Deposit Insurance, Capital Requirements, and Financial Stability

The recent financial crisis has highlighted the interconnectedness between macroeconomic and financial stability, raising questions about how to combine monetary and prudential policies. This paper characterizes the jointly optimal monetary and prudential policies, setting the interest rate and bank-capital requirements. The source of financial fragility is the socially excessive risk taking by banks due to limited liability and deposit insurance. We provide conditions under which locally (Ramsey) optimal policy dedicates the prudential instrument to preventing inefficient risk taking by banks, and the monetary instrument to dealing with the business cycle, with the two instruments covarying either negatively, or positively and countercyclically. (JEL E32, E43, E44, E52, G01, G21, G28)

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The misconception of the option value of deposit insurance and the efficacy of non-risk-based capital requirements in the literature on bank capital regulation

Journal of Financial Stability ◽

10.1016/j.jfs.2009.06.001 ◽

2010 ◽

Vol 6 (2) ◽

pp. 79-84 ◽

Cited By ~ 3

Author(s):

Paolo Fegatelli

Keyword(s):

Deposit Insurance ◽

Capital Requirements ◽

Capital Regulation ◽

Bank Capital ◽

Option Value ◽

Bank Capital Regulation

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

International Journal of Finance and Accounting ◽

10.47604/ijfa.33 ◽

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.

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Sources Of Non-Performing Loans In Turkish Banking System

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v5i10.2595 ◽

2011 ◽

Vol 5 (10) ◽

Author(s):

Gokhan Karabulut ◽

Mehmet Huseyin Bilgin

Keyword(s):

Financial Stability ◽

Deposit Insurance ◽

Developing Economies ◽

Banking System ◽

Bank Loans ◽

System Stability ◽

Insurance System ◽

Turkish Government ◽

Deposit Insurance System ◽

The Impact

The purpose of this paper is to examine the impact of the unlimited deposit insurance on non-performing loans and market discipline. Deposit insurance program play a crucial role in achieving financial stability. Governments in many advanced and developing economies established deposit insurance schemes for reducing the risk of systemic failure of banks. Deposit insurance has a beneficial effect of reducing the probability of a bank run.  However deposit insurance systems have its own set of problems. Deposit insurance systems create moral hazard incentives that encourage banks to take excessive risk. Turkey established an explicit deposit insurance system in 1960. Until 1994, the coverage determined by a flat rate but in that date, Turkey experienced a major economic crisis. In April 1994, Turkish government started to apply an unlimited deposit insurance scheme to restore banking system stability. Unlimited deposit insurance caused a remarkable increase at non-performing loans. This paper empirically estimates the impact of unlimited deposit insurance system on non-performing bank loans (NPLs) and analyses the other potential sources of NPLs.

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The inter-relationships among liquidity creation, bank capital and credit risk: evidence from emerging Asia–Pacific economies

Managerial Finance ◽

10.1108/mf-04-2020-0189 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Tu D.Q. Le ◽

Xuan T.T. Pham

Keyword(s):

Credit Risk ◽

Emerging Economies ◽

Financial Stability ◽

Generalized Method Of Moments ◽

Negative Relationship ◽

Capital Requirements ◽

Asia Pacific ◽

Bank Capital ◽

Content Type ◽

Small Banks

PurposeThis study investigates the inter-relationships among liquidity creation, bank capital and credit risk in selected emerging economies between 2012 and 2016.Design/methodology/approachA three-step procedure as proposed by Berger and Bouwman (2009) is used to measure liquidity creation. Thereafter, a simultaneous equations model with the generalized method of moments (GMM) estimator is used to examine the links between liquidity creation, bank capital and credit risk.FindingsThe findings indicate that bank capital and credit risk affect each other positively after controlling for liquidity creation. Also, the findings show a negative impact of credit risk on liquidity creation while our findings do not find any evidence to confirm the reverse relationship between them. Furthermore, the findings demonstrate a two-way negative relationship between liquidity creation and bank capital in these emerging economies. Finally, the results indicate a positive relationship between capital and credit risk, especially in the case of small banks in the sample.Practical implicationsThe findings suggest that the trade-off between the benefits of financial stability induced by tightening capital requirements and those of improved liquidity creation has crucial implications for policymakers and bank regulators in making the banking system more resilient. A positive impact of capital on credit risk emphasizes that the authorities in selected emerging economies should put more attention on small banks to ensure their exposures under target control.Originality/valueThis is the first study that examines the dynamic interrelationships among liquidity creation, bank capital and credit risk in the Asia–Pacific region.

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U. S. Investment Banks in the Context of the Post-Crisis International Banking Regulation Reform

Moscow University Economics Bulletin ◽

10.38050/01300105202012 ◽

2020 ◽

Vol 2020 (1) ◽

pp. 21-40

Author(s):

Eduard Dzhagityan ◽

Anastasiya Podrugina ◽

Sofya Streltsova

Keyword(s):

Financial Stability ◽

Banking Regulation ◽

Capital Requirements ◽

Capital Adequacy ◽

Investment Banks ◽

Basel Iii ◽

International Banking ◽

Minimum Capital ◽

Negative Effect

The article looks into the reasons underlying the outspread of the full-scale mechanism of banking regulation over U. S. investment banks. We analyze the effect of the Basel III standards on stress-resilience of investment banks and examine the role of U. S. investment banks in ensuring financial stability. Based on regression analysis we found that minimum capital adequacy standards of Basel III do not have negative effect on ROE of the U. S. investment banks that are G-SIB category-designate; however, additional capital requirements (Higher Loss Absorbency (HLA) surcharge) that depend on G-SIB’s systemic significance according to their bucket as per Financial Stability Board classification do have significant and negative effect on ROE in the post crisis period. Besides, leverage requirements that also depend on G-SIB’s systemic significance have a statistically significant effect on ROE.

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Financial and Banking Regulation and Supervision within the EU

Baltic Journal of European Studies ◽

10.2478/bjes-2013-0011 ◽

2013 ◽

Vol 3 (2) ◽

pp. 17-37

Author(s):

Constanze Lehleiter

Keyword(s):

Financial Stability ◽

Sovereign Debt ◽

Debt Crisis ◽

Banking Regulation ◽

Capital Requirements ◽

Green Paper ◽

Shadow Banking ◽

The European Union ◽

European Banking ◽

The Eu

AbstractThe European Union (EU) has faced not only the international financial crisis, but also the European banking and the sovereign debt crisis. A lack of efficient regulations and supervision were a serious cause of recent developments. As a reaction, the EU finally implemented a framework covering both micro- and macro-prudential policies. Measures such as the new capital requirements, the deposit guarantee schemes, the green paper on shadow banking and, most importantly, the new approach for a macro-prudential supervision are headed towards crisis prevention. However, the challenge is to define regulations enhancing financial stability, which, at the same time, do not prevent institutions from generating reasonable financial risks and do not reduce growth. In that regard, the presented measures still have deficits which have to be faced. Furthermore, coordination between various authorities and the European Commission remains another challenge.

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The Application of Macroprudential Capital Requirements in Managing Systemic Risk

Complexity ◽

10.1155/2018/4012163 ◽

2018 ◽

Vol 2018 ◽

pp. 1-15

Author(s):

Hong Fan ◽

Chirongo Moses Keregero ◽

Qianqian Gao

Keyword(s):

Systemic Risk ◽

Financial Stability ◽

Banking System ◽

Capital Requirements ◽

Equity Capital ◽

Risk Allocation ◽

Regulatory Capital ◽

Allocation Mechanism ◽

Bank Equity ◽

Almost All

When setting banks regulatory capital requirement based on their contribution to the overall risk of the banking system we need to consider that the risk of the banking system as well as each banks risk contribution changes once bank equity capital gets redistributed. Therefore the present paper provides a theoretical framework to manage the systemic risk of the banking system in Nigeria based on macroprudential capital requirements, which requires banks to hold capital that is proportional to their contribution to systemic risk. Using a sample of 10 Nigerian banks, we reallocate capital in the system based on two scenarios; firstly in the situation where the system shocks do not exist in the system, we find that almost all banks appear to hold more capital; secondly, we also consider the situation where the system shocks exist in the system; we find that almost all banks tend to hold little capital on four risk allocation mechanisms. We further find that despite the heterogeneity in macroprudential capital requirements, all risk allocation mechanisms bring a substantial decrease in the systemic risk. The risk allocation mechanism based on ΔCoVaR decreases the average default probability the most. Our results suggest that financial stability can be substantially improved by implementing macroprudential regulations for the banking system.

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Asset Quality and Deposit Money Banks Performance in Nigeria

American International Journal of Business and Management Studies ◽

10.46545/aijbms.v1i1.37 ◽

2019 ◽

Vol 1 (1) ◽

pp. 38-47

Author(s):

Mbatabbey Joy Ogboru

Keyword(s):

Time Series ◽

Financial Stability ◽

Deposit Insurance ◽

Time Series Data ◽

Annual Reports ◽

Series Data ◽

Bank Performance ◽

Long Run ◽

Short Run ◽

Asset Quality

This study investigate the relationship between asset quality and deposit money banks performance in Nigeria over a period of 30 years ranging from 1986 to 2016, utilizing time series data collected from the Nigeria deposit insurance corporation annual reports and accounts, CBN financial stability report and CBN statistically bulletin for various years. The variables of study includes return on asset (ROA) proxy for Deposit Money Bank performance in Nigeria, ratio of non-performing loan to total loan (NPL), ratio of liquid assets to total assets (LAT) and ratio of liquid assets to short term liabilities (LAS) as measures of asset quality. The study utilizes both the descriptive and econometric techniques to analyze the time series data. The result shows that there is a short run relationship between asset quality and deposit money bank performance in Nigeria. Also, the co-integration result reveals the presence of a long run relationship between asset quality and deposit money bank performance in Nigeria while the granger causality result shows evidence of causality between asset quality and deposit money bank performance in Nigeria. Based on this we conclude by saying that maintaining sound assets quality position is critical to the long term performance, survival and sustainability of DMBs in Nigeria.

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Italy

IMF Staff Country Reports ◽

10.5089/9781513552194.002 ◽

2020 ◽

Vol 20 (237) ◽

Author(s):

Keyword(s):

Central Bank ◽

Financial Stability ◽

Local Level ◽

Competent Authority ◽

Capital Requirements ◽

Shared Responsibility ◽

European Central ◽

Leading Role ◽

Crd Iv

Macroprudential oversight in Italy combines local elements with the European framework. At a local level, financial stability is a shared responsibility between Banca d’Italia (BdI), which is the national central bank and the prudential authority for banks and other financial institutions, the markets authority, Commissione Nazionale per le Società e la Borsa (CONSOB), the insurance supervisor, Istituto per la Vigilanza Sulle Assicurazioni (IVASS), and the pension funds supervisor, Commissione di Vigilanza sui Fondi Pensione (COVIP).2 Each authority exercises its responsibility within a combination of sectoral and activity boundaries and the BdI plays a leading role in surveillance and coordination. Within the European framework, the BdI is both the national competent authority and the designated authority for the macroprudential tools considered under the Capital Requirements Regulation (CRR) and the Capital Requirements Directive IV (CRD IV), which are implemented and activated following the processes described in these regulatory texts and the guidelines provided by the European Central Bank (ECB) – within the competences assigned to it by the SSM Regulation - and the European Systemic Risk Board (ESRB). The ubiquitous role of the BdI on both fronts eases the challenges posed by the coexistence of these two frameworks.

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