CAMELS-Based Supervision and Risk Management: What Works and What Does Not

2019 ◽  
Vol 8 (3) ◽  
pp. 194-204
Author(s):  
Hari Gopal Risal ◽  
Sabin Bikram Panta
Keyword(s):  
Risk Management ◽  
Standard Deviation ◽  
Central Bank ◽  
Commercial Banks ◽  
Generalized Method Of Moments ◽  
Capital Adequacy ◽  
Management Efficiency ◽  
Average Return ◽  
What Works ◽  
Priority Order

This paper investigates the effectiveness of CAMELS (Capital Adequacy, Assets Quality, Management Efficiency, Earning Efficiency, Liquidity and Sensitivity to Market Risk) based supervision in risk management of A class commercial banks. The riskiness is measured by Downside Deviation (i. e., volatility of returns below minimum average return) and Standard Deviation of ROA and ROE. Using the Generalized Method of Moments (GMM) in secondary balanced panel data during major financial development (i. e., 2004 to 2018; BASEL-I-II-III) of all 28 commercial banks of Nepal; causal relationship between supervision and risk management has been investigated. The result shows that the commercial banks in Nepal can reduce their downside deviation as well as standard deviation of ROA and ROE by reducing the Non-Performing Loan (NPL), maintaining appropriate liquidity and by increasing management efficiency. Further, results justifies the relevance of risk based supervision adopted by central bank and interest spread set. However, increased capital base has not helped in reducing riskiness of banks. Overall, the study finds that among the six parameters of supervision (i. e., CAMELS), five parameters (i. e., AMELS in the priority order of AMLSE) are capable enough to reduce the riskiness of commercial banks if maintained strictly as guided by the central bank.

scholarly journals Bank Regulation and Level of Non performing Loans in Commercial Banks in Nakuru County Kenya

2020 ◽  
Vol 2 (2) ◽  
pp. 59-76
Author(s):  
Geoffrey Indeje Muhanji ◽  
Joseph Theuri
Keyword(s):  
Central Bank ◽  
Commercial Banks ◽  
Bank Regulation ◽  
Capital Adequacy ◽  
Liquidity Management ◽  
Macroeconomic Factors ◽  
Nonperforming Loans ◽  
Management Efficiency ◽  
Asset Quality ◽  
The Relationship

The study sought to determine the effect of bank regulation and level of nonperforming loans in commercial banks in Nakuru County Kenya. The specific objectives of the study were to explore the effect of capital adequacy on the level of nonperforming loans in commercial banks in Nakuru County Kenya, to find out the effect of asset quality on the level of nonperforming loans in commercial banks in Nakuru County Kenya, to evaluate the effect of liquidity management on the level of nonperforming loans in commercial banks in Nakuru County Kenya, to examine the effect of management efficiency on the level of nonperforming loans in commercial banks in Nakuru County Kenya and to determine the moderating effect of macroeconomic factors on the relationship between bank regulation and level of nonperforming loans. The literature review focused on portfolio theory of investment, capital asset pricing theory and the capital buffer theory of capital adequacy. The primary data was collected using structured questionnaires and secondary data was collected from the banking survey 2017 and central bank of Kenya annual supervisory reports. The study employed multiple linear regression analysis and the finding revealed that there exist a negative and statistically insignificant relationship between capital adequacy and non-performing loans. It was also observed that there exist a negative and statistically insignificant relationship between liquidity management and non-performing loans. On the other hand, there exist a positive and statistically significant relationship between asset quality and non-performing loans. Similarly, there exist a positive and statistically insignificant relationship between management efficiency and non-performing loans. Finally, the findings indicated that macroeconomic factors have moderating effect on the relationship between bank regulations and non-performing loans in commercial banks in Nakuru County. It was concluded that asset quality positively influences non-performing loans while management efficiency influence positively the non-performing loans. Similarly, liquidity management exerts a negative influence on non-performing loans. Finally, capital adequacy influence negatively on non-performing loans. The study recommends that Central Bank of Kenya should regularly access lending behavior to ensure compliance with banking regulations to avoid increasing incidences of non-performing loans. In addition, Central Bank of Kenya should closely monitor banks with deteriorating asset quality. Further, Central Bank of Kenya should strictly monitor the economic sector and ensure that banks provide adequate provisions for loans to mitigate risks of default. Furthermore, banks should maintain a good balance on deposits and lending out loans and adhere to regulators decisions about monetary policies. Finally, banks should increase the operational efficiency of operation weakness and improve corporate governance on the sanction of loans and Central Bank of Kenya should focus on managerial performance in order to detect banks with potential increases in non-performing loans.

scholarly journals Risk Management and the Financial Performance of Banks in Nigeria

2020 ◽  
Vol 11 (5) ◽  
pp. 115
Author(s):  
Henry Inegbedion ◽  
Bello Deva Vincent ◽  
Eseosa Obadiaru
Keyword(s):  
Risk Management ◽  
Credit Risk ◽  
Financial Performance ◽  
Asset Management ◽  
Commercial Banks ◽  
Generalized Method Of Moments ◽  
Liquidity Risk ◽  
Capital Adequacy ◽  
Risk Capital ◽  
Ex Post

The study examined “risk management and financial performance of banks in Nigeria” with focus on commercial banks. The broad objective of the study was to ascertain the effect of risk asset management on the optimal financial performance of commercial banks in Nigeria. The study is a longitudinal survey, so the ex-post facto research design was applied. Research data were analysed using generalized method of moments (GMM) and vector Error Correction Model, after testing and adjusting the data for stationarity and Cointegration.The research findings were: Banks’ profitability is significantly influenced in the short run by liquidity risk and in the long-run by credit risk, capital adequacy risk, leverage risk and liquidity risk. Furthermore, profitability measured by ROaA was found to be positively related to liquidity risk but negatively related credit risk. Arising from the findings, there is the need for effective risk management, especially credit, capital adequacy, leverage and liquidity risks, to enhance the profitability of banks. By helping to enhance the going concern of banks, risk management will help to reduce retrenchment and unemployment and hence help to forestall the attendant social vices.

scholarly journals Effects of Basel III Framework on Capital Adequacy of Commercial Banks in Kenya

2016 ◽  
Vol 1 (1) ◽  
pp. 61
Author(s):  
Kevin Kombo ◽  
Dr. Amos Njuguna
Keyword(s):  
Risk Management ◽  
Credit Risk ◽  
Commercial Banks ◽  
Financial Stability ◽  
Safety Net ◽  
Capital Requirements ◽  
Capital Adequacy ◽  
Basel Iii ◽  
Credit Risk Management ◽  
Management Staff

Purpose:The purpose of the study was toassess the effects of Basel III framework on capital adequacy requirement in commercial banks in Kenya. The study sought to address the following research questions: why are capital adequacy regulations important in commercial banks in Kenya? What challenges are commercial banks facing in the implementation of capital adequacy requirement? What measures have commercial banks taken to ensure compliance with the capital adequacy requirement?Methodology:A descriptive survey design was applied to a population of 43 commercial banks operating in Kenya. The target population composed of the 159 management staff currently employed at the head offices of the various commercial banks in Kenya. The population was composed of Senior, Middle and Junior or Entry level Management staff. A sample of 30% was selected from within each group.Primary data was gathered using questionnaires which were dropped off at the bank’s head offices and picked up later when the respondents had filled the questionnaires. Descriptive analysis was used to analyze quantitative data while content analysis was used to analyze qualitative data.Results:The findings show that capital adequacy requirement is important in commercial banks because it leads financial stability in the Kenyan economy, improves credit risk management techniques as poor credit risk management requires more capital and leads to reduced vulnerability to liquidity shocks due to the sound capitalization policies being implemented under the Basel III framework. Findings also revealed that capital adequacy affected the balance sheet structure of the commercial banks in Kenya.Unique contribution to theory, practice and policy: The study recommends that banks should continue the pursuit of various strategies to ensure that they are in compliance with Basel III requirements and the Central Bank of Kenya’s Prudential Guidelines. The staff of this committee should be drawn from mainly the finance, legal, compliance and treasury departments. Compliance with the capital requirements will lead to a safety net for all commercial banks as the additional capital will act as a cushion that absorbs losses in case of distress in the commercial banking sector.

Financial Performance Analysis of Nepalese Financial Institutions in the Framework of CAMEL

2020 ◽  
Vol 9 (1) ◽  
pp. 56-74
Author(s):  
Kedar Raj Gautam
Keyword(s):  
Financial Performance ◽  
Financial Institutions ◽  
Commercial Banks ◽  
Positive Relationship ◽  
Negative Relationship ◽  
Capital Adequacy ◽  
Significant Positive Relationship ◽  
Management Efficiency ◽  
Significant Negative Relationship ◽  
Development Banks

Analysis of financial performance to detect financial health of finance companies, development banks and commercial banks as a whole is a less explored research in Nepalese context. This paper, therefore, attempts to examine the financial performance and factors influencing financial performance of Nepalese financial depositary institutions in the framework of CAMEL. This study is based on descriptive cum casual research design. This study is based on secondary data which was extracted from various publications published by Nepal Rastra Bank such as banking and financial statistics, financial stability report and bank supervision report. All commercial banks, development banks, and finance companies are taken as population of the study. The study deals with financial performance analysis of entire population covering five years from 2014/15 to 2018/19. The variables such as capital adequacy, assets quality, management efficiency, earnings and liquidity are used to analyze financial performance. Descriptive as well as pooled regression analysis was used to assess the relationship among the variables. Descriptive analysis shows that financial institutions in each category meet NRB standard regarding capital adequacy. On the basis of capital adequacy and earnings, finance companies stand at first, on the basis of assets quality, development banks stand at first and on the basis of management efficiency, commercial banks stand at first. Finance companies store high liquidity as compared to other class financial institutions. The regression analysis shows that return on assets, ROA has significant positive relationship with capital adequacy and ROE but ROA has significant negative relationship with assets quality. However, return on equity, ROE has significant positive relationship with assets quality and ROA but ROE has significant negative relationship with capital adequacy. Capital adequacy and assets quality play major role to maximize ROA and ROE of financial institutions.

scholarly journals The Impact of BASEL Accords on the Management of Vietnamese Commercial Banks

2020 ◽  
Vol 13 (10) ◽  
pp. 228
Author(s):  
Hai Long Pham ◽  
Kevin James Daly
Keyword(s):  
Risk Management ◽  
Commercial Banks ◽  
Value At Risk ◽  
Banking System ◽  
Capital Adequacy ◽  
Bank Risk ◽  
Equation Modeling ◽  
Least Squares Regression ◽  
Basel Accord ◽  
The Impact

This paper is an attempt to empirically examine the impact of Basel Accord regulatory guidelines on the risk-based capital adequacy regulation and bank risk management of Vietnamese commercial banks. Our research aims to assess how Vietnamese commercial banks manage their capital ratio and bank risk under the latest Basel Accord capital adequacy ratio requirements. Building on previous studies, this research uses a simultaneous equation modeling (SiEM) with three-stage least squares regression (3SLS) to analyze the endogenous relationship between risk-based capital adequacy standards and bank risk management. A year dummy variable (dy2013) is included in the model to take account of changes in the regulation of the Vietnamese banking system. Furthermore, we add a value-at-risk variable developed by as an independent variable into equations of the empirical models. The results reveal a significant impact of Basel capital adequacy regulatory pressure on the risk-based capital adequacy standards and bank risk management of Vietnamese commercial banks. Moreover, banks under the latest Basel capital adequacy regulations are induced to reduce risks and increase banks’ financial performance.

scholarly journals Investigation of the Pillars of Sustainability Risk Management as an Extension of Enterprise Risk Management on Palestinian Insurance Firms’ Profitability

2020 ◽  
Vol 12 (11) ◽  
pp. 4709
Author(s):  
Rami Shaheen ◽  
Mehmet Ağa ◽  
Husam Rjoub ◽  
Ahmad Abualrub
Keyword(s):  
Risk Management ◽  
Method Of Moments ◽  
Generalized Method Of Moments ◽  
Political Stability ◽  
Enterprise Risk Management ◽  
Reverse Causality ◽  
Comprehensive Understanding ◽  
Management Efficiency ◽  
Enterprise Risk ◽  
Insurance Firms

This research paper examined the simultaneous relationship between sustainability risk management (SRM) as an extension of Enterprise Risk Management (ERM) and Palestinian insurance firms’ profitability, for the period spanning 2007Q1 to 2018Q4, by applying the panel dynamic (Generalized Method of Moments) GMM model. The literature was expanded by providing a comprehensive understanding of determining the pillars of ERM with the use of the factor analysis principle component method. The findings revealed that the firm’s profitability positively corresponded to ERM1 implementation, which represents “management efficiency”. In contrast, it shows negative correspondence to ERM2 implementation, which represents “control and ownership”. Furthermore, there were slightly negative signs from managing the use of leverage and they were conservative in terms of loss reserves. The challenges of firms’ profitability have negatively corresponded to emerging sustainability risks, such as political stability, that cause premiums written to show weak signs of excessive choice of risk or prices that are not met carefully. Interestingly, there is a positive relationship in the interaction between ERM2 implementation during the crisis period on insurance firms’ profitability. There is a robust causal relationship from ERM to the profitability (either positive or negative). The reverse causality is also significant but to a lesser extent. Thus, the study recommends alignment more coherent with the implication of ERM as holistic risk according to the market characteristic towards the environmental perils leads to sustainable development and its segments to maintain the longer term of survival in the firms’ performance.

scholarly journals Capital adequacy ratio and a bank’s financial stability in Vietnam

2021 ◽  
Vol 16 (4) ◽  
pp. 61-71
Author(s):  
Nguyen Minh Sang
Keyword(s):  
Commercial Banks ◽  
Financial Stability ◽  
Generalized Method Of Moments ◽  
Capital Adequacy ◽  
Policy Implications ◽  
Ho Chi Minh City ◽  
Loan Loss ◽  
Control Variables ◽  
Capital Adequacy Ratio ◽  
The Impact

The objective of this study is to provide more empirical evidence on the impact of the capital adequacy ratio, as well as control and micro variables, on the financial stability of commercial banks in emerging markets such as Vietnam. The study analyzes the impact of the capital adequacy ratio on the financial stability of 18 Vietnamese commercial banks in the period 2010–2020 using the Generalized method of moments (GMM) model. Empirical research results show that the capital adequacy ratio has a positive correlation with the financial stability of Vietnamese commercial banks during the study period. Besides, the study also uses control variables such as Profitability through ROA and ROE, Bank Size (SIZE), Loans to Assets Ratio (LTA), Deposits to Assets Ratio (DTA), and Loan Loss Ratio (LLR), to analyze their impact on the financial stability of Vietnamese commercial banks. Based on the above results, the study proposes some policy implications to enhance the financial stability of Vietnamese commercial banks using the capital adequacy ratio and the control variables from the GMM model that are statistically significant. The paper also pointed out four limitations of the study in terms of data, research samples, methods and research models, so that further research can be more complete. AcknowledgmentThe author wishes to acknowledge support from the Banking University of Ho Chi Minh City. This research was made possible thanks to all valuable support from relevant stakeholders.

scholarly journals Does Credit Risk Management affect the Financial Performance of Commercial Banks in Kosovo?

2018 ◽  
Vol 7 (2) ◽  
pp. 49-57
Author(s):  
Rrustem Asllanaj
Keyword(s):  
Risk Management ◽  
Credit Risk ◽  
Financial Performance ◽  
Multiple Regression ◽  
Commercial Banks ◽  
Multiple Regression Model ◽  
Capital Adequacy ◽  
Regression Equations ◽  
Credit Risk Management ◽  
The Impact

This study analyses the impact of credit risk management on financial performance of commercial banks in Kosovo, and comparing the relationship between the determinants of credit risk management and financial performance by using CAMEL indicators. Panel data of 85 observations from 2008 to 2012 of ten commercial banks was analysed using multiple regression model. Findings through multiple regression analysis are presented in forms of tables and regression equations. The study also elaborates whether capital adequacy, asset quality, management efficiency, earnings and liquidity have strong or weak relationship with financial performance of commercial banks. The study concludes that CAMEL model can be used as a system of assessment and rating of credit risk management by commercial banks in Kosovo.

scholarly journals The commercial banks’ credit risk efficiency: Empirical evidence from Kosovo

2021 ◽  
Vol 8 (2) ◽  
pp. 240-254
Author(s):  
Arbana Sahiti ◽  
Arben Sahiti
Keyword(s):  
Risk Management ◽  
Credit Risk ◽  
Commercial Banks ◽  
Capital Adequacy ◽  
Data Envelopment Analysis Model ◽  
Negative Consequences ◽  
Analysis Model ◽  
Tobit Regression ◽  
Credit Risk Management ◽  
Positive Effects

Commercial banks' credit risk management is a function that focuses on events that may affect the achievement of objectives. Improper management will result in negative consequences or results. Therefore, banks usually pay more attention to events with a higher probability and impact of a direct loss of revenue and capital than events that may result in positive effects. This research adopts secondary data and seeks to analyze credit risk management of commercial banks in Kosovo through a developed DEA (Data Envelopment Analysis) model. The study covers seven commercial banks in Kosovo for the period 2008-2016 and uses Tobit regression to determine credit risk efficiency. The estimation results show a statistically significant positive relationship between bank efficiency, capital adequacy, and loans.  Moreover, the study found that banks' efficiency factors, including profitability, deposits, costs, banks size, GDP growth, and inflation, are not statistically significant.

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