1.Introduction:
In developing countries the major driver of economic growth are financial institutions, which are interlinked through innovation in response to the forces of globalization and technology. Rigorous risk management efforts are made to strengthen the financial bodies and economy.
The three possible channel of financial stress spread from one financial institution to the remainder of financial organization are: other party vulnerability, capital markets linkages, and investor confidence. Prices, nevertheless, specify an innate way of measuring the interconnection amongst institutions by all three-risk diffusion means (Monks & Stringa, 2005).
Commencing since the mid-1990s a measure of risk recognized as value-at-risk (VaR) has appeared as the prevalent risk measure for financiers in financial securities, banks and investment companies and the controlling powers that standardize these institutions. VaR is also an important part of both the Basel I and Basel II suggestions upon banking rules published by the Basel Committee on Banking Supervision. Security and Exchange Commission of Pakistan (SECP) also emphasized the significance of VaR measures for financial institutions to quantity the risk.
The global financial crisis made regulators and researcher realize that systemic risk and their spread outs are misjudged in majorly applied risk procedures and that conventional risk measuring instruments, like value-at-risk (VaR), must be fine-tuned fitting to states of market to disclose risk in a better way. (Adams, Fuss, & Gropp, 2013). Measuring risk through VaR has the advantage that it reflects all risk relevant shocks of an institution that result from complex relationship of financial institutions.
For measuring risk ...
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Money related derivatives empower companies to exchange particular monetary dangers, (for example, premium rate hazard, cash, value and product value hazard, and credit hazard, and so ...
The presence of systemic risk in the current United States financial system is undeniable. Systemic risks exist when the failure of one firm may topple others and destabilize the entire financial system. The firm is then "too big to fail," or perhaps more precisely, "too interconnected to fail.” The Federal Stability Oversight Council is charged with identifying systemic risks and gaps in regulation, making recommendations to regulators to address threats to financial stability, and promoting market discipline by eliminating the expectation that the US federal government will come to the assistance of firms in financial distress. Systemic risks can come through multiple forms, including counterparty risk on other financial ...
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There is a vast amount of literature available on the additional procyclicality of regulatory capital charges in Pillar 1 of Basel II. In this section, we shall briefly visit this literature and see if any conclusions can be drawn from this, before proceeding to the conclusion and mitigation of these procyclical effects. The majority of the literature, as expected, focuses primarily on the IRB approach, as this aspect of Basel II has drawn the most criticism from financial practitioners and academics alike. The greater part of this literature has found that there is an overwhelmingly substantial rise in procyclicality of minimum regulatory capital charges originating from the IRB approach. Gordy and Howells found that under the IRB approach, volatility in the capital charge, relative to the mean, is between 0.1 to 0.26 (Gordy & Howells, 2004). This follows another study by Kashyap and Stein, which shows that capital charges rose by 70-90% during the years of 1998 to 2002 dependant of the model used to calculate PD’s (Goodhart & Taylor, 2004).
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What is the net contribution of the Basel Process to the governance of global finance? The goal of this paper is to describe, analyze, and evaluate the costs and benefits of the Basel Capital Adequacy Accords through the comparison of intended consequences, namely the stability of the global banking system, and unintended consequences, namely financial risks.
The key purpose for managing risk is to evaluate the risk and improve the performances of consolidated value of a firm to achieve profitability. Currently the benchmark tool for measuring the risk is VAR (Value at Risk). VAR evaluate the maximum loss a value of a portfolio has for a given interval on a pre-determined period of time. It is commonly used in brokerage houses, investment banks and institutions to measure a risk on their portfolios.
In general, financial interconnectedness refers to relationships between economic mediators that are created through financial transactions and supporting arrangements. The term interconnectedness refers specifically to linkages between and across financial institutions i.e. banks and non-banks, providers of financial market infrastructure services i.e. payment, clearance and payment systems and finally vendors and third parties supporting these bodies. Interconnectedness is a very broad concept. For example, banks which lend or borrow from other banks become interconnected to one another through interbank credit exposures. Contractual obligations amongst financial institutions; such as ownership, loans, derivatives etc. creates interconnectedness among them as well. When firms invest in the same asset, they also become interconnected because of having common exposures to that specific asset. In highly or dense interconnected financial system, distress in one entity most of the times transmits to other
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...ng safety to risk weary investors and liquidity to borrowers. The dramatic effects of weak banking systems can be seen in both developed and developing economies and the repercussions these have had on financial markets everywhere. Each occasion is a reminder of the need for strongly capitalized financial institutions.
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Profitability is high and diversified. Asset quality is good and NPLs are low and well provisioned. Financial soundness indicators for the three main domestic banks remained strong even during the global and European crises. Stress tests suggest that banks are resilient against numerous unfavourable macroeconomic scenarios as their high capitalization can offset potential losses.