Narrow Results

The paper examines the impact of credit rating on capital adequacy ratios of Indian state-owned banks using quarterly data for the period 1997:1 to 2002:4. To this end, a multinomial logit model with multi credit rating indicators as dependent variable is estimated. The variables that can impinge upon capital adequacy ratio have been used as explanatory variables. Two separate models — one for long-term credit rating and another for short-term credit rating — have been estimated. The paper concludes that, both for short-term as well as for long-term ratings, capital adequacy ratios are an important factor impinging on credit rating of Indian state-owned banks.

The standard model defined in the Capital Adequacy Directive issued by the EEC in 1993 imposes nonlinear constraints on certain parts of the trading portfolios of financial institutions. It is shown that an institution that complies with the rules of the standard model but wants to optimize its portfolio according to some internal criteria, such as minimizing the variance or the VaR, faces a computational problem equivalent to finding the ground states of a long range spin glass. This problem is known to be NP-complete, and to have exponentially many solutions which are extremely sensitive to any changes of the input parameters.

Islamic banks do not pay interest on customers' deposit accounts. Instead, customers' funds are placed in profit-sharing investment accounts (PSIA). Under this arrangement, the returns to the bank's customers are their pro-rata shares of the returns on the assets in which their funds are invested, and if these returns are negative so are the returns to the customers. The bank is entitled to a contractually agreed share of positive returns (profits) as remuneration for its work as asset manager; however, if the returns are zero or negative, the bank receives no remuneration but does not share in any loss.

In the case of Unrestricted PSIA, the investment account holders' funds are invested (i.e., commingled) in the bank's asset pool together with the bank's shareholders' own funds and the funds of current account holders. In that case, the bank's own funds that are invested in the asset pool are treated the same as those of Unrestricted PSIA holders for profit and loss sharing purposes; however, the shareholders also receive as part of their profit the remuneration earned by the bank as asset manager (less certain expenses not chargeable to the PSIA holders). This remuneration (management fees) represents an important source of revenue and profits for Islamic banks.

From a capital market perspective, this arrangement presents an apparent anomaly, as follows: shareholders and Unrestricted PSIA holders share the same asset risk on the commingled funds, but shareholders enjoy higher returns because of the management fees. On the other hand, competitive pressure may induce the bank to forgo some of its management fees in order to pay a competitive return to its PSIA holders. In this way, some of the PSIA holders' asset risk is absorbed by the shareholders. This phenomenon has been termed "displaced commercial risk" [2].

This paper analyzes this phenomenon. We argue that, in principle, displaced commercial risk is potentially an efficient and value-creating means of sharing risks between two classes of investor with different risk diversification capabilities and preferences: wealthy shareholders who are potentially well diversified, and less wealthy PSIA holders who are not. In practice, however, Islamic banks set up reserves with the intention of minimizing any need to forgo management fees.

Based on a sample of 59 European listed banks, we employ an event study analysis to investigate the impact of the European Banking Authority (EBA) stress tests on systematic risk measured by market betas. We further investigate the drivers of systematic risk taking into account bank-specific variables, which include credit quality, accounting policies, bank loan loss provisions (LLPs) and capital ratios, along with supervisory assessments of bank vulnerability to stressed scenarios. Finally, we assess the impact of credit quality and capital adequacy variables on the systematic risk associated with growth opportunities.

Our results suggest that stress tests act as a credible anchor to market expectations leading betas to decline. The effect is more pronounced for banks involved in multiple stress tests over time. Our second finding shows a significant and positive impact of Tier 1 capital ratios on betas, i.e., higher capitalization levels contribute to reducing the exposure to systematic risk. Moreover, market betas are responsive to bank vulnerability to stress scenario, in particular, regarding asset riskiness. Finally, betas of growth opportunities are affected by provisioning policies in the sense that conservative provisioning policies impair the ability to invest in growing assets.

This study attempts primarily to measure the financial performance of banking industry of Bangladesh for the periods 2013–2014 and to rate them according to the composite rating system. For this purpose, 10 private commercial banks (PCBs) have been selected from 38 PCBs. CAMEL has critically analyzed the financial performance of these banks. This finds that most of the banks get 2.14 with an average rating of composite range, where only Eastern Bank Ltd. gets “Strong” rating, seven PCBs get “Satisfactory” rating, AB Bank Ltd. and City Bank Ltd. lay middle of the range of composite score. From this ground, it is clearly reflected that most of the PCBs in Bangladesh have performed quite satisfactorily in recent years. The performance of most banks is dependent more on the managerial ability in formulating strategic plans and the efficient implementation of its strategies. Maintenance of asset quality is the major challenge in this year and is feared to remain so in 2014. The banking sector in Bangladesh has passed somewhat an average year regarding governance, profitability and soundness in 2013. Finally, it is recommended that the banks should be more careful to ensure the quality of assets and its uses, and increased their efficiency in managerial grids.

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 purpose of this chapter is to identify the attributes affecting the cost, revenue, and profit efficiency of life insurance companies in India from 2013–2014 to 2018–2019. A two-phase analysis is applied in the study. In the first phase, the cost, revenue, and profit efficiency scores of all the life insurance companies are calculated using the technique of data envelopment analysis. In the second phase, a panel tobit regression model is run to estimate the antecedents of efficiency. The results of the study emphasize that capital adequacy, asset quality, reinsurance and actuarial issues, management soundness, and liquidity have a positive relationship with cost, revenue, and profit efficiency. However, “earning and profitability” has a negative impact on all the efficiency scores, depicting that Indian life insurance companies are not getting much return from their investments, which is their major source of revenue. Low revenues do not seem to be sufficient to cover the cost of insurance and, consequently, generate low profits. In order to improve efficiency, insurers should focus on balancing the input–output mix, taking into consideration their prices. Also, modern virtual platforms should be adopted, which can lead to cost savings and higher profitability.

The following sections are included:

• INTRODUCTION
• WHAT IS THE CURRENT ROLE OF ENTERPRISE-WIDE STRESS TESTING?
• WHAT WILL BE THE FUTURE ROLE OF ENTERPRISE-WIDE STRESS TESTING?
• ONGOING CHALLENGES IN STRESS TESTING?
• CONCLUSIONS
• NOTES
• REFERENCES

In this chapter, we explore how certain binary events can be predicted using relevant economic and financial information. The prediction takes the form of an expected probability. A cutoff can be fixed so as to separate cases with higher probability and other cases with lower probability into different categories.