Implementation of Financial Services Authority Regulation №35/POJK.05/2015 Article 35 by Indonesian Venture Capital Companies in 2015

POJK or the Financial Services Authority Regulation is one of the official documents of the Indonesian government related to the state finance sector. Venture capital itself is one of the contributors to the economy of Indonesia, especially in terms of financing or equity participation. Therefore, regulations are needed to control the operation of venture capital businesses to avoid damages caused by problems/disruptions. Generally, the economic sector in Indonesia is highly regulated, and venture capital is not an exception. However, this paper only focuses on the analysis of the actual implementation of one of the venture capital regulations in Indonesia, namely POJK No. 35/POJK.05/2015 concerning equity participation in Venture Capital Companies (VCC), particularly, Article 35 which states that VCC must have a ratio of Equity to Paid-in Capital not less than 30%. For this research, the method of qualitative normative approach has been applied based on the secondary data concerning Business Operations of Venture Capital Companies. The results of this research show fulfillment of these implemented regulations in practice by the existing VCC and its potential.

The regulation of multilateral development banks: is it needed? A preliminary analysis

Purpose A difference is noted by comparing the net loans to the non-financial sector in the two sets of institutions. The post-global financial crisis (GFC), literature agrees on a reduced lending pace by financial institutions (FIs) as a result of stricter capital regulations. At the same time, an increasing volume of outstanding loans, directed even to advanced countries, characterize the balance sheet of several multilateral development banks (MDBs). Design/methodology/approach This paper observes how a different degree of banking regulation might have shaped the economic response to the GFC by FIs and MDBs. Findings The authors indicate that MDBs’ financing, with a coherent objective of countercyclical support to the economies hit by the GFC, seems to have filled a market gap caused by the FIs’ pro-cyclical lending reduction. Originality/value While a controversial issue is whether Basel standards should be imposed on MDBs, a harmonization amongst MDBs of their transparency and reporting standards might be beneficial: some preliminary consideration has been portrayed.

Leverage and Risk Taking under Moral Hazard

In this paper, I analyze the effectiveness of different capital regulations in mitigating the effects of moral hazard that exists only for systemically important banks. Leverage restrictions have the potential to reduce the fraction of banks that are systemically important but do not mitigate moral hazard for those that are. Risk adjusted requirements could mitigate moral hazard (of banks with low leverage) but do not affect (endogenous) systemic risk. A combination of both requirements as proposed by the Basel III framework can be successful, although only under restrictive conditions.

IFRS 9 Transition Effect on Financial Stability of Kosovo Commercial Banks

From January 1, 2018, most of the commercial banks in Kosovo adopted IFRS 9. The new standard introduces the expected credit loss model to allow for timely recognition of credit losses, estimated not only on the actual credit loss but also on forward-looking information regarding the current loan portfolio. Although, transition phases may lead to increasing impairments and a decrease in banks’ equity, which directly influences the financial stability of banks. This paper examines the day-one transition effect of IFRS 9 on the level of assets balance, allowance for loan losses, and capital regulatory class II of banks in Kosovo. To test our hypothesis, we have performed a comparative analysis for the six biggest commercial banks in Kosovo to identify correlation and causality between studied variables. As a statistical technique, we have employed a “paired sample t-test” where we compare financial indicators before and after adopting IFRS 9 to examine the impact on financial stability for commercial banks in Kosovo. Our results are in line with the results of recent studies in the IFRS 9 field and conclude that the transition phase has a significant influence on the recognition of additional loan impairment but assets and capital regulations are not affected significantly. Results demonstrate the transition to IFRS 9 causes instability and re-consolidation of capital, but in the long-run reduce the possibility for large and sudden losses. Commercial banks in Kosovo should follow a balanced growth approach without compromising the quality of the loan portfolio.

Combining financial and ecological sustainability in bank capital regulations

PurposeWith the macroprudential approach, systemic risk is explained by a general equilibrium (GE) model. However, since on-balance-sheet and off-balance-sheet (OBS) risks are structurally segmented, for example annually or periodically on financial statements, the GE model might need further integration with OBS risks including ecological shocks.Design/methodology/approachThis study develops a theoretical two-period model with consumption, investment and loans, which further includes carbon emissions to distinguish between loans for “green” or “brown” firms to enhance the perspective of ecological sustainability.FindingsThe paper shows how the environmental, social and governance (ESG) factors might be of relevance in the standard bank capital regulatory structure. In dealing with ecological sustainability, a new methodological framework with the green K-index introduces penalties to be paid in the capital structure related to ESG factors. The model is enhanced for screening green or brown firms related to impact investing. The integrated view of financial stability and ecological sustainability further illuminates how a wide cross-sectoral resilience of a green K-index measure for the economy might be achievable.Research limitations/implicationsA stock-flow consistent model with balance-sheet methods raises the question whether all necessary variables and parameters can be computed in practice. Compared to the agent-based model (ABM), this model additionally lacks inputs from agents' behaviour, thus non-rational decisions, which may be relevant in practice. More generally, by adopting a balance-sheet structure, the model shows a coherent framework with relevant variables. The methodology of the GE model with OBS has not been scholarly explored and thus is presented for discussion rather than generalisation. The GE model with OBS provides a new interpretation of systemic risk and interbank relations with a consideration of ecological aspects. Its economic implication contributes to contemporary banking theory as well as to the sustainability discussions in the larger financial sector.Practical implicationsBanks and investors can more carefully measure the ecological risks in their loan portfolios and make better informed decisions leading to a better sustainability of the financial markets.Originality/valueThis study develops a theoretical GE model with off-balance-sheet risks. The model adds green regulation enhancing the capital regulation framework relevant to sustainability. This, in turn, enhances the role of banks in a coherent economic framework for loan decisions towards a much greener finance.

Diversification, corporate governance, regulation and bank risk-taking

Purpose The purpose of this paper is to investigate the impact of diversification, corporate governance and capital regulations on bank risk-taking in Asian emerging economies. Design/methodology/approach The authors applied the generalized method of moments to analyze a sample of 116 listed banks of ten Asian emerging economies for the years 2010–2018. Findings The authors found that diversification, board size, CEO duality and board independence, block holders and capital regulations significantly affect bank risk-taking. In particular, nontraditional income sources such as noninterest income and adoption of diversification strategies minimize bank risk-taking. Practical implications It is expected that the outcomes of this study can be used by banks in Asian emerging economies that seek to reduce risk-taking by managing the diversification of their income streams and managing the impacts of capital regulation and implementing sound corporate governance features in monitoring their operations. This study suggests practical risk minimizing strategies for banks. First is the sourcing of nontraditional income and adoption of diversification strategies. Second, maintaining nonexecutive directors on the board would enhance monitoring of business activities. Third, maintaining deposit insurance would reduce bank’s risk. Government provides insurance to depositors to motivate them to deposit their funds into the banks. This, in return, facilitates banks to overcome risk. However, banks need to be cautious of any increase in capital ratio, as channeling funds into risky investments would increase risk. Originality/value This study is the first to investigate the impacts of corporate governance, diversification and regulation on bank’s risk-taking in a cross-country setting of ten Asian emerging economies.

What Drives Global Lending Syndication? Effects of Cross-Country Capital Regulation Gaps*

We examine how cross-country differences in capital regulations shape the structure of global lending syndicates. Using globally syndicated loans extended by banks from forty-four countries, we find that strictly regulated banks participate more in syndicates originated by lead lenders facing less stringent capital regulations. The resulting lending syndicates extend loans to riskier borrowers, charge higher spreads, forego covenants more frequently, and incur higher default rates. Such syndication activity also facilitates the access to credit by riskier corporations and exposes both participants and lead arrangers to greater systemic risk. Overall, our finding is consistent with the explanation that strictly regulated banks rely on the expertise of loosely regulated banks to procure risky deals outside the border.

Rethinking the Use of Credit Ratings in Capital Regulations: Evidence From the Insurance Industry

We analyze an initiative by insurance regulators to reform capital regulations for mortgage-backed securities (MBS) by replacing credit ratings with third-party estimates of expected credit losses and by considering an insurer’s exposure to future losses when determining regulatory capital. After implementation, insurers are less likely to sell distressed MBS, gains trade corporate bonds, and/or raise external financing. However, the new regime allows insurers to purchase more low-rated MBS at significant capital savings and insurers with greater capital savings are more likely to do so. Our analysis highlights the potential costs and benefits of an alternative methodology for determining regulatory capital. JEL (G11, G18, G22, G28, G32, G38). Received May 6, 2019; editorial decision April 4, 2020 by Editor Andrew Ellul.