Internet of Things and Their Coming Perspectives: A Real Options Approach

Internet of things is developing at a dizzying rate, and companies are forced to implement it in order to maintain their operational efficiency. The high flexibility inherent to these technologies makes it necessary to apply an appropriate measure, which properly assesses risks and rewards. Real options methodology is available as a tool which fits the conditions, both economic and strategic, under which investment in internet of things technologies is developed. The contribution of this paper is twofold. On the one hand, it offers an adequate tool to assess the strategic value of investment in internet of things technologies. On the other hand, it tries to raise awareness among managers of internet of things technologies because of their potential to contribute to economic and social progress. The results of the research described in this paper highlight the importance of taking action as quickly as possible if companies want to obtain the best possible performance. In order to enhance the understanding of internet of things technologies investment, this paper provides a methodology to assess the implementation of internet of things technologies by using the real options approach; in particular, the option to expand has been proposed for use in the decision-making process

BASEL II: THE REVISED FRAMEWORK OF JUNE 2004

A major aim of Basel II has been to revise the rules of the 1988 Basel Capital Accord in such a way as to align banks´ regulatory capital more closely with their risks, taking account of progress in the measurement and management of risk and of the opportunities which these provide for strengthened supervision. Achievement of this aim has involved the incorporation in Basel II of methods for quantifying banking risks introduced since the late 1980s. The task of the designers of Basel II has been complicated by the way in which the BCBS´s rules for banks´ capital, originally intended for the internationally active banks of its member countries, have become a global standard widely applied in developing as well as developed countries. Acceptance of this role by the BCBS has entailed a global consultation process, whose results have been reflected in three consultative papers and the RF, and the different approaches and options for setting numerical capital requirements which are intended to accommodate banks and supervisors of different levels of sophistication. As well as providing a commentary on the main features of the RF this paper documents the response of the BCBS to some of the more important points which were raised during this consultation process, including the outcome of decisions taken at a meeting in Madrid in October 2003 following comments on the consultative paper of April 2003, and summarises the results of the most recent of the BCBS´s initiatives to estimate the quantitative impact of the Basel II rules on banks´ capital. This discussion includes a review of papers issued by the BCBS as part of the last stage of its work preceding the RF.

Market-based Options for Security of Energy Supply

Energy market liberalization and international economic interdependence have affected governments’ ability to react to security of supply challenges. On the other side, whereas in the past security of supply was largely seen as a national responsibility, the frame of reference has increasingly become the EU in which liberation increases security of supply mainly by increasing the number of markets participants and improving the flexibility of energy systems. In this logic, security of supply becomes a risk management strategy with a strong inclination towards cost effectiveness, involving both the supply and the demand side. Security of supply has two major components that interrelate: cost and risk. This paper focus the attention on costs in the attempt to develop a market compatible approach geared towards security of supply.Energy supply, Market-based options

THE BASEL COMMITTEE´S PROPOSALS FOR REVISED CAPITAL STANDARDS: MARK 2 AND THE STATE OF PLAY

The Basel Committee´s Proposals for Revised Capital Standards: Mark 2 and the State of Play. The new 500-page consultative document on capital standards of the Basel Committee on Banking Supervision (BCBS), “The New Basel Capital Accord”, gives what is likely to prove a reasonable idea of the eventual shape of the new capital accord. However, many detailed issues remain to be resolved before completion of the drafting process in 2002. The scale and duration of this process reflects both the increasing complexity of banking operations and the role of the BCBS as the institution responsible for globally applicable standards for banking regulation and supervision. The basic structure of the 2001 consultative document follows that of the June 1999 proposals, in particular three Pillars treating the calculation of capital requirements, supervisory review, and the disclosure necessary for effective market discipline. But the 2001 proposals are much more concrete and detailed. In their present form the proposals of the New Accord raise several concerns likely to apply to all countries but in some respects particularly to developing ones. One set of concerns relates to the New Accord’s impact on supervisory divergences among countries, cross-border competition between banks, and cooperation between national supervisors. The New Accord has been crafted to accommodate banks of very different levels of sophistication. Yet this may compromise its basic objective of enhancing competitive equality by actually creating regulatory divergences in some areas of banking practice both within and between different countries. As a result the difficulties of achieving effective cross-border cooperation amongst supervisors may well increase. A second set of concerns involves the relation of the New Accord to ongoing exercises involving codes and standards. Here the key standard is the BCBS’s Core Principles for Effective Banking Supervision for which the capital adequacy requirements of the Basle Capital Accord provide the principal benchmark. The New Accord will represent a quantum increase in the complexity of supervisors’ responsibilities in most countries, and the resulting administrative burden will be aggravated by its in corporation in assessment exercises regarding compliance with the key standards. Furthermore, the link between the New Accord and key standards for financial systems also implies that implementation will become a subject for IMF Article IV surveillance and part of the conditionality associated with the IMF’s new CCL facility. A further set of issues involves possible effects on regulatory arbitrage, since the comprehensiveness and detailed character of the rules of the New Accord will almost inevitably be a source of new opportunities for such arbitrage. Finally, there are concerns as to the effects of the New Accord on economic activity and international capital flows. The proposed risk weights of the IRB approach would lead to substantial rises in interest rates for lending to borrowers with low credit ratings both within countries and internationally – rises likely to affect borrowers from several developing countries. Moreover, owing to their links to the ratings of credit rating agencies and to observed default rates, the risk weights proposed in the New Accord are capable of contributing to the pro-cyclical character of bank lending both within countries and across borders, since they would be likely to translate higher credit risks in more difficult times into increased capital requirements (and thus more restrictive lending policies). Prudential rules which would minimize such dangers can be sketched but would nonetheless be difficult to incorporate in the design of regulatory systems.

Analysing banking sector conditions - how to use macro-prudential indicators

This paper presents the methodological and statistical framework for macro-prudential analysis of the financial condition of the EU banking sector that has been adopted by the European System of Central Banks (ESCB). The framework is also a central component of broader financial stability assessments carried out by the ECB in co-operation with national authorities. The framework has three main building blocks, which draw on a large number of macro-prudential indicators. The first block is designed for assessing the financial condition of the banking sector. The second building block provides a framework for analysing potential sources of risk and vulnerability to which banks are exposed and an assessment of the importance of related exposures. The final part of the analysis deals with the resilience of banks vis-à-vis these different sources of risk and vulnerability. Analysing the impact of the identified risks on banks’ financial condition is the ultimate objective of the ESCB banking sector stability analysis.Financial stability, Banking sector, Macro-prudential analysis and indicators, Financial sector statistics.

Economic and regulatory uncertainty in renewable energy system design: a review

Renewable energy is increasingly mobilizing more investment around the globe. However, there has been little attention to evaluating economic and regulatory (E&R) uncertainties, despite their enormous impact on the project cashflows. Consequently, this review analyzes, classifies, and discusses 130 articles dealing with the design of renewable energy projects under E&R uncertainties. After performing a survey and identifying the selected manuscripts, and the few previous reviews on the matter, the following innovative categorization is designed: sources of uncertainty, uncertainty characterization methods, problem formulations, solution methods, and regulatory frameworks. The classification reveals that electricity price is the most considered source of uncertainty, often alone, despite the existence of six other equally influential groups of E&R uncertainties. In addition, real options and optimization arise as the two main approaches researchers use to solve problems in energy system design. Subsequently, the following aspects of interest are discussed in depth: how modeling can be improved, which are the most influential variables, and potential lines of research. Conclusions show the necessity of modeling E&R uncertainties with currently underrepresented methods, suggest several policy recommendations, and encourage the integration of prevailing approaches.Peer ReviewedObjectius de Desenvolupament Sostenible::7 - Energia Assequible i No Contaminant::7.2 - Per a 2030, augmentar substancialment el percentatge d’energia renovable en el con­junt de fonts d’energiaObjectius de Desenvolupament Sostenible::7 - Energia Assequible i No ContaminantPostprint (published version

Risk-weighted assets and market value: How relevant is audit quality?

The constant financial scandals and the recent world economic crises have intensified the debate on Audit Quality and the reliability of financial reporting in the capital markets. More robust banking supervision and efficient risk management contribute to better capital adequacy in banks and, consequently, promote financial stability in the banking sector. The present study aims to analyse the relationship between the Risk-Weighted Assets of several European banks and their respective market value, in order to identify the influence of audit quality on this practice. For this purpose, a sample of 94 banks from 22 European countries is used, covering the period from 2007 to 2020. The variables under analysis take the form of bank-specific, institutional, and macroeconomic variables. The results show that Risk-Weighted Assets, the size of banks, and Non-performing loans have a negative influence on the market value. On the other hand, Profitability and Audit Quality have a positive influence.Os constantes escândalos financeiros e as recentes crises económicas mundiais, têm vindo a pôr em causa a Qualidade de Auditoria e a confiabilidade do relato financeiro no mercado de capitais. Uma supervisão bancária mais robusta e uma eficiente gestão de risco contribuem para uma melhor adequação de capital nos bancos e, consequentemente, promovem a estabilidade financeira no setor bancário. O presente estudo tem como objetivo analisar a relação entre o Risk-Weighted Assets de vários bancos Europeus e o seu respectivo valor de mercado, a fim de identificar a influência da qualidade da auditoria nesta relação. Para o efeito, é utilizada uma amostra de 94 bancos de 22 países europeus, entre o período de 2007 a 2020. As variáveis em análise assumem a forma de variáveis específicas do banco, institucionais e macroeconómicas. Os resultados demonstram que o Risk-Weighted Assets, a dimensão dos bancos e os empréstimos em incumprimento têm uma influência negativa no valor de mercado. Por outro lado, a rendibilidade e a qualidade de auditoria têm uma influência positiva

Dynamic Controllability with Overlapping targets: A Generalization of the Tinbergen-Nash Theory of Economic Policy

We generalize some recent results developed in static policy games with multiple players, to a dynamic context. We find that the classical theory of economic policy can be usefully applied to a strategic context of difference games: if one player satisfies the Golden Rule, then either all other players’ policies are ineffective with respect to the dynamic target variables shared with that player; or no Nash Feedback Equilibrium can exist, unless they all share target values for those variables. We extend those results to the case where there are also non-dynamic targets, to show that policy effectiveness (a Nash equilibrium) can continue to exist if some players satisfy the Golden Rule but target values differ between players in the non-dynamic targets. We demonstrate the practical importance of these results by showing how policy effectiveness (a policy equilibrium) can appear or disappear with small variations in the expectations process or policy rule in a widely used model of monetary policy.Policy games, Policy ineffectiveness, Static controllability, Existence of equilibria, Nash feedback equilibrium

Investment and risk appraisal in Energy Storage Systems: a real options approach

The increasing penetration of variable renewable energy is becoming a key challenge for the management of the electrical grid. Electrical Energy Storage Systems (ESS) are one of the most suitable solutions to increase the flexibility and resilience of the electrical system. This paper presents an innovative methodology for the appraisal of the investment in ESS. The methodology is based on the Real Option Analysis and it is able to properly consider investment risks and uncertainties as well as the options available for the investor. The paper assesses the value of the option to wait for a change in the market conditions before investing and re-evaluates the profitability of the investment after each step of the development of the ESS project. In order to exemplify relevant results, this method is applied to the UK energy market and assesses the technical and economic feasibility of investing in ESS operating price arbitrage and Short Term Operating Reserves. The results show that the implementation of the Real Option Analysis increases the economic performance of ESS. Nevertheless, ESS still requires limited incentives to be economically viable

THE BASLE COMMITTEE’S PROPOSALS FOR REVISED CAPITAL STANDARDS: RATIONALE, DESIGN AND POSSIBLE INCIDENCE

The Basle Capital Accord of 1988 was the outcome of an initiative to develop more internationally uniform prudential standards for the capital required for banks´ credit risks. The objectives of the Accord were not only to strengthen the international banking system but also to promote convergence of national capital standards, thus removing competitive inequalities among banks resulting from differences on this front. The key features of this Accord were a common measure of qualifying capital, a common framework for the valuation of bank assets in accordance with their associated credit risks (including those classified as off-balance-sheet), and a minimum level of capital determined by a ratio of 8 per cent of qualifying capital to aggregate risk-weighted assets. The 1988 Basle Agreement was designed to apply to the internationally active banks of member countries of the Basle Committee on Banking Supervision but its impact was rapidly felt more widely and by 1999 it formed part of the regime of prudential regulation not only for international but also for strictly domestic banks in more than 100 countries. From its inception the 1988 Basle Accord was the subject of criticisms directed at features such as its failure to make adequate allowance for the degree of reduction in risk exposure achievable through diversification, at the possibility that it would lead banks to restrict their lending, and at its arbitrary and undiscriminating calibration of certain credit risks. In the aftermath of the East Asian crisis other issues of special interest to developing countries also became a focus of attention: firstly, the Accord´s effectiveness in contributing to financial stability in developing countries; and, secondly, the incentives which the Accord was capable of providing to short-term interbank lending, a significant element of the volatile capital movements perceived as having contributed to the crisis.