Table of Contents

Benefits and Costs of Bank Capital

Jihad C. Dagher, International Monetary Fund (IMF) - Research Department
Giovanni Dell'Ariccia, International Monetary Fund (IMF) - Research Department, Centre for Economic Policy Research (CEPR)
Luc Laeven, European Central Bank (ECB), Centre for Economic Policy Research (CEPR)
Lev Ratnovski, International Monetary Fund
Hui Tong, International Monetary Fund (IMF)

The Cyclical Effects of the Basel III Capital Ratios: The Impact of the LCR Regulation

Hélyoth Theodore Hessou, Laval University

Bank Financial Reporting Opacity and Regulatory Intervention

John Gallemore, University of Chicago - Booth School of Business

Anti-Money Laundering Regulations and the Effective Use of Mobile Money in South Africa – Part 2*

Marike Kersop, North-West University
Sarel du Toit, North-West University

Comments on the Basel Committee On Banking Supervision Proposal for a New Standardized Approach for Operational Risk

Giulio Mignola, Intesa SanPaolo Spa
Roberto Ugoccioni, Intesa SanPaolo Spa
Eric Cope, Credit Suisse AG

Anti-Money Laundering Regulations and the Effective Use of Mobile Money in South Africa – Part 1

Marike Kersop, North-West University
Sarel du Toit, North-West University


REGULATION OF FINANCIAL INSTITUTIONS eJOURNAL

"Benefits and Costs of Bank Capital" Free Download
IMF Staff Discussion Note No. SDN/16/04

JIHAD C. DAGHER, International Monetary Fund (IMF) - Research Department
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GIOVANNI DELL'ARICCIA, International Monetary Fund (IMF) - Research Department, Centre for Economic Policy Research (CEPR)
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LUC LAEVEN, European Central Bank (ECB), Centre for Economic Policy Research (CEPR)
Email:
LEV RATNOVSKI, International Monetary Fund
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HUI TONG, International Monetary Fund (IMF)
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We find that capital in the range of 15–23 percent of risk-weighted assets would have been sufficient to absorb losses in the vast majority of historic banking crises in advanced economies. Further capital increases would have had only marginal effects on preventing additional crises. Appropriate capital requirements may be somewhat below this range, as banks tend to hold capital in excess of regulatory minima, and other bail-in-able instruments can contribute to loss absorption capacity. While long-term social costs associated with this level of capital appear acceptable, the short-term costs of transitioning to higher bank capital may be substantial, which calls for a careful timing of such transition.

"The Cyclical Effects of the Basel III Capital Ratios: The Impact of the LCR Regulation" Free Download

HÉLYOTH THEODORE HESSOU, Laval University
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New liquidity rules and capital buffers requirements are introduced by the Basel committee in its Basel III framework. As capital requirements play a key role in the supervision and regulation of banks, this paper investigates how the risk-sensitive LCR rule impacts the cyclical behavior of the capital ratios. The LCR rule introduces a regulatory trade-off between banks’ asset risk and liquidity, which were absent under Basel II. In addition to the existing risk-based capital ratio, this paper studies the cyclical behavior of the newly introduced leverage ratio under Basel III. It finds that both the LCR and the new buffers requirements increase the bank risk-based capital and leverage ratio during upturns and then contribute to reduce bank capital procyclicality suspected under Basel II. In the opposite, the cushion of capital that banks hold above the minimum required is more likely to decrease during upturns. This will increase the probability that banks becomes bound with the capital ratio, something which could contribute to slow down any excessive asset growth in the banking sector during upturns.

"Bank Financial Reporting Opacity and Regulatory Intervention" Free Download

JOHN GALLEMORE, University of Chicago - Booth School of Business
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I study the association between bank financial reporting opacity, measured by delayed expected loan loss recognition, and the intervention decisions made by bank regulators. Examining U.S. commercial banks during the 2007-2009 financial crisis, I find that delayed expected loan loss recognition is negatively associated with the likelihood of regulatory intervention (measured by either severe enforcement action or closure). This result is robust to using an extensive set of control variables and various research designs. I consider two alternative mechanisms for this association: financial reporting opacity inhibiting the effectiveness of regulatory monitoring (regulatory unawareness) or regulators practicing forbearance on opaque banks (regulatory forbearance). I find evidence supporting the forbearance mechanism, but not the unawareness mechanism. My findings contribute to the extant literature on bank opacity, regulatory forbearance and intervention, and the consequences of loan loss provisioning by suggesting that delayed expected loan loss recognition may affect regulatory intervention decisions.

"Anti-Money Laundering Regulations and the Effective Use of Mobile Money in South Africa – Part 2*" Free Download
Potchefstroom Electronic Law Journal, Vol. 18, No. 5, 2015

MARIKE KERSOP, North-West University
Email:
SAREL DU TOIT, North-West University
Email:

Mobile financial services, specifically mobile money, has the potential to expand access to financial services to millions of unbanked people in South Africa. As such, it looks very promising in terms of financial inclusion. However, concerns exist that mobile money can be detrimental to financial integrity since there are several proven risk factors linked to mobile financial services. These risk factors make mobile money very susceptible to money laundering. The potential for abuse and the need for appropriate controls is therefore something which cannot be ignored.

While the South African legislator has made provision for comprehensive anti-money laundering preventative measures by means of the Financial Intelligence Centre Act 38 of 2001, there exists no South African legislation explicitly concerned with mobile money. It is therefore difficult to determine what the regulatory stance is in terms of mobile money in South Africa. The Financial Action Task Force (FATF) is, however, currently focusing attention on the effect which mobile money may have on financial integrity. The latest FATF Recommendations make provision for several anti-money laundering controls which are specifically applicable to mobile money, including controls regarding money or value transfer services and new technologies.

While it is always difficult to balance financial integrity and financial inclusion, the risk-based approach makes it possible for governments to implement effective anti-money laundering measures, thereby preserving financial integrity, without the need to compromise on financial inclusion objectives. The fact that South Africa has not fully adopted a risk-based approach is a problem which needs to be addressed if mobile money is to deliver on its promises for financial inclusion, without being detrimental to financial integrity.

"Comments on the Basel Committee On Banking Supervision Proposal for a New Standardized Approach for Operational Risk" Fee Download
Journal of Operational Risk, Vol. 11, No. 3, 2016

GIULIO MIGNOLA, Intesa SanPaolo Spa
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ROBERTO UGOCCIONI, Intesa SanPaolo Spa
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ERIC COPE, Credit Suisse AG
Email:

On March 4, 2016, the Basel Committee on Banking Supervision published a consultative document in which a new methodology, the standardized measurement approach (SMA), was introduced for computing operational risk regulatory capital for banks. In this paper, the behavior of the SMA is studied under a variety of hypothetical and realistic conditions, showing that the simplicity of the new approach is very costly in some ways. We find that the SMA does not respond appropriately to changes in the risk profile of a bank, and it is incapable of differentiating among the range of possible risk profiles across banks. We also discover that SMA capital results generally appear to be more variable across banks than the previous advanced measurement approach (AMA) option of fitting the loss data, and that the SMA can result in banks over- or under-insuring against operational risks relative to previous AMA standards. Finally, we argue that the SMA is retrograde in terms of its capability to measure risk and, perhaps more importantly, fails to create any link between management actions and capital requirement.

"Anti-Money Laundering Regulations and the Effective Use of Mobile Money in South Africa – Part 1" Free Download
Potchefstroom Electronic Law Journal, Vol. 18, No. 5, 2015

MARIKE KERSOP, North-West University
Email:
SAREL DU TOIT, North-West University
Email:

Mobile financial services, specifically mobile money, has the potential to expand access to financial services to millions of unbanked people in South Africa. As such, it looks very promising in terms of financial inclusion. However, concerns exist that mobile money can be detrimental to financial integrity since there are several proven risk factors linked to mobile financial services. These risk factors make mobile money very susceptible to money laundering. The potential for abuse and the need for appropriate controls is therefore something which cannot be ignored.

While the South African legislator has made provision for comprehensive anti-money laundering preventative measures by means of the Financial Intelligence Centre Act 38 of 2001, there exists no South African legislation explicitly concerned with mobile money. It is therefore difficult to determine what the regulatory stance is in terms of mobile money in South Africa. The Financial Action Task Force (FATF) is, however, currently focusing attention on the effect which mobile money may have on financial integrity. The latest FATF Recommendations make provision for several anti-money laundering controls which are specifically applicable to mobile money, including controls regarding money or value transfer services and new technologies.

While it is always difficult to balance financial integrity and financial inclusion, the risk-based approach makes it possible for governments to implement effective anti-money laundering measures, thereby preserving financial integrity, without the need to compromise on financial inclusion objectives. The fact that South Africa has not fully adopted a risk-based approach is a problem which needs to be addressed if mobile money is to deliver on its promises for financial inclusion, without being detrimental to financial integrity.

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This eJournal distributes working and accepted paper abstracts covering regulatory and legal aspects of national and international financial institutions. The eJournal welcomes research that deals with legal aspects of depository institutions including banks, credit unions, trust companies, and mortgage loan companies. Topics also include regulation of insurance companies, brokers, underwriters, and investment funds.

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BANKING & FINANCIAL INSTITUTIONS EJOURNALS

MICHAEL C. JENSEN
Social Science Electronic Publishing (SSEP), Inc., Harvard Business School, National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)
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Advisory Board

Regulation of Financial Institutions eJournal

EDWARD I. ALTMAN
Senior Advisor, Credit and Debt Markets Research Program, New York University (NYU) - Salomon Center, Max L. Heine Emeritus Professor of Finance, New York University (NYU) - Department of Finance

DENNIS R. CAPOZZA
Professor Emeritus, Ross School of Business, University of Michigan

DONALD CHEW
Morgan Stanley Investment Management

J. DAVID CUMMINS
Joseph E. Boettner Professor, Temple University - Risk Management & Insurance & Actuarial Science

DOUGLAS W. DIAMOND
Merton H. Miller Distinguished Service Professor of Finance, University of Chicago - Booth School of Business, National Bureau of Economic Research (NBER)

EUGENE F. FAMA
Robert R. McCormick Distinguished Service Professor of Finance, University of Chicago - Finance

STEPHEN FIGLEWSKI
Professor of Finance, New York University - Stern School of Business

STUART I. GREENBAUM
Bank of America Professor of Managerial Leadership, Washington University in St. Louis - Olin Business School

MICHAEL C. JENSEN
Co-Founder, Chairman, Managing Director and Integrity Officer, Social Science Electronic Publishing (SSEP), Inc., Jesse Isidor Straus Professor of Business Administration, Emeritus, Harvard Business School, Research Associate, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

JONATHAN M. KARPOFF
Washington Mutual Endowed Chair in Innovation Professor of Finance, University of Washington - Michael G. Foster School of Business

KENNETH LEHN
Professor of Business Administration, University of Pittsburgh - Finance Group

STANLEY R. PLISKA
University of Illinois at Chicago - Department of Finance

CHARLES I. PLOSSER
President, Federal Reserve Bank of Philadelphia, National Bureau of Economic Research (NBER)

KATHERINE SCHIPPER
Duke University - Fuqua School of Business

ALAN SCHWARTZ
Sterling Professor of Law, Yale Law School

G. WILLIAM SCHWERT
Distinguished University Professor of Finance and Statistics, University of Rochester - Simon Business School, National Bureau of Economic Research (NBER)

RENE M. STULZ
Everett D. Reese Chair of Banking and Monetary Economics, Ohio State University (OSU) - Department of Finance, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

ROSS L. WATTS
Erwin H. Schell Professor of Management, Massachusetts Institute of Technology (MIT) - Sloan School of Management