While the unfolding fi nancial turmoil has involved new elements, more fundamental elements have remained the same. New elements include structured credit, the originate-to-distribute business model and expanded markets for repurchase agreements (repos). The recurrence of crises refl ects a basic procyclicality in the system, which is characterised by a build-up of risk-taking and leverage in g...

Basel II changes risk management in banks strongly. Internal rating procedures would lead one to expect that banks are changing over to active risk control. But, if risk management is no longer a simple “game against nature”, if all agents involved are active players then a shift from a non-strategic model setting (measuring event risk stochastically) to a more general strategic model setting (...

This study compares the hazard of failure in Islamic and conventional commercial banks using survival models. The sample consists of 421 banks from 20 Middle and Far Eastern countries observed during the 1995 to 2010 period. The conditioning variables are of both bank-level and country-level type. The analysis suggests that Islamic banks have lower failure risk and are less interconnected which...

We construct a Risk Management Index (RMI) to measure the strength and independence of the risk management function at bank holding companies (BHCs). U.S. BHCs with higher RMI before the onset of the financial crisis have lower tail risk, lower non-performing loans, and better operating and stock return performance during the financial crisis years. Over the period 1995 to 2010, BHCs with a hig...

The Basel committee proposes making regulatory capital requirements more risk sensitive. Cost-benefit assessment suggests that this yields greater efficiency in the use of regulatory capital, but has substantial enforcement and compliance costs and may well increase the severity of banking crises. Better if the new accord sets risk-insensitive regulatory minimum capital standards and encourages...

One of the important functions of financial intermediation is intertemporal risk smoothing. This paper studies the effects of a production shock in a closed economy and compares the abilities of market-based and bank-based financial systems in processing the shock. The analysis of the shock propagation indicates that a competitive banking system may collapse in absence of a proper regulation. P...

Inventory financing affects the risks of both for banks and supply chain companies. Traditionally, supply chain research focus more on material flow than financial. We construct a supply chain financing risk-information migration model (RMM). In this model, we discussed the preconditions to adopt inventory financing when the enterprises are facing cash constraints. And we simulated the whole op...

In the European Economic Area the home country supervises the activities of its banks, wherever they are operating via branches or across borders, while the host country handles the stability of its financial system and problems stemming from failure or distress. We address two main problems related to the conduct and co-ordination of these two responsibilities. First, the introduction of the e...

One of the most important recent innovations in financial markets has been the development of credit derivative products that allow banks to more actively manage their credit portfolios than ever before. We analyze the effect that access to these markets has had on the lending behavior of a sample of banks, using a sample of banks that have not accessed these markets as a control group. We find...

Two policy instruments for the banking sector are investigated, namely systemic risk taxation and constructive ambiguity about bailout policy. Bailout expectations can induce moral hazard in the form of excessive risk taking by banks. Systemic risk taxation induces banks to prefer uncorrelated investments, leading to lower systemic risk formation. Constructive ambiguity generates uncertainty ab...