Basel II and Bank Credit Risk: Evidence from the Emerging Markets (original) (raw)
Related papers
Basel capital requirements and bank credit risk taking in developing countries
2005
Existing literature has focused attention on the impact of Basle I and similar capital requirement regulations on developed countries where such regulations were found to be effective in increasing capital ratios and reducing portfolio credit risk of commercial banks. In the present study, we study the impact of such capital requirement regulations on commercial banks in 11 developing countries around the world within a cross-section framework with the widely popular simultaneous equations model of Shrieves and Dahl (1992). Surprisingly, we find that such regulations did not increase the capital ratios of banks in the developing countries. This implies that particular attention should be given to the business, environmental, legal, cultural realities of such countries while designing and implementing such policies for developing countries. However, we find evidence that such regulations did reduce portfolio risk of banks. We also find that capital ratios and portfolio risk are inversely related in contrast to the predictions of "buffer capital theory", "managerial risk aversion theory", and "bankruptcy cost avoidance theory." Our, evidence also shows that level of financial development and credit risk are inversely related implying that as the financial sector of a country develops it opens up avenues for alternative sources of finance, which results in reduced risk. 7 Previous empirical work on the impact of capital requirements on bank lending in developing countries includes
Economic Research-Ekonomska Istraživanja
The study examines the nexus between Basel capital requirements, banking sector risk-taking, and profitability in Asian emerging markets by using dynamic panel GMM methodology. The findings of the study suggest that regulatory capital positively affects risk-taking which validates the "regulatory hypothesis." The findings also reveal that regulatory capital positively while risk negatively affects the profitability in the banking sector. The current study finds the bidirectional causality between the regulatory capital and risk-taking, implying that banks with higher capital ratios are expected to increase in risk-taking and vice versa. The findings also suggest that managerial ownership positively affects while foreign ownership negatively impacts risk-taking consistent with the agency theory of corporate governance. The study proposes that ownership structure has a significant influence on bank risk and profitability, however, the combined impact of regulatory capital through its interaction with the ownership structure is not proved to be significant.
2004
The primary purpose of this article is to investigate the relationship between bank capital and credit risk taking in emerging market economies. We also investigate the influence of several regulatory, institutional and legal features on the relationship between risk and capital. We apply a simultaneous equations framework following and . Our results corroborate the existing findings for US and other industrial economies, putting forward the impact of capital regulation on banks' behavior. We also show empirical evidence on the role of the regulatory, institutional and legal environment in driving bank capitalization and credit risk taking behavior in emerging market economies.
Bank Capital and Loan Loss Reserves under Basel II: Implications for Emerging Countries
Policy Research Working Papers, 2004
This paper proposes an integrated approach to minimum bank capital and loan loss reserves regulation. The paper breaks new ground in two main areas. In the first place it provides an explicit measurement of the credit loss distribution for a sample of emerging countries providing a benchmark for discussing the appropriate calibration of new regulatory capital and loan loss provision requirements for non-G10 countries. Second, on normative grounds, it proposes a simplified version of the "internal rating based" (IRB) approach as a transition tool that, while retaining a risk-based definition of solvency ratios, implies reduced supervisory monitoring costs and could therefore be of interest to emerging countries where supervisory resources are particularly scarce.
The Determinants of Bank Capital Ratios in a Developing Economy
Asia-Pacific Financial Markets, 2008
This paper reports new findings on the determinants of bank capital ratios. The results are from an unbalanced panel data set spanning eight years around the period of the 1997-1998 Asian financial crisis. Test results suggest a strong positive link between regulatory capital and bank management's risk-taking behaviour. The risk-based capital standards of the regulators did not have an influence on how regulatory capital is adjusted by low-capitalized banks, perhaps due to the well-documented banking fragility during the test period. Finally, bank capital decisions seem not to be driven by bank profitability, which finding is inconsistent with developed country literature that has for long stressed the importance of banks' earnings as driving capital ratios. Although the study focuses only on one developing economy, these findings may help to identify the correlates of bank capital ratios in both developed and developing economies since this topic has received scant attention of researchers. These findings are somewhat consistent with how banks engaging in risky lending across the world could have brought on the 2007-2008 banking liquidity and capital erosion crisis.
Impact of the Basel I Accord on Credit Expansion in Developing Countries
2011
In this paper, we have attempted to conduct a mean-test to determine if the Basel I Accord had any significant effect on bank activities. The mean-test indicates that it had significant impact on bank activities. We find that the Accord was successful in raising the capital ratios and equity of banks, paving the way for the financial soundness of commercial banks. Our findings also show limited evidence supporting the "risk-retrenchment" hypothesis. Given that our samples consist of both developed and developing countries, the study finds some evidence of "credit crunch" in developing countries also. Capital regulations resulted in a decline in bank lending.
Changes in Basel Capital Requirements and Lending Ability of African Commercial Banks
Journal of Central Banking Theory and Practice
This research examines the potential impact of Basel IV capital requirements (CAR) on bank lending ability in Africa. To achieve the objective, the study simulated Basel IV capital ratio using historical data to create sample representative banks as if the selected banks had implemented Basel IV CAR for the period 2000 and 2018 and used actual data for existing Basel II and III CAR. Dynamic panel regression analyses, namely the System GMM and P-ARDL, were utilised. First, our results suggest that higher Basel CAR, particularly the new Basel IV, portends short-term negative impacts on bank lending while the long-term impact on bank lending is favorable. Second, the weight of non-performing loans tends to decline as banks transitioned from lower to higher Basel CAR. Lastly, this study shows that complying with Basel IV CAR will help African banks to achieve financial deepening and increase bank lending ability.
This paper analyzes the cost impact of the Basel III higher capital and liquidity requirements on bank capital, lending spreads, and steady state output across the main Southeast Asian nations (ASEAN-5). We also investigate potential long-run economic benefit expressed as a gain in steady state output (GDP). By emphasizing the use of dynamic stochastic general equilibrium and vector error correction models, we find that ASEAN-5 banking sectors are comfortably capitalized and need no recapitalization by January 1st 2019 deadline when Basel III is fully enforced. The new Basel III rules are assumed to force ASEAN-5 banks to increase lending spreads to pass down a portion of increasing funding costs to bank customers. The impact of 1 percentage point rise in common equity Tier 1 ratio on lending spreads is analyzed; to meet the regulatory capital minima of 7% as of 2015, ASEAN-5 banks will have to increase lending spreads by 30 basis points on average; to meet 10.5% fully effective by January 2019, ASEAN-5 banks will have to increase average lending spreads by 68 basis points. In terms of economic benefits, the estimates of this study indicate that the projected economic benefits across ASEAN-5 outweigh the economic costs in the long-run.
Basel IV capital requirements and the performance of commercial banks in Africa
Journal of Banking Regulation
Capital adequacy is considered an essential determinant banks' performance. Banks in Africa have revenue growth opportunities, but fragility and vulnerability to bank failures arising from capital inadequacy and non-performing loans affect their performances. The Basel Committee aims to introduce higher capital requirements is to strengthen the resilience of the banking system; however, the implementation of higher Basel capital requirements may affect the performance of banks. This study examines the potential impact of Basel IV capital requirements (CAR) on the performance of commercial banks from selected African countries. To achieve the set objective, the study simulated Basel IV CAR to create sample representative bank balance sheets using historical data from 2000 to 2018 because Basel IV CAR has not commenced. The study developed a sample-representative of Basel IV CAR and employed static and dynamic panel regression analyses as the estimation techniques. The results suggest that Basel IV CAR portends short-term negative impacts on bank performance while the long-term impact on bank performance is favorable.
The Impact of Changes in Basel Capital Requirements on the Resilience of African Commercial Banks
Scientific Annals of Economics and Business, 2022
Focusing on a panel sample of 41 commercial banks over the period of 2000-2018, this study examined the effect of capital adequacy on the resilience of commercial banks in Africa under changing Basel levels (II, III, and the proposed Basel IV). The study created sample representative banks for the proposed Basel IV and used two measures, namely Z-score and CAMELS, to capture bank resilience. Using the panel logistic regression and fixed effect model, we found that capital adequacy, liquidity, earnings management efficiency, and macroeconomic conditions are key determinants of the resilience of commercial banks in Africa. Additionally, Basel compliant banks tend to be less prone to macroeconomic factors. Based on the positive and significant impact of all Basel capital ratios on Zscore, the results suggest that a high level of capital requirements increases African banks' resilience, and banks with higher capital can absorb risk exposures.