled. The most numerous participants in the financial market are financial companies. The NBU softens the monetary policy, maintaining its ability to influence the behavior of economic agents, and strengthens the requirements for financial institutions, bringing them closer to European standards. Recommendations are given for financial institutions: compliance with prudential requirements of the regulator, timely reporting, revival of lending with improvement of credit risk management, improvement of compliance management, perfecting of cyber protection systems and improvement of business models.

An insurance mechanism for electricity reliability differentiation under deep decarbonization

Securing an adequate supply of dispatchable resources is critical for keeping a power system reliable under high penetrations of variable generation. Strategic reserves have been used by a range of jurisdictions to procure investment in additional generation reserves given the missing money problem in energy only market designs. Given the growing flexibility and heterogeneity of load enabled by advancements in distributed resource and control technology, strategic reserve procurement needs to be able to reflect the different preferences of energy consumers. To address this challenge this paper develops an insurance risk mechanism for the procurement of strategic reserves that is adapted to a future with variable generation and flexible demand. The proposed design introduces a central insurance scheme with prudential requirements that align diverse consumer reliability preferences with the financial objectives of an insurer-of-last-resort. We illustrate the benefits of the scheme in (i) differentiating load by usage to enable better management of the system during times of extreme scarcity, (ii) incentivizing incremental investment in generation infrastructure that is aligned with consumer reliability preferences and (iii) improving overall reliability outcomes for consumers.

A resource dependence theory perspective on low savings, cost of capital, leverage and bank valuation in South Africa

ABSTRACT South Africa has one of the lowest savings rates of the emerging economies. However, the minimum capital and liquidity coverage prudential requirements are consistently exceeded by local banks. This paper investigates whether low savings have any impact on bank’s cost of capital, leverage and valuation through the lens of the resource dependence theory. The Autoregressive Distributed Lag Bounds Test estimates of panel data from 2008 to 2018 suggest that low savings have a long-run relationship with cost of equity, leverage and bank’s value. Furthermore, bank’s value and cost of equity are negatively affected in the short run but positively in the long run, implying that South African banks benefit from their interactions with contractual savings institutions in the long run and transfer cost increases to customers. As for leverage, the impact is positive in the short and not significant in the long run. The policy implications of these findings are, at the banks’ level, to act on the financial determinants of savings and household over-indebtedness. Banks should promote financial literacy and trust, avoid predatory lending and cut back bank charges in order to attract households informal savings (called stokvels in South Africa) by offering, for example, fixed floor rate on deposits when repo rate decreases and no ceiling when repo rate increases. At a national level, competitive exchange rate as well as the protection of property rights as per the literature would drive individual and national savings through investment.

The New European Public Country-by-Country-Reporting Requirement

After five years of controversial discussions, mandatory public country-by-country (CbC) reporting has been implemented at the EU level. In line with prior regulations on tax-related CbC reporting and public CbC reporting by specific industries (Regulation on prudential requirements for credit institutions and investment firms (575/2013) Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176 (27 June 2013). for institutions and firms in the commodities sector), cross-industry public CbC reporting will be mandatory for multinational group companies with consolidated group net sales of more than EUR 750 million. The present note provides an overview of, and critically evaluates, the European regulations on CbC reporting.

Does risk governance mediate the impact of governance and risk management on banks’ performance? Evidence from a selected sample of Islamic banks

PurposeRelying on the agency theory and the financial intermediation theory, the purpose of this paper is to examine to what extent risk governance would improve corporate governance and risk management effectiveness. The paper especially investigates the mediating role that would have the risk governance mechanisms in explaining both of the following relationships: the corporate governance–the banks’ performance, and the risk management–the banks’ performance.Design/methodology/approachThis research uses the Baron and Kenny’s (1986) approach to investigate the mediating effect of risk governance; besides, the study refers to structural equation modeling in carrying out the appropriate panel regressions. The data collection was based largely on Bank scope Database, but some missing qualitative data were gathered manually from the banks’ annual reports available on the banks’ websites.FindingsThe study findings illustrate the significant role of risk governance mechanisms in improving both corporate governance and risk management’s effectiveness. Especially, this paper finds that risk governance is fully explaining the corporate governance–bank performance relationship, but risk governance would explain partially the risk management–bank performance relationship. Further, findings suggest that the internal corporate governance mechanisms seem to be more relevant than the external ones in improving the sample bank performance, and that risk management mechanisms seem to impede rather the sample bank performance.Practical implicationsThe findings would make an important contribution to the current debate on the need to reinvent the optimal organization of the bank’s board and directorates and would allow readers to develop more cost-effective governance and risk-management thinking. Besides, the findings may help bank deciders and boards to rationalize costs and to focus only on the relevant corporate governance and risk management mechanisms. Finally, findings might illustrate to regulatory instance the importance of recommending risk governance in their coming corporate governance guidance.Social implicationsThe global credit crisis of 2008 caused significant difficulties to financial institutions, so it would be worth enlightening practitioners and policymakers, even regulators, on the importance of considering the level of potential risk and risk monitoring as a key component in the decision-making process, to strengthen the stability and resilience of banks in an increasingly uncertain environment.Originality/valueThe issues raised in the paper are important in that Islamic banking is an integral part of the global banking and finance industry. This paper extends the knowledge of the potential importance of the new concept of risk governance with specific reference to Islamic banking industry peculiarities. It also provides a telling illustration of the need for the enhancements of the Basel Committee’s prudential requirements as well as the accounting and auditing organization for Islamic financial institutions and Islamic Financial Services Board set out especially regarding the consideration of risk in the strategic decision process.

Correlations between the outsourcing activity that can be caried out by credit institutions and the protection of personal data

In the operation of credit institutions, the legal institution of outsourcing is becoming increasingly important. In the framework of this, credit institutions perform some of their activities for financial reasons, economies of scale, or for other reasons, such as their need for access to new technologies, not independently within their own organizational framework, but with the assistance of an external service provider.2 In order to comply with prudential requirements, credit institutions shall meet a number of legal and supervisory criteria even if they wish to use the assistance of a third party for any of their activities. However, if the governing regulatory regulations are not in compliance with each other, even just in terms of concepts, it may cause a practical problem for credit institutions, which may unreasonably reduce the efficiency of their activities. Among its interpretative provisions, Act CCXXXVII of 2013 on Credit Institutions and Financial Enterprises (hereinafter referred to as Hpt.) defines the term of outsourcing: ‘outsourcing’ shall mean an arrangement where a financial institution enters into an agreement with a functionally independent service provider, by which that service provider performs continuously or regularly the activities related to its financial services or financial auxiliary services or as prescribed by law, involving the management, processing and storage of data, which would otherwise be undertaken by the financial institution itself.” [Point 58 of Section 6 (1) of Hpt.]. However, in relation to the interpretation of certain factual elements included in the definition of outsourcing, a question may arise as to which legislation is applicable to define the terms „data management, data processing, data storage”? Can data protection laws be used as background legislation for this? If the effective data protection laws are taken into account, does the legislator clearly define the concept of the Credit Institutions Act for practitioners in accordance with such laws, as well? I will examine these questions in more detail below.

Prudential requirements framework and sustainability

Prudential requirements framework and sustainability

Contagion Risks and Systemic Stability in Financial Networks

An agent-based model is proposed, constructing an evolutionary banking system, where interbank loans and investment strategies are, respectively, determined by liquidity shortage and utility maximization. The causes of systemic risk are then explored based on the evolutionary banking system, which is calibrated by a sample from China. The regulatory interventions indicate the positive effects of increased investment assets, while the negative but inappreciable effects of increased interbank counterparties on contagion risks decrease. This observation hints at the possibility of promoting systemic stability by incentivizing more diversifications in investment assets instead of interbank counterparties. The results also demonstrate the advantages of prudential liquidity requirements, interbank liquidity facilities, and monetary policies from the central bank in promoting banking system stability.

At the End of the Waterfall – Resolvability of Central Counterparties

After the prudential requirements introduced by EMIR in 2012, the European Union took a further step when it adopted a regulation in 2021 on the framework for the recovery and resolution of central counterparties. The regulation is based on the bank recovery and resolution directive of 2014. This paper provides a critical overview of the new regulation by focusing on the question of whether the bank resolution tools are useful and effective in the case of central counterparty resolutions.

Political risk and financial development in Nigeria: Can credit buy social peace?: Evidence from NARDL approach

This study provides a first attempt to analyze the role of credit in the political stability of developing countries. By examining the case of Nigeria using annual data over the period 1984–2017 and the non-linear ARDL (NARDL) approach, we find that credit supply shocks have a significant and non-linear impact on short- and long-term political risk. In terms of asymmetry, we show that positive shocks have a positive and more pronounced impact than negative shocks in the short run, proving that credit expansion can be effective in terms of short-term political stability. In the long run, positive credit shocks increase political risk while negative shocks decrease it. These results suggest that an improvement in Nigeria’s prudential requirements for credit supply could be more effective for political stability than an easing of credit in the long run. In addition, better management of oil revenues, particularly through effective sterilization policies, is essential to prevent oil price fluctuations from leading to a highly pro-cyclical supply of credit, which threatens long-term political stability.

The New EU Regulatory Framework Governing the Approval and Consolidated Supervision of Financial Holding Companies and Mixed Financial Holding Companies

In 2019, the so-called “Capital Requirements” Directive 2013/36/EU (CRD IV) was amended by virtue of Directive (EU) 2019/878 (CRD V) in respect to several aspects, including the supervision of financial holding companies and mixed financial holding companies. The new rules apply from 1 January 2021. In accordance with the considerations set out in the CRD V, the key rationale for the introduction of novel elements was to lay down a specific approval procedure and direct supervisory powers over certain financial holding companies and mixed financial holding companies in order to ensure that such holding companies can be held directly responsible for ensuring compliance with consolidated prudential requirements, without subjecting them to additional prudential requirements on an individual basis. The following University notes, which briefly albeit systematically present the amendments inserted to the CRD IV in relation to financial holding companies and mixed financial holding companies, are structured in five Sections: Section A discusses the initial framework and the rationale for its enhancement and provides the definition of the terms financial holding companies and mixed financial holding companies. Section B presents then the provisions of the new Article 21a on the conditions for granting approval and the related exemptions, as well as on the decisions on the approval and exemption from approval, and the related transitional provisions. The new requirements relating to the management body and to internal arrangements, processes and mechanisms of financial holding companies and mixed financial holding companies are laid down in Section C. This is followed by Section D discussing the amendments inserted to Articles 11-118 CRD IV in relation to the principles for conducting supervision on a consolidated basis. Finally, the amendments to other related provisions of the CRD IV (including, inter alia, those on the enhanced powers of supervisory authorities, on cooperation arrangements and on the inclusion of holding companies in consolidated supervision) are discussed in Section E.

Banks’ Capital Requirements in Terms of Implementation of the Concept of Sustainable Finance

In 2015, the governments of 193 United Nations member states adopted the 2030 Agenda for Sustainable Development, followed by the Paris Agreement. Their detailed solutions assume the inclusion of the concept of sustainable finance into investment decision-making processes, including directing capital towards sustainable investments and stopping climate change. The main subject of the study is sustainable finance, which is one of the pillars of the sustainable development of the global economy, which has also become an important objective of the European Union, enshrined in the Treaty of Lisbon. The main aim of the paper is an extrapolation of risks appearing in the unstable environment of credit institutions, which are increasingly boldly directing their expectations on their inclusion in the sustainable finance concept implementation. The empirical research included in the first stage a questionnaire survey, while in the second one, a quantitative comparative analysis. The research was aimed at verifying the research hypothesis stating that after the global financial crisis, banks meet the new prudential capital regulations, however by their inclusion in the concept of green finance, they will increase a share of mitigation in the bank risk management strategy. The research, carried out in the Polish banking sector, has shown that domestic banks meet all prudential requirements resulting from the new capital norms. However, investment strategies, based on the composition of the portfolio in accordance with the principles of sustainable finance and on high rates of return in the long term, will change banks’ resilience to key risks from the perspective of sustainable development.

Removing the regulatory barriers to cross-border banking

The establishment of the Banking Union and the introduction of the European Single Rulebook seek to pave the way for a single banking market and to break the nexus between banks and sovereigns. Ideally, banks should be subject to a common set of rules and do business across the Banking Union without having to comply with different supervisory practices and methodologies. However, there are still loopholes and discrepancies in the legislative framework that cause regulatory fragmentation, among others, by allowing national authorities to take restrictive measures to protect national interests against the common interest.The present paper analyzes the current obstacles to the free flow of funds within cross-border banking groups operating in the Banking Union, namely the obligation for subsidiaries to meet prudential requirements (capital, liquidity and internal MREL) at individual level and the restrictions to intragroup exposures. To that end, this paper proposes some amendments to the Union regulatory framework aiming to achieve a dual objective; to strengthen banks’ profitability and overall financial position and to promote financial integration and consolidation of the banking sector, preferably through cross-border mergers and acquisitions (M&As). The proposed changes have become more significant today amidst the COVID-19 crisis and its impact on the European banking sector and the European economy. The European Central Bank (ECB) and the Single Resolution Board (SRB) have granted (temporary) relief measures to banks to withstand the effects of the pandemic and continue lending to the economy. Nonetheless, in light of the ECB’s pressure on banks to address effectively and timely the financial impact from the COVID-19 crisis, it is necessary to establish a framework to relieve banking groups from the unnecessary capital and liquidity burden placed on them. The aim of the proposed framework is to improve the banks’ ability to generate sustainable profits and, hence, to enhance their capacity to absorb the impact from the COVID-19 crisis and any future external shock as well.The proposed regulatory reform is governed by three (3) principles. Firstly, the introduction of a default approach for the application of reduced prudential requirements (capital, liquidity and internal MREL) to subsidiaries accompanied by the lifting of restrictions to intragroup exposures. Secondly, particular emphasis is placed on the Supervisory Review and Evaluation Process (SREP) and the resolvability assessment carried out by the ECB and the SRB respectively whose outcome may result in an increase of the prudential requirements. Thirdly, the establishment of a credible escalation mechanism to ensure that parent entities will remain committed to providing capital and/or liquidity support to subsidiaries should their financial situation deteriorate. The proposed mechanism serves as a safety net to prevent the failure of subsidiaries and, if that happens, to minimize the negative implications for domestic financial stability and fiscal sovereignty of host Member States.Under the proposed escalation mechanism, banking groups wishing to take advantage of the proposed capital and liquidity relief measures should sign intragroup financial support agreements on a mandatory basis. Furthermore, the group recovery plan should cover all the subsidiaries enjoying the proposed preferential treatment, irrespective of their materiality for the banking group and/or the host Member State. Once a recovery trigger relevant to a subsidiary is triggered, recovery action should be taken to restore the subsidiary’s financial position. If the parent entity is reluctant to respond appropriately to the worsening of the financial situation of the subsidiary, the ECB and the SRB should take early intervention measures, which could be extended to the parent entity. As a last resort measure, if a material subsidiary comes into a “failing or likely to fail” situation, the SRB may decide the write-down and/or conversion of internal MREL-eligible instruments into equity either independently or in combination with resolution action.The proposed regulatory measures could promote both financial integration and financial stability in various ways, particularly if were accompanied by the completion of some institutional reforms (e.g. establishment of the European Deposit Insurance Scheme).

One Size Fits Some: Analysing Profitability, Capital and Liquidity Constraints of Custodian Banks Through the Lens of the Srep Methodology

Custodians play a key but discrete role in the global financial market infrastructure. In Europe, they are licensed as “credit institutions ”, a legal requirement for European deposit-taking institutions, and therefore they face the same prudential requirements as “traditional” banks. However, their business model and risk profile are different from those of traditional banks since the core of their activity does not encompass balance sheet transformation and the associated risks. JEL Classification: G15, G21, G28, L22