scholarly journals Fair premium rate of the deposit insurance system based on banks’ creditworthiness

2019 ◽  
Vol 36 (1) ◽  
pp. 8-31 ◽  
Author(s):  
Naoyuki Yoshino ◽  
Farhad Taghizadeh-Hesary ◽  
Farhad Nili
Keyword(s):  
Financial Institutions ◽  
Deposit Insurance ◽  
Credit Rating ◽  
Financial System ◽  
Insurance Premium ◽  
Capital Adequacy ◽  
Rate System ◽  
Content Type ◽  
Premium Rate ◽  
Fair Premium

Purpose Deposit insurance is a key element in modern banking, as it guarantees the financial safety of deposits at depository financial institutions. It is necessary to have at least a dual fair premium rate system based on creditworthiness of financial institutions, as considering singular premium system for all banks will have moral hazard. This paper aims to develop theoretical and empirical model for calculating dual fair premium rates. Design/methodology/approach The definition of a fair premium rate in this paper is a rate that covers the operational expenditures of the deposit insuring organization, provides it with sufficient funds to enable it to pay a certain percentage share of deposit amounts to depositors in case of bank default and provides it with sufficient funds as precautionary reserves. To identify and classify healthier and more stable banks, the authors use credit rating methods that use two major dimensional reduction techniques. For forecasting nonperforming loans (NPLs), the authors develop a model that can capture both macro shocks and idiosyncratic shocks to financial institutions in a vector error correction model. Findings The response of NPLs/loans to macro shocks and idiosyncratic innovations shows that using a model with macro variables only is insufficient, as it is possible that under favorable economic conditions, some banks show negative performance due to bank level reasons such as mismanagement or vice versa. The final results show that deposit insurance premium rate needs to be vary based on banks’ creditworthiness. Originality/value The results provide interesting insight for financial authorities to set fair deposit insurance premium rate. A high premium rate reduces the capital adequacy of individual financial institutions, which endangers the stability of the financial system; a low premium rate will reduce the security of the financial system.

Critical Analysis of the Zero Risk Weight Privilege for European Sovereign Debt in Light of Art. 124 TFEU

2020 ◽  
Vol 17 (1) ◽  
Author(s):  
Patrick Hauser
Keyword(s):  
Financial Institutions ◽  
Sovereign Debt ◽  
Banking System ◽  
Financial System ◽  
Significant Risk ◽  
Capital Adequacy ◽  
Individual Member ◽  
Member States ◽  
The Individual ◽  
Credit Institutions

AbstractThe zero risk weight privilege for European sovereign debt in the current capital adequacy requirements for credit institutions incentivises credit institutions to acquire and hold sovereign debt. However, it also poses a significant risk to the stability of the banking system and thus the financial system as a whole. It is argued that this privilege should not only be abolished due to the risk it entails but that it is also non conformant with EU primary law. Art. 124 TFEU prohibits privileged access of the EU and Member States' public sector to financial institutions except for prudential considerations. The protective purpose of Art. 124 TFEU to ensure sound budgetary policies by subjecting public borrowing to the same rules as borrowing by other market participants is thwarted by the uniform zero risk weight privilege. Further, as this privilege does not take into account the varying creditworthiness of the individual Member States it does not promote the soundness of financial institutions so as to strengthen the soundness of the financial system as whole, but rather endangers systemic stability. The zero risk weight privilege is therefore not based on prudential considerations and hence violates Art. 124 TFEU.

A proposed framework for implementing risk-based Shari’ah audit

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Suleiman Dalhatu Sani ◽  
Mustapha Abubakar
Keyword(s):  
Financial Institutions ◽  
Real Life ◽  
Financial System ◽  
Practical Work ◽  
System Stability ◽  
Illustrative Case ◽  
Content Type ◽  
Finance Industry ◽  
Islamic Financial Institutions

Purpose This paper aims to recommend a framework that serves as a practical work tool for conducting risk-based Shari’ah audit (RBSA) in Islamic financial institutions (IFIs). Design/methodology/approach Qualitative research method was used through critical in-depth content analysis of documented literature to generate deep insights, further supported with a hypothetical illustrative case study application of the framework on an Islamic bank, aimed at bringing the framework to a practical, near real-life scenario. Findings A robust RBSA framework has been developed which focuses on Shari’ah non-compliance risks to systematically and practically arrive at a rated opinion on the level of an IFI’s adherence with Shari’ah rules and principles as recommended by the Accounting and Auditing Organization for Islamic Financial Institutions, aimed to safeguard the IFI and promote financial system stability at large. Research limitations/implications Practical realities limited the study to the use of a hypothetical case study bank. Future researchers can apply the framework to a real case study of diverse IFIs for effective contextual recalibration in diverse jurisdictions. Practical implications This paper aids the development of both internal and external Shari’ah audit practice using the risk-based approach. Social implications The RBSA framework contributes to promoting public trust and confidence in the Islamic finance industry. Originality/value This paper has proposed this RBSA framework as a practical work tool for Shari’ah auditors in their engagements and regulators in promoting sound governance and financial system stability. It provides foundation for future researchers in the field.

scholarly journals Financial stability: does social activism matter?

2019 ◽  
Vol 28 (2) ◽  
pp. 183-214
Author(s):  
Peterson K. Ozili
Keyword(s):  
Gender Equality ◽  
Financial Institutions ◽  
Environmental Sustainability ◽  
Financial Stability ◽  
Social Protection ◽  
Social Activism ◽  
Financial System ◽  
System Stability ◽  
Content Type ◽  
The Impact

Purpose This study investigate the impact of social activism on financial system stability. Design/methodology/approach Financial stability was analysed from two complementary perspectives: bank-led financial stability and financial system stability driven by sector-wide credit supply. Social activism was analysed from three perspectives: gender equality advocacy, environmental sustainability advocacy and social protection advocacy. Findings The findings reveal that gender equality and environmental sustainability advocacy have significant positive effects for financial stability, whereas social protection advocacy has a significant negative effect for financial stability. In addition, social activism has negative effects for financial stability in the post-2008 financial crisis era. Finally, there are differential effects for country-groups, for instance, social activism strongly improves bank-led financial stability in African countries and for BLEND countries (countries that are eligible for International Development Association (IDA) borrowing based on per capita income levels and are also creditworthy for some borrowing from the International Bank of Restructuring and Development). The findings are relevant for the on-going debate about whether social inclusivity and activism has any economic value for the stability of businesses and the financial system. The findings have implications. Research limitations/implications The implication for policy-making is that the pressure on, or commitment of, financial institutions to be socially inclusive in all social matters such as gender equality, environmental sustainability and social protection does not guarantee stability in the financial system – whether bank-led financial stability or sector-wide financial stability. Therefore, regulators should ensure that financial institutions exercise careful discretion when adjusting their risk models to include all “social risk” factors amidst the recent pressure on corporations to be socially inclusive. Practical implications Another implication for business practice is that business leaders in financial institutions should identify the optimal level of social inclusivity that improves the stability of their corporations, because it would seem counterproductive if business leaders adopt full-scale social inclusion (or considerations) that subsequently make their corporations financially unstable which could lead to loss of shareholders wealth. Originality/value This study is the first attempt to investigate the impact of social activism on financial stability to determine whether greater social activism promotes stability or instability in the financial system.

Indonesia's new financial crisis law carries risks

2016 ◽  
Keyword(s):  
Financial Crisis ◽  
Crisis Management ◽  
Financial Crises ◽  
Deposit Insurance ◽  
Financial System ◽  
Legal Basis ◽  
Content Type ◽  
Regulatory Authorities ◽  
Crisis Prevention ◽  
First Time

Subject The new financial crisis management law. Significance On March 17, parliament approved the long-awaited 'Financial System Crisis Prevention and Mitigation' bill. For the first time, Indonesia has a law on financial crisis management that will provide the legal basis for regulatory authorities to respond better to future financial crises. Impacts Government preparedness to manage a financial crisis will rise, albeit gradually. Political stalemate during a crisis, especially in parliament, would prevent effective and timely action by the president. The Deposit Insurance Corporation has limited capitalisation and may not be strong enough to manage more than two large troubled banks.

scholarly journals Interconnectedness and systemic risk measures of Chinese financial institutions

Kybernetes ◽  
2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ming Qi ◽  
Jiawei Zhang ◽  
Jing Xiao ◽  
Pei Wang ◽  
Danyang Shi ◽  
...  
Keyword(s):  
Financial Institutions ◽  
Systemic Risk ◽  
Risk Measures ◽  
Financial System ◽  
Vulnerability Index ◽  
Content Type ◽  
Systemic Risks ◽  
Impact Index ◽  
Systemic Impact ◽  
Potential Risks

PurposeIn this paper the interconnectedness among financial institutions and the level of systemic risks of four types of Chinese financial institutions are investigated.Design/methodology/approachBy the means of RAS algorithm, the interconnection among financial institutions are illustrated. Different methods, including Linear Granger, Systemic impact index (SII), vulnerability index (VI), CoVaR, and MES are used to measure the systemic risk exposures across different institutions.FindingsThe results illustrate that big banks are more interconnected and hold the biggest scales of inter-bank transactions in the financial network. The institutions which have larger size tend to have more connection with others. Insurance and security companies contribute more to the systemic risk where as other institutions, such as trusts, financial companies, etc. may bring about severe loss and endanger the financial system as a whole.Practical implicationsSince other institutions with low levels of regulation may bring about higher extreme loss and suffer the whole system, it deserves more attention by regulators considering the contagion of potential risks in the financial system.Originality/valueThis study builds a valuable contribution by examine the systemic risks from the perspectives of both interconnection and tail risk measures. Furthermore; Four types financial institutions are investigated in this paper.

Testing the interrelatedness of banking stability measures

2014 ◽  
Vol 6 (1) ◽  
pp. 25-45 ◽  
Author(s):  
Vighneswara Swamy
Keyword(s):  
Emerging Economies ◽  
Financial Stability ◽  
Banking System ◽  
Financial System ◽  
Capital Adequacy ◽  
System Stability ◽  
Var Model ◽  
Content Type ◽  
Banking Stability ◽  
Asset Quality

Purpose – This study aims to investigate the inter-relatedness and the dynamics of banking stability measures and offers answers for some of the related issues such as does financial stability require the soundness of banking institutions, the stability of markets, the absence of turbulence and low volatility? and to what extent the soundness of banking sector in the case of emerging economies can help financial system stability. Design/methodology/approach – This study investigates banking stability by structuring a recursive micro panel vector auto regressive (VAR) model and corroborates the significance of the interrelatedness of the bank-specific variables such as liquidity, asset quality, capital adequacy and profitability by employing a robust panel data drawn from 56 leading banks for a period of 12 years. Findings – A significant contribution of this study is in establishing that liquidity in the banking-dominated financial system is reciprocally related with asset quality, capital adequacy, and profitability of the banking system and in effectively forecasting banking stability employing micro panel recursive VAR model. Research limitations/implications – The study could be further broadened by employing a macro and structural VAR modelling to forecast banking stability. Practical implications – This paper is one among the evolving body of literature that underscores the significant relationship between banking system resilience and financial stability in the context of emerging economies dominated with banking systems. Further, the forecast model is able to capture the dynamics of banking stability with greater and appreciable accuracy. Originality/value – The uniqueness of the study is in modelling banking stability measures in the context of banking-dominated emerging economy financial systems by employing micro panel recursive VAR model by deriving data from 58 leading banks for the period of 12 years from 1996 to 2009 and in offering insights in understanding financial stability with comprehensive literature review.

Factors related to the failure of FDIC-insured US banks

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mario Jordi Maura-Pérez ◽  
Herminio Romero-Perez
Keyword(s):  
Deposit Insurance ◽  
Capital Adequacy ◽  
Bank Failures ◽  
Main Hypothesis ◽  
Content Type ◽  
Explanatory Factors ◽  
Selection Strategies ◽  
Capital Ratios ◽  
The 2008 Financial Crisis ◽  
Federal Deposit Insurance

Purpose This study aims to analyze the factors related to the failure of 535 Federal Deposit Insurance Corporation (FDIC)-Insured United States banks in conjunction with the 2008 financial crisis. Design/methodology/approach The research consists of an analysis of the following three five-year partitions: pre-crisis (2002–2006), crisis (2007–2011) and post-crisis (2012–2016). The main hypothesis is that the factors explaining bank failures vary by period. Using logistic regression analysis, the authors identify the desirable models by period based on three model selection strategies. Findings Liquidity and non-risk-based capital ratios are important explanatory factors in all three periods. As the authors can see from the results, when comparing the full period (2002–2016) and the three five-year period partitions (2002–2006, 2007–2011 and 2012–2016), the ratios change from period to period, but they measure the same financial areas of concern in different contexts as follows: liquidity, leverage/risk exposure and capital adequacy. Risk-based capital ratios are not effective predictors of bank failures. Originality/value Recent academic studies have analyzed bank failures during periods that cover the years before, during and after the crisis, but most of these studies discuss bank failures in the forecasting context only. This study includes an analysis of failure determinants during pre-crisis, crisis and post-crisis subperiods based on the FDIC monitoring system of bank failures and identifies what ratios are more relevant during each period and how they change from period to period.

Toward Islamic deposit insurance model

2020 ◽  
Vol 11 (1) ◽  
pp. 130-151 ◽  
Author(s):  
Usama Adnan Fendi
Keyword(s):  
Financial Institutions ◽  
Deposit Insurance ◽  
Banking System ◽  
Theory And Practice ◽  
Content Type ◽  
Proposed Model ◽  
Islamic Financial Institutions ◽  
Rules And Principles ◽  
Insurance Model ◽  
The Cost

Purpose This paper aims to provide an essential framework for establishing Shariah-compliant deposit insurance scheme, by reviewing the Shariah provisions concerning the available approaches for deposit guarantee, types of deposits in Islamic financial institutions and the permissible party to incur the cost of this guarantee. Design/methodology/approach This paper reviews the Fiqh rules and principles approved by the well-known Islamic Fiqh references, as well as the resolutions of International Islamic Fiqh Academy (IIFA) and Shariah standards issued by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), and presents these resolutions and judgments in a modern applicable way. Findings This paper recommends that the Islamic scheme for deposit insurance should be established based on Takaful insurance principle, and this scheme must adopt fund segregation principle to comply with Shariah provisions for guarantee permissibility. Research limitations/implications The paper bridges the gap between theory and practice by highlighting how the proposed model can be initiated in practice, thus, it can influence public policy in countries with Islamic banking system. Originality/value This paper represents a significant contribution toward the establishment of a consensual Shariah-compliant Islamic deposit insurance model.

Balancing anti-money laundering measures and financial inclusion

2020 ◽  
Vol 23 (1) ◽  
pp. 64-76
Author(s):  
Ehi Eric Esoimeme
Keyword(s):  
Central Bank ◽  
Money Laundering ◽  
Financial Institutions ◽  
Financial System ◽  
Secondary Data ◽  
Financial Inclusion ◽  
Content Type ◽  
Financing Of Terrorism ◽  
The Uk ◽  
Fair Balance

Purpose The purpose of this paper is to critically examine the anti-money laundering measures of the UK and Nigeria, to determine what the best approach is. The best approach is likely the one that strikes a fair balance between protecting the financial system against money laundering and promoting financial inclusion. Design/methodology/approach This paper relies mainly on primary and secondary data drawn from the public domain. It also relies on documentary research. Findings This paper critically analysed the anti-money laundering measures of the UK and Nigeria to determine that the anti-money laundering measures of Nigeria does not strike a fair balance between protecting the financial system against money laundering and promoting financial inclusion because it does not expressly provide for verification of a customer’s identity at the account opening stage for low risk accounts. The paper, however, determined that the anti-money laundering measures of the UK does strike a fair balance between protecting the financial system against money laundering and promoting financial inclusion because it requires customer identification and verification before the establishment of a business relationship for customers who want to open a basic bank account. Research limitations/implications This paper focuses on the anti-money laundering and financial inclusion measures in the UK’s Payment Accounts Regulations 2015 and the Central Bank of Nigeria’s (Anti-Money Laundering and Combating the Financing of Terrorism in Banks and Other Financial Institutions in Nigeria) Regulations, 2013. Originality/value This paper offers a critical analysis of the anti-money laundering and financial inclusion measures of the UK and Nigeria as provided in the UK’s Payment Accounts Regulations 2015 and the Central Bank of Nigeria’s (Anti-Money Laundering and Combating the Financing of Terrorism in Banks and Other Financial Institutions in Nigeria) Regulations, 2013. The paper will provide recommendations on how the measures could be strengthened. This is the only article to adopt this kind of approach.

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