Supervisory Rules Research Articles

Consideration of <i>ESG</i> factors in investors’ activities: Experience of individual countries

Aim. To identify common and specific features in the approaches of countries in the aspect of formation of national policy of financial market regulation in order to motivate investors to finance sustainable development.Tasks. To analyze the approaches of countries to the legislative fixation and introduction of mandatory accounting of ESG factors in the activities of investors; to study the practice of voluntary accounting of ESG factors in the activities of investors; to systematize the ESG approaches of countries used by them in the financial segment of the national economy.Methods. The study of foreign experience of integration of ESG factors into the national financial policy is based on the traditional methodological approach, including methods of structural-logical, systemic and comparative analysis. The analysis of national normative legal acts, documents of voluntary national associations of financial organizations and investors, regulating the rules of conduct of financial market participants to take into account ESG factors in their strategies and activities was carried out. These are open access documents posted on the Internet on the websites of relevant organizations.Results. The following facts were found: 1) regulatory impact has different degrees of rigor; 2) creating demand for sustainable finance is the key challenge that countries are primarily seeking to address; 3) creating incentives for investors to motivate them to engage in sustainable finance is recognized as the main challenge. Countries are choosing different strategies to address it. First, simultaneously influencing both the supply of and demand for sustainable development projects. Second, creating and stimulating demand for sustainable development projects primarily from investors.Conclusions. Principles and standards for ESG risk assessment and ESG investor reporting are now being actively incorporated into supervisory rules, procedures and investor management systems, although a wait-and-see approach still prevails in most of them.

전문가 시스템 기반 살수 시험기 챔버를 위한 온도 제어 알고리즘 개발

The PID controller used to regulate the internal temperature of a splash water chamber has only one modeling and control gain set. In addition, it is very difficult to control the temperature within a splash water chamber because of hardware design problems. The heater can be finely controlled by changing the output amount from 0 to 100% through the PWM method. However, the chiller cannot be connected to the output of the PID controller due to hardware compatibility issues. Therefore, the chiller is not finely controllable and only has output levels of 100%, 60% and 40%. Therefore, the control system is designed to control the temperature using the heater only after setting the output level of the chiller. This type of design causes problems such as not reaching the desired temperature, exceeding the settling time, and creating overshoots. In this paper, an expert system is introduced to develop a control algorithm to solve the above-mentioned problems. The expert system to be developed consists of supervisory rules and reasoning rules; based on these rules, the output level of the chiller is switched to achieve the desired performance such as fast settling to the target temperature and elimination of overshoot. To validate the feasibility of the proposed method, several experiments are performed and the results are provided.

Computing valuation adjustments for counterparty credit risk using a modified supervisory approach

Considering counterparty credit risk (CCR) for derivatives using valuation adjustments (CVA) is a fundamental and challenging task for entities involved in derivative trading activities. Particularly calculating the expected exposure is time consuming and complex. This paper suggests a fast and simple semi-analytical approach for exposure calculation, which is a modified version of the new regulatory standardized approach (SA-CCR). Hence, it conforms with supervisory rules and IFRS 13. We show that our approach is applicable to multiple asset classes and derivative products, and to single transactions as well as netting sets.

대손충당금 분류조정을 이용한 상호저축은행의 이익관리; 특별대손충당금을 중심으로 (Earnings Management of Savings Banks Using Loan Assets Classification: Focusing on Special Loan Loss Provision)

Korean Abstract: 본 연구는 상호저축은행이 특별대손충당금의 분류조정을 이용하여 이익을 조정하는지를 살펴보았다. 상호저축은행은 일반(상업)은행과 달리 고정여신에 대한 충당금을 일부 자본으로 인정받는다. 상호저축은행이 위 규정을 이용하여, 특별대손충당금의 분류조정을 통해 이익관리 및 자본관리를 수행하는지 살펴보았다. 이를 검증하기 위하여 대손충당금 전입액을 일반대손충당금과 특별대손충당금으로 구분하고 대손충당금과 대손충당금 전입 및 법인세 전 이익과의 관련성을 살펴보았다. 실증분석결과 저축은행은 이익을 유연화하기 위하여 대출자산 항목의 분류조정을 이용하는 것으로 나타났다. 구체적으로, 상호저축은행은 고정이하여신 내 분류조정을 이용하여 특별대손충당금 전입액을 조정하여 이익을 유연화하고 있다. 재무건전성이 취약한(BIS 7% 미만) 저축은행의 경우에는 특별대손충당금 전입액을 이용한 이익조정을 더 많이 하는 것으로 나타났다. 이러한 결과는 저축은행의 고정여신의 충당금을 자본으로 인정하는 현행 제도의 수정보완이 필요함을 시사한다. English Abstract: This study examines earnings management method of savings banks which serve as representative financing institution for people with poor credit. Because regulatory and supervisory regulations of savings banks are different to those of commercial banks, managers of savings banks may reflect these characteristics in earnings management method. Especially, managers of the savings bank are expected to choose the earnings management method considering resulting costs and benefits such as effects on BIS ratio, discretion of loan assets classification, and the magnitude of earnings management. Empirical evidence indicates that savings bank discretionarily exploit classification of loans assets to smooth earnings. Specifically, managers discretionarily classify loan assets items upwards or downwards within non-performing assets. In addition, savings banks with BIS ratio lower than 7% tend to manage earnings upwards by classifying loan assets items upwards within non-performing assets to increase both net income and BIS ratio. The results of study imply that limitation of present regulatory and supervisory rules on savings banks incurs unintended negative effects on agency problem

Do Loan Loss Provisions Affect the Credit Fluctuations in China’s Banking System?

ABSTRACTThe global financial crisis of 2008 sparked new ideas on pro-cyclical transmission in the financial system. The accounting treatment method of loan loss provisions differs between the accounting standards that banks use and the supervisory rules of banks. This fundamental difference has attracted wide attention from academics and regulators. This article studies whether bank loan loss provisions affect credit fluctuation in China’s banking system. We divide loan loss provisions into discretionary and non-discretionary loan loss provisions. We find that non-discretionary loan loss provisions result in greater credit fluctuation, whereas discretionary loan loss provisions have no significant impact on credit fluctuation. Further evidence shows that the relation between non-discretionary loan loss provisions and credit fluctuations does not vary among different types of banks. Overall, our study shows that non-discretionary loan loss provisions can increase credit fluctuation and therefore strengthen banks’ pro-cyclical behavior.

“The price is right”: using auction theory to enhance competition in the NPL market

Almost a decade after the onset of the global financial crisis, the stock of non-performing loans (NPLs) still represents a major burden for European banks’ profitability and a severe headwind for credit growth at an area-wide level. While a great deal has been done to establish stricter supervisory rules and more robust insolvency frameworks, the development of an efficient secondary market for impaired assets is currently lagging behind, especially in the countries where the level of troubled loans is more worrisome. To address this problem, the European Banking Authority has recently proposed to set up an EU-backed asset management company (AMC) for the exchange of NPLs. In addition to the difficulties associated with a full compliance of a public AMC with EU State aid rules, we argue that such a vehicle might be useful in solving just one of the three failures typically affecting the market for NPLs, that is the information asymmetry between buyers and sellers. To successfully tackle the other two—namely, market power and collusion—a correct design of the market is crucial. From this point of view, auction theory can be of great help.

A Wearable Gait Phase Detection System Based on Force Myography Techniques.

(1) Background: Quantitative evaluation of gait parameters can provide useful information for constructing individuals’ gait profile, diagnosing gait abnormalities, and better planning of rehabilitation schemes to restore normal gait pattern. Objective determination of gait phases in a gait cycle is a key requirement in gait analysis applications; (2) Methods: In this study, the feasibility of using a force myography-based technique for a wearable gait phase detection system is explored. In this regard, a force myography band is developed and tested with nine participants walking on a treadmill. The collected force myography data are first examined sample-by-sample and classified into four phases using Linear Discriminant Analysis. The gait phase events are then detected from these classified samples using a set of supervisory rules; (3) Results: The results show that the force myography band can correctly detect more than 99.9% of gait phases with zero insertions and only four deletions over 12,965 gait phase segments. The average temporal error of gait phase detection is 55.2 ms, which translates into 2.1% error with respect to the corresponding labelled stride duration; (4) Conclusions: This proof-of-concept study demonstrates the feasibility of force myography techniques as viable solutions in developing wearable gait phase detection systems.

Modeling and verification of supervisory rules in Internet of Things environment

The increasing demands of quality and productivity, together with the Internet of Things (IoT) technology, promote the development of intelligent manufacturing where supervisory system plays an increasing role. Verification of supervisory rules to ensure the system is error-free becomes essential. A timed automata (TA) formalism is one of the most widespread approach appropriate for the system modeling and verification. This paper proposes an approach for modeling and verification supervisory rules in production process. The behavior models of entities are translated into timed automata models. The timed automata models of all entities in workspace construct a synchronized network, which can simulate the occurrences in production process. In addition, the paper presents a method of building checking automata. Comparison of the result from supervisory system with the result from checking automata can test the supervisory rules, and analysis of the simulation process can discover the reasons of existing problems. Experiment result shows that the approach is effective in the motivating scenario by finding the potential deficiency in supervisory rules.

The Development of FinTech. Opportunities and Risks for the Financial Industry in the Digital Age - With Preface to the FinTech Series

The research analyses the operation of FinTech companies, highlighting the benefits and risks that their development generates in terms of competitive stimulus within the financial system and streamlining its operating mechanisms, broadening the accessibility of financial services for customers and improving the satisfaction of their financial needs, the correct and efficient allocation of financial resources to the benefit of economic growth, as well as the correct and transparent management of information and risks linked to financial services, especially when directed at retail investors. First of all, the work qualifies the type of FinTech companies, clarifying the fact that they are a fully-fledged new component of the financial industry, since they perform financial activities using innovative technological solutions. FinTech, therefore, is a phenomenon that is developing within the financial services industry, in the wake of the more general process of creation of the digital economy. In particular, the work highlights the product and process innovations introduced by these new financial operators, as well as the extensive areas of overlap or affinity identified on the operating plane for intermediation performed by traditional intermediaries and financial markets subject to supervisory rules. In addition, the analysis reveals the different business models adopted by FinTech companies, through the development of direct and indirect digitalised financial intermediation channels. Particular attention is also paid to the examination of risks linked to FinTech operation, as well as the critical aspects that may be identified with regard to both the management of the services offered and the fairness and transparency towards customers. Overall, this paper makes a series of considerations that contribute to the on-going international debate on the opportunities and methods of regulating FinTech and that support the definition of a regulatory architecture that is more activity-based than today's more prevalent entity-based structure, which is not sufficient to ensure, on the one hand, neutral rules for the technological solutions adopted by individual financial operators and, on the other, equal protection for customers. The regulatory decisions that are to be made may have as yet unpredictable effects on the development of market shares and the range of offering of new operators, on the degree of competitiveness of the financial industry and on its evolution in the different countries. However, considering that the digitalisation of financial activities is an incontrovertible process and a structural feature of the new financial industry, the final part of the paper highlights the strategic choices that financial intermediaries (namely banks) are making in this changed market scenario.

Real earnings management in public vs private firms in the GCC countries: a risk perspective

PurposeThe purpose of this paper is to examine the use of real earnings management by private and public firms in a unique institutional setting, which is the Gulf Cooperation Council (GCC) countries. The paper also compares the level of real earnings management between public and private firms in the GCC area.Design/methodology/approachThe GCC area is a unique setting to investigate the use of real earnings management because of the low enforcement of reporting standards and supervisory rules, lack of sophisticated financial analysis, specialized media tools and high concentration of capital ownership. The authors use different models of real earnings management proposed by Roychowdhury, 2006, cash flow management, productions cost management and discretionary expenses management to examine the use of real earnings management.FindingsThe paper documents evidence consistent with private and public firms using real earnings management to influence their earnings figures. The paper also shows that the level of real earnings management is higher for private firms compared to public firms when cash flow management and discretionary expenses management models are used. The production cost model results show evidence consistent with public firms only engaging in real earnings management through production cost reduction.Research limitations/implicationsThe results of this study might not be applicable to other emerging markets.Practical implicationsThe findings of this study should promote a general understanding of firms’ behavior in unique environment such as GCC countries. Regulators in the GCC region should be aware that real earnings management techniques have been used by firms and that extra caution is required when auditing or analyzing the financial information of private and public firms in the GCC market.Originality/valueThis paper contributes to the literature in many aspects. First, it provides additional evidence on the use of earnings management in unique market contexts outside the USA and Europe. The GCC markets share many common characteristics that make them interesting settings to be investigated. Second, this paper adds more evidence on the use of earnings management between public and private firms. In this regard, the paper adds additional evidence in the discussions proposed by Ball and Shivakumar (2005) and Givoly et al. (2010) who use two competing perspectives to investigate earnings quality in public and private firms: the demand hypothesis and the opportunistic behavior hypothesis.

The Price Is Rightt. Using Auction Theory to Enhance Competition in the NPL Market

Almost a decade after the onset of the global financial crisis, a huge stock of nonperforming loans (NPLs) still represents a major burden for European banks’ profitability and a severe headwind for credit growth at an area-wide level. While a great deal has been done to establish stricter supervisory rules and more robust insolvency frameworks, the development of an efficient secondary market for impaired assets is currently lagging behind, especially in the countries where the level of troubled loans is more worrisome. To address this problem, the European Banking Authority has recently proposed to set up an EU-backed asset management company (AMC) for the exchange of NPLs. In addition to the difficulties associated to a full compliance of a public AMC with EU State aid rules, we argue that such a vehicle might be useful in solving just one of the three failures typically affecting the market for NPLs, that is the information asymmetry between buyers and sellers. To successfully tackle the other two – namely, market power and collusion – a correct design of the market is crucial. From this point of view, auction theory can be of great help.

The Interaction of the IFRS 9 Expected Loss Approach with Supervisory Rules and Implications for Financial Stability

This paper examines the interaction of the International Financial Reporting Standard (IFRS) 9 expected credit loss (ECL) model with supervisory rules and discusses potential implications for financial stability in the European Union. Compared to the incurred loss approach of IAS 39, the IFRS 9 ECL model incorporates earlier and larger impairment allowances and is more closely aligned with regulatory expected loss. The earlier recognition of credit losses will reduce the build-up of loss overhangs and the overstatement of regulatory capital. In addition, extended disclosure requirements are likely to contribute to more effective market discipline. Through these channels IFRS 9 might enhance financial stability. However, due to the reliance on point-in-time estimates of the main input parameters (probability of default and loss given default) IFRS 9 ECLs will increase the volatility of regulatory capital for some banks. Furthermore, the ECL model provides significant room for managerial discretion. Bank supervisors might play an important role in the implementation of IFRS 9, but too much supervisory intervention bears the risk of introducing a prudential bias into loan loss accounting that compromises the integrity of financial reporting. Overall, the potential benefits of the standard will crucially depend on its proper and consistent application across jurisdictions.

Mandatory Participation in Occupational Pension Schemes in the Netherlands and Other Countries. An Update

This paper discusses mandatory participation in Dutch occupational pension schemes. While historically mandatory participation is a feature of most second-pillar pension arrangements, some recent developments may affect the case for mandatory participation. The main ones are the revision of the Dutch supplementary pension contract, changes in the prudential supervisory rules and developments in European regulations regarding supplementary pensions. We also compare mandatory participation in the Dutch occupational pension system with that in a number of foreign pension systems.

Do Islamic and Conventional Banks Really Differ? A Panel Data Statistical Analysis

This study compares two types of banks: conventional banks and Islamic banks. Indeed, since the aftermath of the credit crunch and the global financial crisis (2008–2009), the former have been severely criticized, while the latter are increasingly considered as an alternative form of banking. From a panel sample of twenty major banks (ten conventional banks and ten Islamic banks) located in various developed and emerging countries over the period April 2006- February 2013, the present paper examines whether or not there are significant differences between the two banking systems. Our sample enables us to compare these international banking systems, taking the crisis impact and new regulations and supervisory rules into account. To this effect, we carried out econometric analyses of univariate and multivariate panel data, which pointed to two interesting findings. First, there are only a few significant differences between IBs and CBs in terms of financial risk. Second, PVAR (Panel Vector Autoregressive) estimates and the analysis of Impulse Response Functions (IRFs) indicate weak interactions between IBs and CBs, while panel causality tests reject the causality hypothesis from IBs to CBs.

Optimal supervisory rules for pension funds under diverse pension security mechanisms

The present paper analyzes optimal supervisory rules for pension funds taking account of diverse pension security mechanisms: support provided by either a plan sponsor, a pension guarantee fund or by both. Assuming that the regulatory rule is either to control the shortfall probability or expected shortfall, we show that both the security mechanisms and risk measures used by the regulators have a substantial impact on the optimal regulation and hence need to be considered adequately when setting regulatory rules.

Optimal Supervisory Rules for Pension Funds Under Diverse Pension Security Mechanisms

The present paper analyzes optimal supervisory rules for pension funds taking account of diverse pension security mechanisms: support provided by either a pension guarantee fund, a plan sponsor or by both. Assuming that the regulatory rule is either to control the shortfall probability or expected shortfall, we show that both the security mechanisms and risk measures used by the regulators have a substantial impact on the optimal regulation and hence need to be considered adequately when setting regulatory rules.

Mandatory Participation in Occupational Pension Schemes in the Netherlands and Other Countries

This paper discusses mandatory participation in Dutch occupational pension schemes. While mandatory participation is a historical feature of most second-pillar pension arrangements, some recent developments may affect the case for mandatory participation. The main ones are the revision of the Dutch supplementary pension contract, changes in the prudential supervisory rules and developments in European regulations regarding supplementary pensions. We also compare mandatory participation in the Dutch occupational pension system with that in a number of foreign pension systems.

Experimental investigation of model predictive control-based rules for a radiantly cooled office

A novel hybrid approach for supervisory control was applied to a test cell with thermo-active building systems and fan-assisted natural ventilation. Model predictive control was first used to identify combined thermo-active building systems and ventilation control strategies that maximized cooling energy savings while preserving thermal comfort. A rule extraction process using classification and regression trees then yielded supervisory rules capable of reproducing nearly all of the energy and comfort benefits of the model predictive control solutions when simulated. An experimental test of the rules was conducted on the same facility, yielding 40% average cooling energy savings compared to a base case, with comparable comfort. A variety of model input mismatches, including weather, model parameters, internal gains, and imperfect weather forecasts, degraded the performance of the rule significantly under experimental conditions, and analysis suggests that energy savings could have been nearly double had these factors been eliminated.

When Chinese Observance Meets Western Innovation: Complementary Impacts on Technical Workers

Can traditional Chinese values coexist with Western innovation in technological areas to facilitate knowledge and ethical attributes among employees? This empirical investigation considers Chinese observance, a Chinese tradition related to ordering relationships, respect for seniority, conformance with supervisory rules, and preferences for personal relationships, to determine how these values might function. The sample features engineering workers from two regions that concentrate technological resources along the Taiwan Strait. Two seemingly contradictory values--Chinese observance and Western innovation--create a complementary, instead of competitive, pattern of integrative culture model for Chinese workers’ learning technology knowledge and ethical attributes, though the overall contribution of Western innovative values is stronger. Further results suggest that Chinese observance, though uncommon in Western innovative cultures, is as significant as Western tolerance for conflict in terms of influencin...

Extraction of supervisory building control rules from model predictive control of windows in a mixed mode building

Rule extraction is a promising technique for developing or fine-tuning supervisory control strategies in buildings. Three data mining techniques are examined that extract rules from offline model predictive control (MPC) results for a mixed mode building operated during the cooling season: generalized linear models (GLM), classification and regression trees (CART), and adaptive boosting. All rules were able to recover approximately 90% of the original optimizer energy savings under open loop tests, but the GLM-based rules saw significant performance degradation under simulated tests. CART and boost rules only degraded in performance by a few percentage points, still retaining the vast majority of optimizer savings (84% and 93% for the CART and boost rules, respectively). The results demonstrate that the proposed rule extraction techniques may allow building automation systems to achieve near-optimal supervisory control strategies without online MPC systems, although further research is required to broadly test applicability to more complex cases.