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Joint defaults in a non-normal world : empirical estimations and suggestions for Basel Accords based on copulasMoreira, Fernando Francis January 2011 (has links)
Credit risk models widely used in the financial market nowadays assume that losses are normally distributed and have linear dependence. Nevertheless it is well known that asset returns (loans included) are not normally distributed and present tail dependence. Therefore the traditional approaches are not able to capture possible stronger association among higher losses and tend to underestimate the probability of joint extreme losses. Copula functions are an alternative to overcome this drawback since they yield accurate dependence measures regardless of the distribution of the variables analysed. This technique was first applied to credit risk in 2000 but the studies in this field have been concentrated on corporate debt and derivatives. We filled this gap in the literature by employing copulas to estimate the dependence among consumer loans. In an empirical study based on a credit card portfolio of a large UK bank, we found evidence that standard models are misspecified as the dependence across default rates in the dataset is seldom expressed by the (Gaussian) copula implicit in those models. The comparison between estimations of joint high default rates from the conventional approach and from the best-fit copulas confirmed the superiority of the latter method. The initial investigation concerning pairs of credit segments was extended to groups of three segments with the purpose of accounting for potential heterogeneous dependence within the portfolio. To do so, we introduced vine copulas (combinations of bivariate copulas to form high-dimension copulas) to credit risk and the empirical estimations of simultaneous excessive defaults based on this technique were better than both the estimations from the pairwise copulas and from the conventional models. Another contribution of this work concerns the application of copulas to a method derived from the limited credit models: the calculation of the capital required to cover unexpected losses in financial institutions. Two models were proposed and, according to simulations, outperformed the current method (Basel) in most of the scenarios considered.
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Potential downside effects of Basel III : lessons from previous Accords.Wood, Christopher 16 September 2014 (has links)
The Basel III accord is the cornerstone of global financial reform efforts that seek to guard against
the types of financial crisis seen in 2007/8. It requires banks to fund more of their activities with
better-quality capital and, in so doing, attempts to assure that they are better able to absorb shocks
that can lead to crises. However, capital requirements come with a range of costs, which could spark
a slowdown in credit or a change in the types of lending banks engage in. This paper conducts a
comprehensive literature review of theoretical and empirical studies of the impacts of previous
Accords, Basel I and Basel II, and attempts to draw lessons on possible downside effects of the latest
iteration of the Basel Accord. It proceeds in three parts. Part 1 explores the history of the Basel
Accords, exploring their theoretical basis and the evolution of the regulation into its current form.
This section identifies two possible mechanisms by which capital regulation can negatively impact
the broader economy: increasing capital costs and increasing risk aversion. Part 2 explores the
potential for increased capital cost, while Part 3 examines the possibility of excessive risk aversion. In
conclusion, the paper finds that while the potential for downside effects does exist, these are not
likely to be significant, and seem particularly unlikely to have a major impact in the South African
case.
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Capital Adequacy Behaviour: : A case study of Swedish banking industrySiddiq, Abu Bakar January 2010 (has links)
No description available.
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Awareness of the new capital requirements in the light of the European Sovereign Debt Crisis : A study focused on the loan officers, managers and board members working in Scandinavian banks / Medvetande av de nya kapitaltäckningskraven i ljuset at den Europeiska finanskrisenJernbeck, Camilla January 2012 (has links)
This paper surveys the insider opinions and awareness’s of swedish bank loan officers, managers and board members on their view of the new capital requirements in light of the European Sovereign Debt Crisis, less than optimal rules and the opaqueness of state issued sovereigns. The paper will try to find the rationale in the reasoning of bank insiders and discuss their views in relation to current research. The ground breaking inside perspective will give researchers insight into the bank insiders’ view, which is previously not known in current research.
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Capital Adequacy Behaviour: : A case study of Swedish banking industrySiddiq, Abu Bakar January 2010 (has links)
No description available.
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Determining the appropriate capital level for Farm Credit Mid-AmericaPerry, Nathan W. January 1900 (has links)
Master of Agribusiness / Department of Agricultural Economics / Allen M. Featherstone / Farm Credit Mid-America is experiencing strong growth due to the success of the farming sector in our four state territory of Tennessee, Kentucky, Indiana, and Ohio. The company is well positioned to meet the financial demands of its customers and they have an aggressive growth plan to increase total assets from $18 billion to $25 billion in five years. They also plan to add 600 new employees in that time period. Determining the appropriate level of capital to sustain growth and meet the demands of its customers will be
a primary objective of the organization over the next five years.
Permanent capital is viewed as a percentage of total assets at Farm Credit Mid-America with the ideal amount between 14% and 16%. A detailed analysis of the current capital level, regulatory requirements, and the projected future financial position of the company
was completed to:
· Define and understand capital as it applies to Farm Credit Mid-America;
· Research the current capital levels for Farm Credit Mid-America;
· Compare capital levels of Farm Credit Mid-America to capital levels of other Farm Credit Associations and other banks;
· Understand Basel III Accords and how it applies to Farm Credit Mid-America’s capital requirements;
· Complete sensitivity analysis with multiple scenarios applied to the current Farm Credit Mid-America loan portfolio to determine the effect certain events may have on capital levels;
· Determine if Farm Credit Mid-America is appropriately capitalized based on the
other objectives.
When looking at the results, it is determined that current capital levels are in line with other Farm Credit associations and competitors. Also, Farm Credit Mid-America has met the Basel III guidelines for minimum capital requirements. The sensitivity analysis included a wide range of scenarios from normal growth rates to extreme loan portfolio distress and the effects those scenarios would have on permanent capital. The permanent capital ratio exceeded the minimum standard of 12% on all sensitivity analysis scenarios. Therefore, based on the objectives of this thesis Farm Credit Mid-America appears to be adequately capitalized.
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Essays on banking regulation, macroeconomic dynamics and financial volatilityZilberman, Roy January 2013 (has links)
The recent global financial crisis of 2007-2009 and the subsequent recession have prompted renewed interest into how banking regulation and fluctuations in the financial sector impact the business cycle. Using three different model setups, this thesis promotes a further understanding and identification of the various transmission channels through which regulatory changes and volatility in the financial system link to the real economy. Chapter 1 examines the effects of bank capital requirements in a simple macroeconomic model with credit market frictions. A bank capital channel is introduced through a monitoring incentive effect of bank capital buffers on the repayment probability, which affects the loan rate behaviour via the risk premium. We also identify a collateral channel, which mitigates moral hazard behaviour by firms, and therefore raises their repayment probability. Basel I and Basel II regulatory regimes are then defined, with a distinction made between the Standardized and Foundation Internal Ratings Based (IRB) approaches of Basel II. We analyse the role of the bank capital and collateral channels in the transmission of supply shocks, and show that depending on the strength of these channels, the loan rate can either amplify or mitigate the effects of productivity shocks. Finally, the impact of the two channels also determines which of the regulatory regimes is most procyclical. Chapter 2 studies the interactions between bank capital regulation and the real business cycle in a Dynamic Stochastic General Equilibrium (DSGE) framework with financial frictions, along with endogenous risk of default at the firm and bank capital levels. We show that in a model which accounts for bank capital risk and regulatory requirements, the endogenous risk of default produces an accelerator effect and impacts the loan rate and the real economy through multiple channels. Furthermore, the simulations illustrate that a risk sensitive regulatory regime (Basel II) amplifies the response of macroeconomic and financial variables following supply, monetary and financial shocks, with the strength of the key transmission channels depending on the nature of the shock. The impact of higher regulatory requirements (as proposed under Basel III) is also examined and is shown to increase procyclicality in the financial system and real economy. Chapter 3 studies the interactions between loan loss provisions and business cycle fluctuations in a Dynamic Stochastic General Equilibrium (DSGE) model with credit market imperfections. With a backward-looking provisioning system, provisions are triggered by past due payments (or nonperforming loans), which, in turn, depend on current economic conditions and the loan loss reserves-loan ratio. With a forward-looking system, both past due payments and expected losses over the whole business cycle are accounted for, and provisions are smoothed over the cycle. Numerical experiments based on a parameterized version of the model show that holding more provisions can reduce the procyclicality of the financial system. However, a forward-looking provisioning regime can increase or lower procyclicality, depending on whether holding more loan loss reserves translates into a higher or lower fraction of nonperforming loans.
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Do profitable banks with a solid capital base have a higher ratio of capital buffer? : Reviewing the impact of regulation, the previous financial crisis and banks own incentives of having excess capital.Clausén, Gabriella January 2013 (has links)
The financial crisis starting in mid-2007 is still affecting us, and with increased regulation banks and institutions are supposed to get more solvent and the industry to become more stable. The Basel Committee is working towards more unified regulation across countries, but the question is how the increased regulation is affecting banks financials. Do profitable banks with a solid capital base have a higher ratio of capital buffer? Looking at banks in 16 OECD countries during the period 1993-2009, with country-level panel-data displayed in two simultaneous equation estimations illustrating how profit and capital buffer has changed during these years, and the relation between them. To get an understanding of how the crisis affected these variables the regressions are also done for a pre-crisis period of 1993-2006. Internal funding variables and other economic control variables are explanatory variables and results show the internal funding variables have a large effect on profit and for capital buffer profit have the largest impact. Results imply that profitable banks with a solid capital base do have a higher ratio of capital buffer. The results coincide with the franchise value theory which is applied in the paper.
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Securitisation of mortgage loans, regulatory capital arbitrage and bank stability in South Africa: Econometric and theoretic analysesKasse-Kengne, Sophie Claude Annick 24 August 2018 (has links)
Mortgage loans are the major assets securitised by South African banks. Arguments from the literature indicate that the use of securitisation as an instrument for regulatory arbitrage weakened banks’ soundness and caused, at least partially, the 2007-2008 Global Financial Crisis. In this regard, financial institutions continually took advantage of the loopholes in the Basel regulation, principally that of Basel I. Undertaken from both the empirical and theoretical angles, this thesis investigated whether regulatory capital arbitrage under Basel II and III regulations, was a driver of mortgage loans securitisation by South African banks. Additionally, the effect of mortgage loans securitisation on the South African banks’ stability was analysed. Furthermore, the project built upon the case of mortgage loans securitisation to deepen the insight on banks’ behaviour towards risk, by considering a rare contractual relationship where banks are regarded as agents acting on behalf of regulators. The theoretical examination was carried out by means of perspectives from Agency and Institutional Theories. The South African banking system is essentially monopolistic with five banks holding more than 90% of total assets, out of which four, with 70% of the assets, consistently report outstanding volume of mortgage loans securitised. Based on the data collected from these four major banks, this research project is the first in many regards. It involves an emerging economy, considers the influence of both Basel II and III regulations, covers the period 2008 to 2015, and focuses on well-capitalised banks exclusively. Moreover, it extends regulatory capital arbitrage analysis to the evidence of loans expansion, includes CAMELS as bank stability proxy and brings in Agency Theory and Institutional Theory to explain banks’ behaviour with regards to risk in this particular context. In contrast, other studies were concentrated on Europe and America, mostly under Basel I, limited to one or two baseline models for regulatory capital arbitrage and often only the Z-score measure was used for bank stability. In three major steps, this study first employed the Ordinary Least Squares statistical methodology to test the capital arbitrage theory of securitisation and other of its features whereby it causes the decrease of capital with little or no reduction of risk. The estimation results indicated that securitisation of mortgage loans lessened South African banks’ regulatory capital, increased their overall risk level and moreover, suggested that the proceeds from securitisation were used to expand their loans portfolios. These outcomes tentatively imply that South African banks securitise mortgage loans for regulatory capital arbitrage. The second step explored the impact of securitisation of mortgage loans on South African banks’ stability. Two different measures of bank stability were involved: the CAMELS and the Z-score. CAMELS stands for C: capital (leverage ratio and not the regulatory capital); A: assets quality; M: management efficiency; E: earning; L: liquidity; and S: sensitivity to market risk (interest risk). The Two Stage Least Squares and the Ordinary Least Squares statistical methods were used respectively for the analysis of the relationship between the two bank stability indicators and the outstanding volume of mortgage securitised. The empirical results from CAMELS showed that mortgage loans securitised negatively affected the level of capital proxied by the leverage ratio, eroded assets quality and increased South African banks’ overall costs. However, they had a positive effect on South African banks’ profit, they seemed to be an additional source of liquidity and represented a useful tool to curtail market risk sensitivity, especially the interest risk as they increased net interest income. With regards to the analysis with the Z-score, the results indicated a negative impact of mortgage securitised on South African banks’ stability. The outcome remained unchanged when retained interests in the form of subordinated loans were included in the analysis, but retained interest had a positive influence on the Z-score. The last step of this study pertained to the theoretical analysis based on the concepts of Agency Theory and Institutional Theory. Acting as regulators’ agents in an agency relationship, the simple model of Agency Theory in its extended form explained that South African banks were first and foremost risk-taking players. They were more interested in the risk/reward trade-off in their decision-making attitude towards risk than pursuing the regulators’ goal of the stability of the banking system. In that sense, it was not a surprise that they engaged in regulatory capital arbitrage despite knowing that it was risky but could provide gains in liquidity and profit. In addition to goals conflict, Agency Theory indicated asymmetry of information between banks and regulators as the indirect origin of regulatory capital arbitrage, where the opacity of banks’ activities, such as securitisation, rendered regulations ineffective and thus easy to shirk. Furthermore, it was found that the essentials of the behaviour-oriented contract suggested by the theory as the optimal contract, were already included in the formulation of the latest Basel Accords. However, the researcher believes that one key element, which is the reward or compensation that should benefit the banks (the agent) when they abide by the terms of the contract, is missing. Regulators should therefore include incentives in the regulations and combine the behaviour and outcome-oriented contracts to optimize their relationship with banks even though, as explained by the theory, the outcome of bank stability will remain partially uncertain due to uncontrollable factors such as the economic conditions. The concept of legitimacy, from Institutional Theory, explicated that banks’ legitimacy came from their ability to comply with the regulations. From this stance, the results suggested that regulatory capital arbitrage seemed instead to undermine the legitimacy of South Africa banks well-capitalised position.
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Developing an Advanced Internal Ratings-Based Model by Applying Machine Learning / Utveckling av en avancerad intern riskklassificeringsmodell genom att tillämpa maskininlärningQader, Aso, Shiver, William January 2020 (has links)
Since the regulatory framework Basel II was implemented in 2007, banks have been allowed to develop internal risk models for quantifying the capital requirement. By using data on retail non-performing loans from Hoist Finance, the thesis assesses the Advanced Internal Ratings-Based approach. In particular, it focuses on how banks active in the non-performing loan industry, can risk-classify their loans despite limited data availability of the debtors. Moreover, the thesis analyses the effect of the maximum-recovery period on the capital requirement. In short, a comparison of five different mathematical models based on prior research in the field, revealed that the loans may be modelled by a two-step tree model with binary logistic regression and zero-inflated beta-regression, resulting in a maximum-recovery period of eight years. Still it is necessary to recognize the difficulty in distinguishing between low- and high-risk customers by primarily assessing rudimentary data about the borrowers. Recommended future amendments to the analysis in further research would be to include macroeconomic variables to better capture the effect of economic downturns. / Sedan det regulatoriska ramverket Basel II implementerades 2007, har banker tillåtits utveckla interna riskmodeller för att beräkna kapitalkravet. Genom att använda data på fallerade konsumentlån från Hoist Finance, utvärderar uppsatsen den avancerade interna riskklassificeringsmodellen. I synnerhet fokuserar arbetet på hur banker aktiva inom sektorn för fallerade lån, kan riskklassificera sina lån trots begränsad datatillgång om låntagarna. Dessutom analyseras effekten av maximala inkassoperioden på kapitalkravet. I sammandrag visade en jämförelse av fem modeller, baserade på tidigare forskning inom området, att lånen kan modelleras genom en tvåstegs trädmodell med logistisk regression samt s.k. zero-inflated beta regression, resulterande i en maximal inkassoperiod om åtta år. Samtidigt är det värt att notera svårigheten i att skilja mellan låg- och högriskslåntagare genom att huvudsakligen analysera elementär data om låntagarna. Rekommenderade tillägg till analysen i fortsatt forskning är att inkludera makroekonomiska variabler för att bättre inkorporera effekten av ekonomiska nedgångar.
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