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

bin Mohd Isa, Mohd Yaziz
May 2014
Australian Journal of Basic & Applied Sciences;May2014, Vol. 8 Issue 7, p377
Academic Journal
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.


Related Articles

  • A MODEL OF RATING FOR BANKS IN ROMANIA. Bātrâncea, Ioan; Bātrâncea, Maria; Popa, Anamaria; Țiplea, Augustin // Annals of the University of Oradea, Economic Science Series;2012, Vol. 21 Issue 1, p644 

    In the paper the authors present a model of rating for the banking system. Thus we took into account the records of 11 banks in Romania, based on annual financial reports. The model classified the banks in seven categories according with notes used by Standard Poor's and Moody's rating Agencies.

  • Major banks face £356bn Basel III bill. Dale, Samuel // Mortgage Strategy (Online Edition);5/17/2012, p3 

    The article reports on the impact of Basel III requirements on major banks according to a Fitch Ratings report.

  • Banks Expect Higher Biz Loan Costs.  // American Banker;6/22/2012, Vol. 177 Issue F324, p3 

    The article notes information from the Institute of International Finance survey which concluded banks will charge more for commercial loans when they have to comply with the proposed Basel III international accord on capital requirements.

  • Regulate and bust. Frith, Damon // BRW;2/2/2012, Vol. 34 Issue 3, p12 

    The article reports on the concerns expressed by Australian banks over the timing and the purpose of the Basel III banking accord and its tightened capital ratios requirements which, although designed to prevent another global financial crisis, may lead to another global recession.

  • The Determinants of Systematic Risk in the Italian Banking System: A Cross-Sectional Time Series Analysis. Biase, Pasquale di; D'Apolito, Elisabetta // International Journal of Economics & Finance;Nov2012, Vol. 4 Issue 11, p152 

    This research provides an insight to the main determinants behind the systematic risk of banks. For this purpose, we use a number of regression models to test the statistical significance of a wide range of bank-specific risk factors. The results indicate that bank equity beta correlates...

  • Thinking beyond Basel III: Necessary Solutions for Capital and Liquidity. Blundell-Wignall, Adrian; Atkinson, Paul // OECD Journal: Financial Market Trends;2010, Vol. 2010 Issue 1, p9 

    In previous studies, the OECD has identified the main hallmarks of the crisis as too-big-to-fail institutions that took on too much risk; insolvency resulting from contagion and counterparty risk; the lack of regulatory and supervisory integration; and the lack of efficient resolution regimes....

  • MOGUĆNOST UPOTREBE Z-SCORE MODELA ZA ODREĐIVANJE KREDITNE SPOSOBNOSTI PREDUZEĆA U FBIH. Salkić, Arijana // Proceedings of the Conference on the Economy of Integrations (IC;2011, p327 

    Altman Z-score model is one of the most well known quantitative models for valuation the financial position of enterprises. Z-score contains several key indicators and each of them has a corresponding weight. The assumption is that the financial indicators of failed companies, which have...

  • Methods for Evaluating the Creditworthiness of Borrowers. Genriha, Irina; Voronova, Irina // Economics & Business;2012, Vol. 22, p42 

    The Internal Rating Based Approach (IRB) of the Basel Capital Accord allows banks to use their own rating models for the estimation of probabilities of default (PD). The objective of this research is to present mathematical-statistical methods of creditworthiness evaluation usage at banks,...

  • Capital raising woes may turn small Indian banks into takeover targets: S&P.  // FRPT- Finance Snapshot;3/23/2013, p5 

    The article reports on the impact of the Basel III, a global, voluntary regulatory standard, on banks based in India in 2013.


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics