Narrow Results

The Basel II internal ratings-based (IRB) approach to capital adequacy for credit risk plays an important role in protecting the banking sector against insolvency. We outline the mathematical foundations of regulatory capital for credit risk, and extend the model specification of the IRB approach to a more general setting than the usual Gaussian case. It rests on the proposition that quantiles of the distribution of conditional expectation of portfolio percentage loss may be substituted for quantiles of the portfolio loss distribution. We present a more compact proof of this proposition under weaker assumptions. Then, constructing a portfolio that is representative of credit exposures of the Australian banking sector, we measure the rate of convergence, in terms of number of obligors, of empirical loss distributions to the asymptotic (infinitely fine-grained) portfolio loss distribution. Moreover, we evaluate the sensitivity of credit risk capital to dependence structure as modeled by asset correlations and elliptical copulas. Access to internal bank data collected by the prudential regulator distinguishes our research from other empirical studies on the IRB approach.

The global crisis and increased competition have become increasingly essential issues in the risk and capital concern of banks. This study delves the effect of development indicators and market competition over the Asian banking industry. The robust generalized methods of moments (GMM) and two-stage least square (TSLS) estimated results of 191 Asian banks for 2000–2014 depict the significant impact of development indicators and competition over risk and capital of Asian banks. The findings of the study also show the substantial positive effect of inflations in regulatory capital, whereas the risk of banks is significantly reduced in the economic progression. Increase risk level act as a striking force of capital escalation which is consistent with the Basel accord and capitalized banks provokes managerial efficiency in managing risk than low capitalized counterparts.

The environment surrounding banks is becoming increasingly severe. Particularly, to prevent the next financial crisis, Basel III requires financial institutions to prepare higher levels of capitals by 1 January 2028, and the financial stability board (FSB) suggests the risk appetite framework (RAF) as their internal risk management. Hence, efficient usage of their own capitals for banks is more important than ever to improve profitability. Under such circumstances, this paper is the first to consider an optimization problem for a typical loan portfolio of international banks under comprehensive risk constraints with realistic profit margins and funding costs to achieve an efficient capital allocation. Concretely, after taking concentration risks on large individual obligors into account, we obtain a loan portfolio that attains the maximum profit under Basel regulatory capital and loan market constraints, as well as internal management constraints, namely, risk limits on business units and industrial sectors. Moreover, we separately calculate credit risk amounts of the internal constraints in terms of regulatory and economic capitals to compare the optimized profits. In addition, considering sharp increases in default probabilities of all obligors as in the global financial crisis, we perform a stress test on the optimization results to investigate the effects of changes in risk amounts and profits. As a result, we propose to unify risk constraints on the business units and industrial sectors by using credit risk amounts in terms of economic capitals.

This paper analyses the effect of regulatory pressure on bank behavior, using a sample of Tunisian banks covering the period 2005–2020. First, the paper examines the impact of regulatory capital on bank profitability and risk. Second, it contributes to the literature which has received scant attention from researchers investigating the nonlinear impact of regulatory pressure on bank behavior. Third, we consider different determinants of bank profitability and risk. Finally, we use both static and dynamic models to test for the persistence of bank profitability and risk, as well as to make sure that the results are not biased by endogeneity. The results suggest that regulatory capital pressure improves bank profitability and stability. This effect is, however, conditioned by the existence of a certain threshold, after which stringent capital regulation may have adverse effects. Our results have important policy implications on optimal bank capital regulation.