Regulatory capital and bank risk-resilience amid the Covid-19 pandemic: How are the Basel reforms faring? (original) (raw)
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When financial regulators require banks to hold a higher ratio of equity capital to debt funding, banks incur short-term costs as they adjust their balance sheets and lose some of the advantages associated with their existing funding mix. They then seek to maintain post-tax income by, for example, raising lending margins. Higher lending margins tend to lower the volumes of borrowing. This creates a trade-off between the greater stability associated with a higher ratio of equity capital to debt funding and the level of economic activity in the short to medium term. While the benefits of greater stability are obviously very large, and the reduction in economic activity is very unlikely to be on a comparable scale, exploring the trade-off is not straightforward. Past work on this did not solve all of the modelling problems, nor does this paper. We do, however, report some useful developments, which may assist in calibrating policy or monitoring the impacts of judgements already made. Recent papers (e.g. Haldane and May, 2011) have begun to explore the characteristics that appear to make the banking network more or less stable. It
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In this paper the authors study the role of regulatory banking capital and analyze the incentive effects of the Basel II Accord. They argue that Basel II may become a source of systemic risk due to endogenous risk and the risk sensitivity of the capital requirements. In this context they note that financial instability may enter via the asset side of the banks' balance sheets when banks are forced to sell assets in order to maintain the capital buffer prescribed by Basel II.
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SSRN Electronic Journal, 2007
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Ever since the COVID-19 pandemic hit the global economy, banks all over the world experienced significant reductions in loan growth and increases in distressed and non-performing assets. The persistent increase in non-performing loans, accompanied by low interest rates, led to a surge in banking risk, posing a solemn threat to banks' stability. In this paper, we empirically assess the accounting-and marketbased risks of banks during the COVID-19 pandemic. Using a quarterly panel of international banks over the period 2020:Q1-2021:Q1, we find that banks exhibit greater accounting risk and increased return volatility during the pandemic. In particular, we report that a 1% growth of total COVID cases reduces (increases) our sample banks' z-score (standard deviation of quarterly return) by 0.756 (2.51%). Our results remain robust across alternative measures of the pandemic, z-score decomposition, and across daily and monthly stock returns. We obtain consistent results for both U.S. and non-U.S. banks, as well as for banks from both high-and low-income economies. We use a propensity score matching strategy to deal with endogeneity. Additional tests reveal that government responses such as economic support, stringency, and containment play important roles in banking risk and stability during the pandemic.
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Journal of Empirical Finance, 2016
Banks use internal models to optimize risk weights and better account for the specific risk of each asset. As the choice of risk weights affects the regulatory capital ratio, economic theory suggests that banks with a higher cost of equity should be more aggressive in reducing risk weights. We consider a large panel of international banks and find that, after controlling for a number of bank and country characteristics and contrary to what happens for a non-Basel II bank, for a Basel II bank a higher cost of equity is not associated with a higher ratio between risk-weighted assets and total assets. These results are obtained in the context of state-of-the-art endogeneity-robust econometric procedures and across several specifications. We propose an indicator of risk weights saving and assess its impact on several performance measure during the 2008-2009 and the 2010-2012 crises. We find that for European banks not located in peripheral countries, a higher degree of RWA-saving is associated with more equity raising during the European crisis, more volatility, lower distance-to-default. European banks located in peripheral countries engaged less strongly in RWA-saving than European banks located in core countries, and its impact on the various performance measures is almost non-existent, except for a decrease in the distance-todefault.
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South African Journal of Economic and Management Sciences, 2011
The robustness of the Basel II accord in protecting banks during volatile economic periods has been challenged in the ongoing credit crisis. In particular, advanced approaches to measuring and managing credit risk have drawn criticism for being both irrelevant and too complex. Despite accusations that the accord was largely responsible for the crisis, this article explores which of Basel II's credit risk approaches were more successful in allocating capital. It was found that, in general, compliance with Basel II actually protected banks during the crisis, with simpler approaches enjoying greater success than more advanced ones in protecting banks against credit risk.