Narrow Results

This study examines the effectiveness of the Basel III capital framework for mitigating procyclical behavior in the banking sector regarding macroeconomic variability and uncertainty. Our sample includes Korean banking industry data from 2001 to 2018. Using fixed- and random-effects panel data and fixed-effects difference-in-differences approaches, we discover that procyclicality in banks’ performance and capital factors is mitigated after the Basel III accord is adopted. The capital adequacy ratio’s volatility increases, whereas the loans-to-assets ratio increases and stabilizes. The Basel III accord therefore effectively serves its intended purpose, as it encourages banks to serve as shock absorbers for the economy and reduces economic uncertainty.

Since the beginning of the credit and liquidity crisis, financial institutions have been considering creating a convertible-bond type contract focusing on capital. Under the terms of this contract, a bond is converted into equity if the authorities deem the institution to be under-capitalized. This paper discusses this contingent capital (CoCo) bond instrument and presents a pricing methodology based on firm value models that calibrate exactly the credit term structure of the issuer either through credit default swaps or corporate bonds data. Decorrelation between the capital conversion trigger and credit quality is introduced. The equity value for the issuer is derived in closed form with a barrier option type formula. A stress test of model parameters is illustrated to account for potential model risk and the obtained prices are compared to the price obtained from a market source. Finally, a brief overview of how the instrument valuation performs compared to pure corporate bonds and a discussion involving the CDS bond basis are presented.

This paper examines the factors that determine banking flows from advanced economies to emerging markets. In addition to the usual determinants of capital flows in terms of global push and local pull factors, we examine the role of bilateral factors, such as growth differentials and economic size, as well as contagion factors and measures of the depth in financial interconnectedness between lenders and borrowers. We find profound differences across regions. In particular, in spite of the severe impact of the global financial crisis, emerging Europe stands out as a more stable region. Assuming that the determinants of banking flows remain unchanged in the presence of structural changes, we use these results to explore the short-term implications of Basel III capital regulations on banking flows to emerging markets.

The recently finalised Basel Framework continues to allow banks to use internal data and models to define risk estimates and use them to compute their capital adequacy ratios. Globally, there are more than two thousand banks running Basel internal models. However, there are countries that have no such banks. They face the dilemma of which of the transition paths to adopt: the voluntary path, as in the EU, or the mandatory path, as in the US. Our objective is to take an investor’s perspective and benchmark the two modes. Thus, we wish to determine whether there is a premium for either of them or whether they are, perhaps, equivalent. The novelty of our research is in its robust estimate that investors prefer a mandatory transition to a voluntary one if we consider the period of the 2007–2009 crisis. However, the use of the common post-crisis sample yields the opposite conclusion. A voluntary transition is preferred, though it implies a rise in stock volatility, and thus, the overall risk-return relationship is preserved. This is mostly driven by the tighter used when adopting internal models in the US compared to the EU. European banks have had more room to expand their business after the IRB transition, while for US banks, the transition involved a reduction in business, all else being equal. Our findings are of value primarily to emerging economies such as Argentina or Indonesia.

This study aims to compare capital adequacy and financial stability in Islamic and conventional Saudi banks and investigate the impact of capital adequacy on the financial stability of a bank. Our study uses the annual data of five conventional banks and four Islamic banks listed on the Saudi Stock Exchange for the period 2016–2020. The Z-score has been computed and used as the measure of the stability of listed Saudi Islamic and conventional banks for the period 2016–2020. This study uses ordinary least square regression to investigate the impact of capital adequacy on the financial stability of banks. The researchers adopt the development of research hypotheses in the light of the theory of stakeholders and the foundations of Islamic law. The findings indicated that, first, there are significant differences in the capital adequacy ratio between conventional and Islamic banks. This difference is due to the increase in the mean capital adequacy ratio of Islamic banks over conventional banks. Second, our result found significant differences in financial stability between conventional and Islamic banks. This difference is due to the increase in the mean of the Z-score for Islamic banks over conventional banks. Third, our result refers to significant negative impacts of capital adequacy ratio on financial stability. Our study applied to listed Saudi banks from 2016 to 2020. The empirical results of our study are very useful for supervisors, banks management, investors, bank customers, and policymakers. The results contribute to knowing the unexpected negative effects of increased capital adequacy and its negative impact on the bank’s profits and the threat to financial stability, in addition to knowing the main indicators of capital adequacy and financial stability for Islamic and conventional banks in a way that helps bank supervisors, policymakers, and investors in rationalizing. Their decisions are specific to both Islamic and conventional banks, in addition to identifying the factors that help to enhance the financial stability process. This study is among a few studies that provide empirical evidence for the claim that the increase in capital adequacy rates is always one of the positive indicators to achieve financial stability, in addition to the great role of Islamic banks in achieving this. The study found a rejection of the validity of this claim and reached unexpected results.

The following sections are included:

• INTRODUCTION
• REGULATORY DEVELOPMENTS
• CHALLENGES FOR REGULATORS
• IMPACT ON ASIAN BANKS
• FUTURE IMPLICATIONS
• CONCLUSION
• NOTES
• ANNEX A
• REFERENCES