Academic journal article Asian Social Science

Assessment and Management of Banking Risks in the Global Community: Benefits and Challenges of Implementation of Basel Standards

Academic journal article Asian Social Science

Assessment and Management of Banking Risks in the Global Community: Benefits and Challenges of Implementation of Basel Standards

Article excerpt

Abstract

Regulation of banking risks by the state is due to the specifics of banking, associated with the transformation of deposits into loans and multiform negative effects that banking risks bear to the national economy. Since the late 1980s, the international practice of assessment and management of banking risks began to be reflected in the documents of the Basel Committee on Banking Supervision. In this paper we consider the evolution of Basel standards from Basel I to Basel III, and discuss substantial features of each generation of the standards. To date, a considerable number of countries, including Russia, have joined Basel standards. The paper discusses the features of regulation of banking risks in Russia, as well as the problems faced by commercial banks and the regulator in the implementation of Basel standards in the Russian banking sector.

Keywords: risk management, banking sector, Basel standards, Basel III

1. Introduction

The problem of assessment and management of banking risks in a rapidly changing situation in the global economy, accompanied by financial instability and desire of banking entities to permanent progressive development, acquires today a global character. Banking theory and practice in today's realities needs to develop a systematic approach to the assessment and management of financial risks. Currently accepted standards of banking supervising authorities are based on assumptions about the importance of determining the level of capital that reduces the risk of bankruptcy.

In the work of Freixas and Rochet (Freixas & Rochet, 2008) is noted that financial markets are characterized by various forms of information asymmetry: ex ante (adverse selection), interim (moral hazard), and ex post (costly state verification). In determining the state policy of regulation of the banking sector the central problem is "moral hazard", which in banking refers to the desire of owners and/or managers of banks to conduct operations with high profitability by transferring its inherent risks to the third party, who may be depositors, other creditors and the state.

By its very nature, any financial institution, when implementing procedures aimed at the prevention of banking risks, seeks to maximize the profit from operations by effective use of funds. Thus, if we talk about the level of capital adequacy, the representatives of the banking sector prefer to operate with minimum capital in order to provide growth of assets and profitability. This in turn contradicts the ideas of supervising authorities in the banking sector, who on the other hand believe that it is the high level of capital that can help to reduce the level of bankruptcies.

The increasing complexity of banking activities, the emergence of new risks faced by banks in their operations, the rapid changes in the environment - all of this requires constant revision of approaches to assessment of the level of capital adequacy. It is important to note that activities of many large banking institutions have today an international character, which in turn explains the need to establish common standards for capital and methods of its estimation. The development of relevant standards is carried out by the Basel Committee on Banking Supervision (BCBS). The result of its work is the adoption of agreements, which regulate the procedure of capital adequacy assessment of commercial banks.

2. Materials

Since the early 1980s the problem of banks' capital adequacy and assessment methodology was the subject of lively debate in the international financial institutions. Interest of regulators to bank capital is due to the fact that it performs the function of protection of depositors from possible losses. The size of the bank's capital is a key factor in the confidence of depositors and clients of the bank's ability to compensate for losses. As a result, the concept of a minimum level of capital adequacy has been proposed. …

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