Abstract: The New Basel Capital Accord (Basel II) influences how financial institutions around the world, and especially European Union institutions, determine the amount of capital to reserve. However, as the recent global crisis has shown, the revision of Basel II is needed to reflect current trends, such as increased volatility and correlation, in the world financial markets. The overall objective of Basel II is to increase the safety and soundness of the international financial system. Basel II builds on three main pillars: Pillar I deals with the minimum capital requirements for credit, market and operational risk, Pillar II focuses on the supervisory review process and finally Pillar III promotes market discipline through enhanced disclosure requirements for banks. The aim of this paper is to provide the historical background, key features and impact of Basel II on financial markets. Moreover, we discuss new proposals for international bank regulation (sometimes referred to as Basel III) which include requirements for higher quality, constituency and transparency of banks' capital and risk management, regulation of OTC markets and introduction of new liquidity standards for internationally active banks.
Abstract: This paper focuses on operational risk measurement
techniques and on economic capital estimation methods. A data
sample of operational losses provided by an anonymous Central
European bank is analyzed using several approaches. Loss
Distribution Approach and scenario analysis method are considered.
Custom plausible loss events defined in a particular scenario are
merged with the original data sample and their impact on capital
estimates and on the financial institution is evaluated. Two main
questions are assessed – What is the most appropriate statistical
method to measure and model operational loss data distribution? and
What is the impact of hypothetical plausible events on the financial
institution? The g&h distribution was evaluated to be the most
suitable one for operational risk modeling. The method based on the
combination of historical loss events modeling and scenario analysis
provides reasonable capital estimates and allows for the measurement
of the impact of extreme events on banking operations.
Abstract: There are three main ways of categorizing capital in banking operations: accounting, regulatory and economic capital. However, the 2008-2009 global crisis has shown that none of these categories adequately reflects the real risks of bank operations, especially in light of the failures Bear Stearns, Lehman Brothers or Northern Rock. This paper deals with the economic capital allocation of global banks. In theory, economic capital should reflect the real risks of a bank and should be publicly available. Yet, as discovered during the global financial crisis, even when economic capital information was publicly disclosed, the underlying assumptions rendered the information useless. Specifically, some global banks that reported relatively high levels of economic capital before the crisis went bankrupt or had to be bailed-out by their government. And, only 15 out of 50 global banks reported their economic capital during the 2007-2010 period. In this paper, we analyze the changes in reported bank economic capital disclosure during this period. We conclude that relative shares of credit and business risks increased in 2010 compared to 2007, while both operational and market risks decreased their shares on the total economic capital of top-rated global banks. Generally speaking, higher levels of disclosure and transparency of bank operations are required to obtain more confidence from stakeholders. Moreover, additional risks such as liquidity risks should be included in these disclosures.
Abstract: The impact assessment in its various forms has
recently become a very important part of policy-making and
legislation in many different countries. Regulatory impact assessment
(RIA) is yet another set of analytical methods deployed in the
legislation of the European Union, of many developed countries as
well as in many developing ones such as Mexico, Malaysia and
Philippines. The aim of this paper is to provide a theoretical
background for economic models in regulatory impact assessment
and an overview of their application especially on the financial
market in the Czech Republic. We found out an inadequate
application of these models, what makes room for further research in
this field.
Abstract: This paper focuses on sovereign credit risk meaning a
hot topic related to the current Eurozone crisis. In the light of the
recent financial crisis, market perception of the creditworthiness of
individual sovereigns has changed significantly. Before the outbreak
of the financial crisis, market participants did not differentiate
between credit risk born by individual states despite different levels
of public indebtedness. In the proceeding of the financial crisis, the
market participants became aware of the worsening fiscal situation in
the European countries and started to discriminate among
government issuers. Concerns about the increasing sovereign risk
were reflected in surging sovereign risk premium. The main of this
paper is to shed light on the characteristics of the sovereign risk with
the special attention paid to the mutual relation between credit spread
and the CDS premium as the main measures of the sovereign risk
premium.
Abstract: The article deals with dividends and their distribution from investors from a theoretical point of view. Some studies try to analyzed the reaction of the market on the dividend announcement and found out the change of dividend policy is associated with abnormal returns around the dividend announcement date. Another researches directly questioned the investors about their dividend preference and beliefs. Investors want the dividend from many reasons (e.g. some of them explain the dividend preference by the existence of transaction cost; investors prefer the dividend today, because there is less risky; the managers have private information about the firm). The most controversial theory of dividend policy was developed by Modigliani and Miller (1961) who demonstrated that in the perfect and complete capital markets the dividend policy is irrelevant and the value of the company is independent of its payout policy. Nevertheless, in the real world the capital markets are imperfect, because of asymmetric information, transaction costs, incomplete contracting possibilities and taxes.
Abstract: The term private equity usually refers to any type of
equity investment in an asset in which the equity is not freely
tradable on a public stock market. Some researchers believe that
private equity contributed to the extent of the crisis and increased
the pace of its spread over the world. We do not agree with this.
On the other hand, we argue that during the economic recession
private equity might become an important source of funds for firms
with special needs (e.g. for firms seeking buyout financing, venture
capital, expansion capital or distress debt financing). However,
over-regulation of private equity in both the European Union and
the US can slow down this specific funding channel to the
economy and deepen credit crunch during global crises.
Abstract: While the form of crises may change, their essence
remains the same (such as a cycle of abundant liquidity, rapid credit
growth, and a low-inflation environment followed by an asset-price
bubble). The current market turbulence began in mid-2000s when the
US economy shifted to imbalanced both internal and external
macroeconomic positions. We see two key causes of these problems
– loose US monetary policy in early 2000s and US government
guarantees issued on the securities by government-sponsored
enterprises what was further fueled by financial innovations such as
structured credit products. We have discovered both negative and
positive lessons deriving from this crisis and divided the negative
lessons into three groups: financial products and valuation, processes
and business models, and strategic issues. Moreover, we address key
risk management lessons and exit strategies derived from the current
crisis and recommend policies that should help diminish the negative
impact of future potential crises.
Abstract: There are many debates now regarding undervalued
and overvalued currencies currently traded on the world financial
market. This paper contributes to these debates from a theoretical
point of view. We present the three most commonly used methods of
estimating the equilibrium real effective exchange rate (REER):
macroeconomic balance approach, external sustainability approach
and equilibrium real effective exchange rate approach in the reduced
form. Moreover, we discuss key concepts of the calculation of the
real exchange rate (RER) based on applied explanatory variables:
nominal exchange rates, terms of trade and tradable and non-tradable
goods. Last but not least, we discuss the three main driving forces
behind real exchange rates movements which include terms of trade,
relative productivity growth and the interest rate differential.
Abstract: Liquidity risk management ranks to key concepts
applied in finance. Liquidity is defined as a capacity to obtain
funding when needed, while liquidity risk means as a threat to this
capacity to generate cash at fair costs. In the paper we present
challenges of liquidity risk management resulting from the 2007-
2009 global financial upheaval. We see five main regulatory
liquidity risk management issues requiring revision in coming
years: liquidity measurement, intra-day and intra-group liquidity
management, contingency planning and liquidity buffers, liquidity
systems, controls and governance, and finally models testing the
viability of business liquidity models.