Regulatory Capital Management: Fair Value Measurement and Regulatory Capital Ratios

2019 ◽  
Vol 52 (3) ◽  
pp. 375-421
Author(s):  
Felix Krauß
Keyword(s):  
Conflicts Of Interest ◽  
Fair Value ◽  
Capital Requirements ◽  
Jel Classification ◽  
Regulatory Capital ◽  
Tax Rate ◽  
Comprehensive Income ◽  
Capital Ratios ◽  
Value Changes ◽  
The Impact

Abstract The calculation of the regulatory capital ratios according to the Capital Requirements Regulation (CRR) is based on the IFRS consolidated financial statements. Therefore, banks are able to influence their regulatory capital ratios through discretionary powers when measuring with fair values according to IFRS 13. This paper analyzes the effects that discretionary fair value changes have on the regulatory capital ratios. Furthermore, the impact of the prudent valuation according to article 105 CRR on the regulatory capital ratios is examined. While the results depend on a multitude of factors and vary from case to case, there are situations in which the same fair value change of an identical financial asset can have opposing effects on certain regulatory capital ratios depending on bank specific factors like its regulatory capitalization or its tax rate. As a result, decreasing fair values can in some circumstances lead to higher regulatory capital ratios and thus, indicate a greater solvency. In order to identify possible conflicts of interest, the effects of fair value changes on the comprehensive income are also included in the analysis because the comprehensive income serves as an important target figure for banks in addition to the regulatory capital ratios. JEL Classification: F380, G380, M410, M480

scholarly journals The Effects of Regulatory Capital Requirements and Ownership Structure on Bank Lending in Emerging Asian Markets

2019 ◽  
Vol 12 (3) ◽  
pp. 142 ◽  
Author(s):  
Yasmeen Akhtar ◽  
Ghulam Mujtaba Kayani ◽  
Tahir Yousaf
Keyword(s):  
Ownership Structure ◽  
Bank Lending ◽  
Capital Requirements ◽  
Managerial Ownership ◽  
Regulatory Capital ◽  
Loan Portfolios ◽  
Bank Ownership ◽  
Capital Ratios ◽  
Lending Activity ◽  
The Impact

This study examines the impact of regulatory capital requirements and ownership structure on bank lending in Emerging Asian Markets. The findings of the study imply that banks with excess capital are less affected by capital constraints and enjoy opportunities to extend their credit portfolios. The monitory policy indicator has the expected negative and significant impact on bank lending. In case of well-capitalized banks, the interaction between the excess capital and monetary policy indicator has a significant positive relation with bank lending, which means that banks with excess capital have capability to raise uninsured financing and shield their loan portfolios as compared to less-capitalized banks that reduce their lending in the period of monetary tightening. In the case of bank ownership structure, banks with excess capital ratios and ownership concentration lead towards an increase in lending activity. The findings also show that well-capitalized banks with managerial ownership tend to reduce lending which validates agency theory of corporate governance.

Fair value and banking contagion

2016 ◽  
Vol 7 (3) ◽  
pp. 215-236 ◽  
Author(s):  
Leila Gharbi ◽  
Halioui Khamoussi
Keyword(s):  
Data Model ◽  
Banking Sector ◽  
Fair Value ◽  
Islamic Banks ◽  
Fair Value Accounting ◽  
Content Type ◽  
Gcc Countries ◽  
Conventional Banks ◽  
Value Changes ◽  
The Impact

Purpose This paper aims to explore empirically the impact of fair value accounting on banking contagion in a comparative context between Islamic banks and conventional banks. Design/methodology/approach The analysis of the impact of fair value changes on banking contagion is carried out through a panel data model. This study covers 20 Islamic banks and 40 conventional banks operating in the Gulf Cooperation Council (GCC) countries during nine years from 2003 to 2011. Findings Empirical evidence shows that there is a significant change in dynamic volatility in GCC banking sector because of financial crisis 2008. However, results fail to confirm the hypothesis that fair value accounting is significantly associated with an increase of banking contagion for both Islamic and conventional banks operating in GCC countries. Originality/value The outcome of this study provides some insights for academicians, accountants as well as regulators in terms of enhancing the effectiveness of accounting practices.

scholarly journals Are Banks’ Below Par Own Debt Repurchases a Cause for Prudential Concern?

2018 ◽  
Vol 35 (3) ◽  
pp. 501-529
Author(s):  
Martien Lubberink ◽  
Annelies Renders
Keyword(s):  
Fair Value ◽  
Alternative Methods ◽  
Basel Iii ◽  
Regulatory Capital ◽  
Liability Management ◽  
Tier 1 ◽  
Capital Ratios ◽  
European Banks ◽  
Using Data ◽  
Tier 1 Capital

In the lead-up to the implementation of Basel III, European banks repurchased debt securities that traded below par. Banks engaged in these Liability Management Exercises (LMEs) to realize a fair value gain that prudential rules exclude from regulatory capital calculations. The LMEs enabled banks to augment Core Tier 1 capital, given that alternative methods to increase capital ratios were not feasible in practice. Using data of 720 European LMEs conducted between April 2009 and December 2013, we show that poorly capitalized banks repurchased securities and lost about €9.1bn in premiums to compensate their holders. Banks also repurchased the most loss-absorbing securities, for which they paid the highest premiums. These premiums increase with leverage and in times of stress. Hence debt repurchases are a cause for prudential concern.

Banks' Asset Reporting Frequency and Capital Regulation: An Analysis of Discretionary Use of Fair-Value Accounting

2018 ◽  
Vol 94 (2) ◽  
pp. 157-178 ◽  
Author(s):  
Carlos Corona ◽  
Lin Nan ◽  
Gaoqing Zhang
Keyword(s):  
Cost Accounting ◽  
Fair Value ◽  
Capital Requirements ◽  
Capital Adequacy ◽  
Critical Determinant ◽  
Historical Cost ◽  
Accounting Choices ◽  
Reporting Frequency ◽  
Value Changes ◽  
Historical Cost Accounting

ABSTRACT This paper examines banks' choice between fair-value and historical-cost accounting when reported accounting information is used in capital requirement regulation. We center our analysis on a key difference between fair-value and historical-cost accounting: the frequency with which asset value changes are reported. We show that the elasticity of banks' loan returns to aggregate lending is a critical determinant of the interaction between capital adequacy requirements and accounting choices. If lending returns are inelastic, then higher capital requirements reduce fair-value usage. By contrast, higher capital requirements encourage fair value if capital requirements are low and lending returns are sufficiently elastic. In equilibrium, banks may elect different accounting choices, and we find that mandating uniform adoption of historical cost (fair value) is desirable when capital requirements are loose (tight). Our study offers many other implications about fundamental links between accounting and prudential choices.

Drivers of Bank Solvency, Risk Provisioning and Profitability in the Armenian Banking System

2018 ◽  
Vol 17 (3) ◽  
pp. 307-332
Author(s):  
Suren Pakhchanyan ◽  
Jörg Prokop ◽  
Gor Sahakyan
Keyword(s):  
Banking Sector ◽  
Banking System ◽  
Jel Classification ◽  
Regulatory Capital ◽  
Loan Loss ◽  
Loan Loss Provisions ◽  
Capital Ratios ◽  
Bank Solvency ◽  
Macroeconomic Determinants ◽  
Loan Growth

The aim of this study is to examine the effects of bank-specific, regulatory and macroeconomic determinants on solvency, risk provisioning, and profitability in the Armenian banking sector. We show that abnormal loan growth is associated with a decrease in regulatory capital ratios, an increase in loan loss provisions, and a reduction in loan portfolio profitability. In addition, we observe an inverse relationship between GDP growth and bank solvency as well as profitability. Regarding regulation, we identify a decrease in regulatory capital ratios as well as a drop in profitability after the implementation of the Basel II Accord. JEL Classification: G32, G21, G28

Ex ante, ex post risk and bank capital ratios: an empirical investigation

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Faisal Abbas ◽  
Adnan Bashir
Keyword(s):  
Generalized Method Of Moments ◽  
Regulatory Capital ◽  
Content Type ◽  
Ex Post ◽  
Ex Ante ◽  
Capital Ratios ◽  
Cooperative Banks ◽  
The Impact ◽  
Practical Implications ◽  
Tier I

PurposeThe purpose of this study is to investigate the impact of leverage, regulatory capital and tier-I capital ratios on the ex ante and ex post risk of Japanese banks.Design/methodology/approachTo test the hypotheses, the authors have implemented a panel of 507 commercial and cooperative banks of Japan over the period extending from 2001 to 2020, using a two-step system Generalized Method of Moments (GMM) framework.FindingsThe overall sample banks' results show that the impact of leverage, regulatory capital and tier-I capital ratios on ex ante and ex post risk is positive. The findings reveal that the effects of regulatory and tier-I capital ratios on ex post risk are negative (positive) for commercial (cooperative) banks, high-liquid, low-liquid and high-growth banks in Japan. In addition, the regulatory capital ratio is more beneficial for risk due to its power to absorb losses. The lagged coefficient indicates that banks require more time to adjust their ex post and ex ante risk during crisis period than during normal economic conditions.Practical implicationsThe heterogeneity in results has practical implications for regulators, policymakers and bank managers in formulating the capital requirement guidelines with respect to ex ante and ex post risk across different categories and characteristics of banks.Originality/valueTo the best of the authors' knowledge, this is the first study investigating the impact of leverage, regulatory capital and tier-I capital ratios on the ex ante and ex-post risk of Japanese commercial and cooperative banks over the period from 2001 to 2020. The insights into the impact of leverage, regulatory capital and tier-I capital ratios on the ex ante and ex post risk of well-capitalized, under-capitalized, high and low-liquid banks are new in the context of Japan.

scholarly journals The Value and Risk Relevance of Fair Value: The Case of French Firms

2016 ◽  
Vol 6 (2) ◽  
pp. 15
Author(s):  
Mondher Kouki ◽  
Mosbeh Hsini ◽  
Farah Tabassi
Keyword(s):  
Value Relevance ◽  
Fair Value ◽  
Net Income ◽  
Financial Instruments ◽  
Historical Cost ◽  
Comprehensive Income ◽  
Empirical Tests ◽  
Income Measurement ◽  
Value Changes ◽  
Value Measurement

We study the performance of fair value accounting standards of financial instruments starting from the analysis of quality relevance of accounting information. In particular, we are interested in the value relevance and risk relevance of income that contains financial instruments measured or not at fair value. To do so, we compare three income levels known as accounting standard’s history. The three major levels are Full-Fair-Value income measurement (all-fair-value changes recognized in income), piecemeal-fair-value income measurement or comprehensive income (some fair-value changes recognized in income), and historical-cost income measurement or net income (no fair-value measurement existing). The empirical tests of value relevance showed that net income is not a relevant value, and Full Fair Value Income is more significant than the Comprehensive Income. The study shows also that risk relevance is more, measured by the volatility of Full Fair Value Income.

scholarly journals How Do Capital Ratios Affect Bank Risk-Taking: New Evidence From the United States

SAGE Open ◽  
2021 ◽  
Vol 11 (1) ◽  
pp. 215824402097967
Author(s):  
Faisal Abbas ◽  
Omar Masood ◽  
Shoaib Ali ◽  
Sohail Rizwan
Keyword(s):  
United States ◽  
Risk Mitigation ◽  
The United States ◽  
Jel Classification ◽  
Loan Loss ◽  
Capital Ratios ◽  
Hypothesis Theory ◽  
New Guidelines ◽  
The Impact ◽  
New Evidence

This study aims to examine the impact of different capital ratios on Non-Performing loans, Loan Loss Reserves, and Risk-Weighted Assets by studying large commercial banks of the United States. The study employed a two-step system generalized method of movement (GMM) approach by collecting the data over the period ranging from 2002 to 2018. The study finds that using Non-Performing loans and Loan Loss Reserves as a proxy for risk, results support moral hazard hypothesis theory, whereas the results support regulatory hypothesis theory when Risk-Weighted Assets is used as a proxy for risk. The results confirm that the influence of high-quality capital on Non-Performing loans, Loan Loss Reserves, and Risk-Weighted Assets is substantial. The distinctive signs of Non-Performing loans, Loan Loss Reserves, and Risk-Weighted Assets have indications for policymakers. The results are intimate for formulating new guidelines regarding risk mitigation to recognize Non-Performing loans and Loan Loss Reserves and the Risk-Weighted Assets for better results. JEL Classification: G21, G28, G29

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