TITLE

Basel III Accord: Different Bank Characteristics (Insolvency Risk) Due to Unobserved Heterogeneity Effects

AUTHOR(S)
bin Mohd Isa, Mohd Yaziz
PUB. DATE
May 2014
SOURCE
Australian Journal of Basic & Applied Sciences;May2014, Vol. 8 Issue 7, p377
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
Background: The banking literature on loan loss provisions (LLP) have analyzed on several provisioning issues, but to the best of knowledge none of any previous literature has analyzed which regression model is more preferred that capture credit losses that are about to occur and the impending needs to also incorporate in the model, the moderating effects of the "credit risk management" arising from assessment of credit portfolio; and "intervening effects", of "relevance and faithful representation in financial statements. Objective: To determine which regression model is a more appropriate model with determinants of loan loss provisions taking into account the current purposes in loan loss provisioning and the requirements of Basel III in strengthening stability of the banking industry through risk coverage, and that banks who are undercapitalized in internalizing to mitigate risks and externalities couple in the post adoption of IAS 39 regime to determine whether it has succeeded to mitigate the discretionary components of the loan loss provisioning practices; and - after the implementation of the Basel III Accord to determine whether it has strengthen reliability of financial statements, and to determine whether it accounts for treatment of pro cyclicality in the loan loss provisioning practices. Results: The results show, from using E Views version 8 and STATA version 13, the Random Effects model is a more preferred as it accounts for risk variation coming from within the particular bank itself (time series), as well as risk variation between banks in the banking industry, whilst the model allows for a different bank characteristics due to different capabilities to withstand insolvency risk arising from the unobserved heterogeneity effects or features that are unique in fundamental unmeasured ways of a particular bank in its loan loss provisioning practices such as, the different structural ability in mitigating more risk in lending activities. Conclusion: The Random Effects model allows the banks to capture their loss expectations for their loans and for the bank to be in a position to continuously reassess changes in the loss expectations as the conditions affecting their borrowers change; and will meet the two purposes of the recent regulatory changes - adoption of IAS 39 and implementation of Basel III Accord.
ACCESSION #
96583888

 

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