DO BANK CAPITAL REQUIREMENTS AMPLIFY BUSINESS CYCLES? BRIDGING THE GAP BETWEEN THEORY AND EMPIRICS

2011 ◽  
Vol 16 (3) ◽  
pp. 358-395 ◽  
Author(s):  
Roger Aliaga-Díaz ◽  
María Pía Olivero
Keyword(s):  
Business Cycles ◽  
Empirical Work ◽  
Theoretical Work ◽  
Capital Requirements ◽  
Capital Adequacy ◽  
Credit Crunch ◽  
Bank Capital ◽  
Financial Accelerator ◽  
Productivity Shocks ◽  
Structural Framework

In this paper we study the role of bank capital adequacy requirements in the transmission of aggregate productivity shocks. We identify a gap between the empirical and the theoretical work that studies the “credit crunch” effects of these requirements, and how they can work as a financial accelerator that amplifies business cycles. This gap arises because the empirical work faces some difficulties in identifying the effects of capital requirements, whereas the theory still lacks a structural framework that can address these difficulties. We bridge that gap by providing a general equilibrium theoretical framework that allows us to study this financial accelerator. The main insight we obtain is that the “credit crunch” and financial accelerator effects are rather weak, which confirms the findings of existing empirical work. Additionally, by developing a structural framework, we are able to provide an explanation for this result.

scholarly journals THE NEW CAPITAL ADEQUACY FRAMEWORK (BASEL III) OPTIONS AND ISSUES IN COMMERCIAL BANKS OF LITHUANIA

Ekonomika ◽  
2015 ◽  
Vol 93 (4) ◽  
pp. 119-134 ◽  
Author(s):  
Filomena Jasevičienė ◽  
Daiva Jurkšaitytė
Keyword(s):  
Banking Regulation ◽  
Capital Requirements ◽  
Capital Adequacy ◽  
System Stability ◽  
Basel Iii ◽  
Management Problem ◽  
Bank Capital ◽  
Factors Influencing ◽  
Capital Adequacy Ratio ◽  
The World

Currently, banking is one of the most regulated activities in the world, because banks are the most important institutional units engaged in financial intermediation and affects not only the whole national economy of the country, but the global financial market as well. One of the key components of banking regulation are requirements expected for the bank capital, which prevent the bank from various unforeseen risks incurring substantial losses and are a sort of guarantee to maintain the financial system stability. For this reason, it is useful to find out what factors affect the capital adequacy ratio, and what measures the banks are going to take in order to meet the new capital requirements. The present research reveals the options of the implementation of the new system and the main problems faced by banks. The paper consists of four main parts: review of theory and literature, the research methodology of the factors influencing the capital adequacy, the study of factors influencing the capital adequacy ratio, and the capital adequacy management problem areas according to the Basel III requirements and conclusions.

scholarly journals Developing “best practices” for bankers’ pay in line with Basel III.

2011 ◽  
Vol 1 (3) ◽  
pp. 7-16 ◽  
Author(s):  
Peiyi Yu ◽  
Jessica Hong Yang ◽  
Nada Kakabadse
Keyword(s):  
Financial Crisis ◽  
Risk Taking ◽  
Global Financial Crisis ◽  
Capital Requirements ◽  
Capital Adequacy ◽  
Incentive Compensation ◽  
Basel Iii ◽  
Bank Capital ◽  
Bank Executives ◽  
The Global Financial Crisis

This paper proposes hybrid capital securities as a significant part of senior bank executive incentive compensation in light of Basel III, a new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. The committee developed Basel III in a response to the deficiencies in financial regulation brought about by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. The hybrid bank capital securities we propose for bank executives’ compensation are preferred shares and subordinated debt that the June 2004 Basel II regulatory framework recognised as other admissible forms of capital. The past two decades have witnessed dramatic increase in performance-related pay in the banking industry. Stakeholders such as shareholders, debtholders and regulators criticise traditional cash and equity-based compensation for encouraging bank executives’ excessive risk taking and short-termism, which has resulted in the failure of risk management in high profile banks during the global financial crisis. Paying compensation in the form of hybrid bank capital securities may align the interests of executives with those of stakeholders and help banks regain their reputation for prudence after years of aggressive risk-taking. Additionally, banks are desperately seeking to raise capital in order to bolster balance sheets damaged by the ongoing credit crisis. Tapping their own senior employees with large incentive compensation packages may be a viable additional source of capital that is politically acceptable in times of large-scale bailouts of the financial sector and economically wise as it aligns the interests of the executives with the need for a stable financial system.

Banking Regulation in Hard Times: Business Cycles, Bank Capital, and the Bank Failure - Credit Crunch Dilemma

2002 ◽  
Vol 22 (1) ◽  
pp. 61-75 ◽  
Author(s):  
Thomas Bernauer ◽  
Vally Koubi
Keyword(s):  
Business Cycles ◽  
Total Population ◽  
Banking Regulation ◽  
Bank Failure ◽  
Credit Crunch ◽  
Bank Failures ◽  
Bank Capital ◽  
Capital Asset ◽  
Policy Makers ◽  
Hard Times

Restrictive policies aimed at reducing the likelihood of bank failures during recessions tend to increase the probability of a credit crunch. We examine whether this policy-dilemma is empirically observable, and whether policy-makers concentrate more on preventing bank failures or avoiding a credit crunch. We find that although capital-asset ratios in the total population of US banks in the 1990s are pro-cyclical, the most vulnerable banks (substantially undercapitalized ones) tend to increase their capital-asset ratios during recessions. These findings suggest that policy-makers are indeed experiencing a dilemma, and that they try to balance the relative probabilities of the two evils: they force the weakest banks to improve their capital-asset ratios while mitigating the risk of a credit crunch by accepting a reduction in the capital-asset ratios of less vulnerable banks.

The Determinants of Bank Capital for East Asian Countries

2019 ◽  
Vol 20 (6) ◽  
pp. 1311-1323
Author(s):  
Rubi Ahmad ◽  
Mohamed Albaity
Keyword(s):  
East Asian ◽  
Capital Requirements ◽  
Capital Adequacy ◽  
Bank Capital ◽  
Asian Countries ◽  
Management Quality ◽  
Risk Appetite ◽  
Capital Ratios ◽  
European Banks ◽  
Capital Regulations

This study identifies the determinants of bank capital ratios in eight East Asian countries using unbalanced panel data of 278 banks from 2004 to 2014. The results indicate that bank capital decisions are significantly driven by management quality, liquidity, leverage and bank size, as well as bank regulations, indicating that the determinants of bank capital are consistent with past findings for US and European banks. The capital adequacy ratios in East Asia are not linked with banks’ risk appetite. Given that our results show that bank managers generally react negatively to capital requirements, capital regulations should be followed with more rigorous supervisory oversight, to reduce the adverse effects of high capital requirements on bank safety.

scholarly journals On the Rising Complexity of Bank Regulatory Capital Requirements: From Global Guidelines to their United States (US) Implementation

2018 ◽  
Vol 11 (4) ◽  
pp. 77 ◽  
Author(s):  
James R. Barth ◽  
Stephen Matteo Miller
Keyword(s):  
United States ◽  
Latin American ◽  
Debt Crisis ◽  
The United States ◽  
Capital Requirements ◽  
Capital Adequacy ◽  
Bank Capital ◽  
Regulatory Capital ◽  
Minimum Capital ◽  
The Us

After the Latin American Debt Crisis of 1982, the official response worldwide turned to minimum capital standards to promote stable banking systems. Despite their existence, however, such standards have still not prevented periodic disruptions in the banking sectors of various countries. After the 2007–2009 crisis, bank capital requirements have, in some cases, increased and overall have become even more complex. This paper reviews (1) how Basel-style capital adequacy guidelines have evolved, becoming higher in some cases and overall more complex, (2) how the United States (US) implementation of these guidelines has contributed to regulatory complexity, even when omitting other bank capital regulations that are specific to the US, and (3) how the US regulatory measures still do not provide equally valuable information about whether a bank is adequately capitalized.

Basel Capital Adequacy Ratio Standard in The Light of Islamic Law Perspective

2016 ◽  
Vol 1 ◽  
pp. 308-317
Author(s):  
Adi Rahmanur Ibnu
Keyword(s):  
Financial Crises ◽  
Global Economy ◽  
Banking Sector ◽  
Islamic Law ◽  
Capital Requirements ◽  
Capital Adequacy ◽  
Minimum Capital ◽  
Capital Adequacy Ratio ◽  
Global Banking ◽  
Banking Development

Bank is one of the most important pillars of economy activities. However, banking sector has a real potential crisis threat. Alongside with the steady current global banking development, financial crises that have happened clearly affected global economy. Based on that situation, BIS (Bank for International Settlement) – an international financial standard setting organization, realizes the urgency to establishan international financial standard and supervision to anticipate future potential financial crises. This research aims to identify how Capital Adequacy Ratio Standard in Basel Capital Accord (II) based on Islamic law perspective. The research is conducted by analyzing Basel Capital Accord published by BIS. The research uses library research method to find out the aimed result. The focus is on the 1st pillar of Basel II publication that is Minimum Capital Requirements (CAR) policy. CAR, as an Islamic economics policy, will be analyzed using falāḥ approach. Falāḥ is an Islamic economics objective that consists of happiness, success, accomplishment or good luck concept. The earthly dimension of falāḥ has some parameters that can be used to analyze Islamic economics policy. Additionally, the Islamic fiqh maxim takes part in analyzing the policy. The maṣlaḥat concept in fiqh maxim approach shares aim with falāḥ concept in the sense that all of sharia law aims for success, happiness, eternal survival etc. The maṣlaḥat can be accomplished by extinguishing mafsadat or seizing maṣlaḥat. The maṣlaḥat aspect is essential to determine the compatibility Basel Capital Accord with jurisprudential maxim i.e harm must be dispelled (al-dharāru yuzāl). The conclusion results are, 1) Basel Capital Accord focuses on macro-prudential aspect in order to anticipate potential financial crises, 2) beneficial/interest (maṣlaḥat) aspects of the hereafter, cooperation principle, justice, fairness and the prohibition of exploitation are not the core value of Basel Capital Accord frame work, thus 3) the achievement of maslahat as intended by sharia i.e. jurisprudential maxim are not convincing. Therefore, 4) Basel Capital Accord as a regulation basis is not in line with jurisprudential maxim i.e harm must be dispelled (al-dharāru yuzāl).

Islamic Banking Regulations in Light of Basel II

2010 ◽  
Vol 27 (1) ◽  
pp. 74-101 ◽  
Author(s):  
M. Kabir Hassan ◽  
Muhammad Abdul Mannan Chowdhury
Keyword(s):  
Financial Institutions ◽  
Banking Regulation ◽  
Capital Requirements ◽  
Basel Ii ◽  
Capital Adequacy ◽  
Regulatory Agencies ◽  
Islamic Banking ◽  
Islamic Banks ◽  
Minimum Capital ◽  
Regulatory Standards

This paper seeks to determine whether the existing regulatory standards and supervisory framework are adequate to ensure the viability, strength, and continued expansion of Islamic financial institutions. The reemergence of Islamic banking and the attention given to it by regulators around the globe as to the implications of a recently issued Basel II banking regulation makes this article timely. The Basel II framework, which is based on minimum capital requirements, a supervisory review process, and the effective use of market discipline, aligns capital adequacy with banking risks and provides an incentive for financial institutions to enhance risk management and their system of internal controls. Like conventional banks, Islamic banks operate under different regulatory regimes. The still diverse views held by the regulatory agencies of different countries on Islamic banking and finance operations make it harder to assess the overall performance of international Islamic banks. In light of the increased financial innovation and diversity of instruments offered in Islamic finance, the need to improve the transparency of bank operations is particularly relevant for Islamic banks. While product diversity is important in maintaining their competitiveness, it also requires increased transparency and disclosure to improve the understanding of markets and regulatory agencies. The governance of Islamic banks is made even more complex by the need for these banks to meet a set of ethical and financial standards defined by the Shari`ah and the nature of the financial contracts banks use to mobilize deposits. Effective transparency in this area will greatly enhance their credibility and reinforce their depositors and investors’ level of confidence.

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