Regulatory changes and loan loss provisions management by Chinese banks

PurposeThe authors examine whether Chinese banks use loan loss provisions (LLPs) for capital management, income smoothing and signaling purposes, and assess the effect of the recent regulatory changes following the implementation of Chinese Basel III on such behavior.Design/methodology/approachThe authors use a unique set of hand-collected data on bank capital combined with financial data downloaded from the China Stock Market and Accounting Research (CSMAR) database. Multivariate regression models are used to test our hypotheses.FindingsThe authors find that while there is no evidence to suggest capital management practice before the Chinese Basel III, the implementation of the new regulations induced listed banks to manage tier-1 capital via LLPs. The authors also find strong support that Chinese banks engage in income smoothing via LLPs management, and there is no change in such tendency following the issuance of Chinese Basel III. Lastly, the authors do not find support for the signaling behavior by Chinese banks using LLPs.Practical implicationsThe authors’ evidence suggests that elevated tier-1 capital and provisioning requirements may induce capital management by banks, which indicates a potential unintended effect brought forth by the new Basel regulations.Originality/valueTo the best of authors’ knowledge, this study is the first to examine Chinese banks' behavior relating to LLPs in terms of capital management, income smoothing and signaling. In particular, the authors use a sample containing a large number of Chinese commercial banks – previously a major data issue in other studies.

Reconsidering the Prudential Filter for the Cash Flow Hedge Reserve in View of the Purpose of Banking Regulation

Common Equity Tier 1 capital of credit institutions is adjusted by the prudential filter for the cash flow hedge reserve according to art. 33(1)(a) CRR. Thereby, fair value changes of hedging instruments, especially of derivatives, are neutralized by imputed fair value changes of future cash flows that are part of a cash flow hedge. However, these future cash flows are (mostly) expected to occur under market conditions and, thus, imputed fair value changes are not reflected in changes of present values derived from real transactions that exist at the time of the regulatory capital calculation. As a result, positive effects on Common Equity Tier 1 capital can be viewed critically in regard to the prudence principle of banking supervision if an initial reduction in Common Equity Tier 1 capital due to losses from hedging instruments is corrected. Furthermore, the adjustment is case specific and depends on the hedge effectiveness, which is questionable because of consistency reasons. To solve these weaknesses, we suggest to eliminate the prudential filter for the cash flow hedge reserve as a whole. This would lead to a better quality of Common Equity Tier 1 capital by improving its loss absorbency and as a side effect to a reduction in complexity enhancing supervision through regulatory authorities and market discipline. Furthermore, we demonstrate the impact that the proposed abolishment of the prudential filter for the cash flow hedge reserve would have on the Common Equity Tier 1 capital ratios of the largest European banks in 2014–2019

Leverage, capital and profitability of the banks: Evidence from Saudi Arabia

The study examines the effect of leverage and capital on the profitability of selected Saudi Arabian Banks during the period 2014 and 2019. The banks have been selected based upon their size in terms of total assets. The profitability elements, such as Earnings per Share (EPS), Return on Assets (ROA), and Return on Equity (ROE) are the dependent variables; Total Debt Ratio (TDR), Tier 1 Capital Ratio (Tier 1 CAP), and Debt to Equity Ratio (DE) are the independent variables, and firm size is the control variable. The study estimates a pooled regression analysis to analyze the effect of these variables. The results of the study show that there is a positive relationship between the different profitability variables and Debt to Equity Ratio. The Total Debt Ratio is having positive association with ROA and ROE, and has an insignificant negative relationship with the EPS, and the Tier 1 capital ratio is having positive association with ROA and ROE, and has an insignificant relationship with the EPS.

The effects of Tier-1 capital to risk management and profitability on performance using multiple fixed effect panel data model

Purpose This paper aims to examine the effects of Tier-1 capital toward risk management and profitability on the performance of Indonesian Commercial Banks. Design/methodology/approach The research population consisted of all commercial banks listed on the Indonesia Stock Exchange. The data were in the form of financial statements of commercial banks for the periods of 2012 to 2016 with a total of 42 companies (bank). From a total of 42 commercial banks listed in the Indonesia Stock Exchange, not all of them met the criteria. Commercial banks that meet these criteria are as many as 28 banks are sampled research. Findings Tier-1 capital has a positive direct effect on risk management, Tier-1 capital has a positive indirect effect on profitability with risk management as a mediation variable, risk management has a positive direct effect on profitability, Tier-1 capital has a positive indirect effect on performance with risk management and profitability as mediation variables, risk management has a positive indirect effect on performance with as mediation variable and profitability has a positive impact on performance. Originality/value The originality of this research can be seen from the causal relationship between the effects of Tier-1 capital, risk management and profitability on the performance of commercial banks in the context of stock performance among Indonesia commercial banks. Also, the analysis tools using multiple fixed effect panel data models in this research as a novelty in this research. In addition, previous research findings remain inconsistent with one another. By conducting this research, it is expected that more consistent research findings than the previous ones can be generated. Sluggish global economic conditions, which result in declined bank performance are an interesting topic to investigate. The paper uses an original sample, 28 Indonesian banks in 2012-2016. Also, it links Tier 1 capital with risk management and performance in a novel theoretical framework.

Evaluación de la solvencia bancaria: Un modelo basado en las pruebas de resistencia de la banca española

Spanish financial system is involved in a restructuring and refinancing process and, in 2012, credit institutions have been submitted to a stress test in order to check their solvency and resilience against increasingly worse economic conditions.This study aims to predict those stress test results measured in terms of tier 1 capital by means of multiple regression where indicators are obtained from the financial statements.The results show that autonomy ratio (equity /debt) has a strong predictive capability, although the model should also consider the outlier status of the nationalized banks.

The effects of Tier-1 capital, risk management, and profitability on performance of Indonesian Commercial Banks

Purpose This research aims to examine the effect of Tier-1 capital, risk management, and profitability on performance of Indonesia commercial banks. Design/methodology/approach The research population consisted of all commercial banks listed in the Indonesia Stock Exchange periods of 2010 to 2014 with a total of 42 companies. The statistical analysis for testing the hypothesis using structural equation modeling (SEM) covariance based using WarpPLS. Findings Research result shows that Tier-1 capital has a positive effect on capital on risk management; risk management has a positive effect on performance, but risk management does not have an effect to profitability; profitability has a positive effect on performance; and Tier-1 capital has a negative effect on profitability. On the other hand, profitability has a negative effect on Tier-1 capital and performance has a positive effect on Tier-1 capital, whereas Tier-1 capital does not have an effect on performance. Originality/value The originality of this research can be seen from the causal relationship between the effects of Tier-1 capital, risk management and profitability on performance of commercial banks in the context of stock performance among Indonesia commercial banks. In addition, previous research findings remain inconsistent between one another. By conducting this research, it is expected that more consistent research findings than the previous ones can be generated. Sluggish global economic conditions which result in declined bank performance are an interesting topic to investigate.

Part V Liquidity and Leverage, 23 The Leverage Ratio

This chapter discusses the leverage ratio under Basel 3. The leverage ratio was initially implemented as a disclosure standard, with the aim of becoming a mandatory requirement as from 1 January 2018. Basel 3 provides that the original 2014 standard should become binding as a requirement from 2018 to 2021, with the revised Basel 3 requirement taking effect as from 1 January 2022. All banks are required to maintain a leverage ratio of 3 per cent at all times. However, in addition to the 3 per cent requirement, they must also meet a leverage ratio buffer requirement. Both of these requirements must be met with tier 1 capital. The leverage ratio buffer will be set at 50 per cent of a bank's G-SIB buffer.

Are Banks’ Below Par Own Debt Repurchases a Cause for Prudential Concern?

In the lead-up to the implementation of Basel III, European banks repurchased debt securities that traded below par. Banks engaged in these Liability Management Exercises (LMEs) to realize a fair value gain that prudential rules exclude from regulatory capital calculations. The LMEs enabled banks to augment Core Tier 1 capital, given that alternative methods to increase capital ratios were not feasible in practice. Using data of 720 European LMEs conducted between April 2009 and December 2013, we show that poorly capitalized banks repurchased securities and lost about €9.1bn in premiums to compensate their holders. Banks also repurchased the most loss-absorbing securities, for which they paid the highest premiums. These premiums increase with leverage and in times of stress. Hence debt repurchases are a cause for prudential concern.