An Evaluation and Management of the Systemic Risk of the Banking System -A Literature Review

There is consensus among financial regulators that the recent global financial crisis has highlighted the need of addressing incomplete reforms, one of them being the contribution of financial risks in destabilizing the financial markets. One of the most important form of financial risks is the systemic risk that is imposed by the inter linkages and interdependencies in a financial system. The purpose of this paper is to review some of the updated research articles published on the evaluation and management of the systemic risk between 2005 and 2015 by using diverse systemic risk analytics. The paper highlights the main contributions of the authors to the research. The discussion on the literature is classified into two parts namely empirical and non-empirical studies. The results show that the cross section measures proposed down by Acharya et al (2010) and Adrian and Brunnermeir (2011) MES and CoVaR respectively have gained popularity in evaluating the systemic risk, however the proposed measures should be used with warning. Moreover, despite the fact that the interest in the topic of management of systemic risk has grown tremendously, but little research has been conducted in developing countries. Keywords: Macroprudential policy, Systemic risk, Systemic financial institutions, financial regulation

A theoretical framework for simulating systemic risk and its application to analysis of the banking system

Risk of basic defaults and contagious defaults are two main sources of bank systemic risk. In this paper, a theoretical framework is proposed to classify the time evolution of the basic defaults and contagious defaults using sequences of daily financial data. The new theoretical framework combines an existing asset value estimation algorithm and obligation clearing algorithm to calculate the time evolution of systemic risk. The asset value estimation algorithm is used to estimate the asset values of the banks each day and the obligation clearing algorithm is used to calculate systemic risk given the tuples of data each day. This framework is applied to assess the systemic risk of the Nigerian banking system between 2008 and 2014 when the economy was hit by the financial meltdown. The main findings depict that the risk of the basic defaults was high during this period while contagious default seldom appeared. It is also found that the Nigerian banking system was more stable in 2010 and 2012 than in other years, while it was seriously unstable in 2008, 2011, and 2014. The findings would assist in monitoring systemic risk in the Nigerian banking system

The Application of Macroprudential Capital Requirements in Managing Systemic Risk

When setting banks regulatory capital requirement based on their contribution to the overall risk of the banking system we need to consider that the risk of the banking system as well as each banks risk contribution changes once bank equity capital gets redistributed. Therefore the present paper provides a theoretical framework to manage the systemic risk of the banking system in Nigeria based on macroprudential capital requirements, which requires banks to hold capital that is proportional to their contribution to systemic risk. Using a sample of 10 Nigerian banks, we reallocate capital in the system based on two scenarios; firstly in the situation where the system shocks do not exist in the system, we find that almost all banks appear to hold more capital; secondly, we also consider the situation where the system shocks exist in the system; we find that almost all banks tend to hold little capital on four risk allocation mechanisms. We further find that despite the heterogeneity in macroprudential capital requirements, all risk allocation mechanisms bring a substantial decrease in the systemic risk. The risk allocation mechanism based on ΔCoVaR decreases the average default probability the most. Our results suggest that financial stability can be substantially improved by implementing macroprudential regulations for the banking system

Corporate governance and financial performance: Evidence from commercial banks in Tanzania

AbstractThis study looks at mechanisms for improving and stabilising the financial performance of commercial banks in Tanzania. More specifically, this study aimed to assess corporate governance’s influence on financial performance regarding asset quality, efficiency use of equity, earning ability, capital adequacy, and liquidity. The study included the board aspect of governance and board control, constructs which have not been studied previously in assessing the influence of corporate governance on the performance of commercial banks. Other constructs included are the board’s gender diversity, board size, directors’ shareholding, board control, board members’ over boarding, board activities, and the existence of important board committees. Panel data were collected from published reports of 15 commercial banks covering a period of 17 and employing multiple linear regression analysis to establish causal-effect relationships among the study variables. The findings revealed that corporate governance (board aspects of governance, board members over-boarding) positively influences the financial performance of commercial banks in terms of their earning ability, asset quality, and capital adequacy. Corporate governance also negatively influences the efficient use of equity and liquidity through board gender diversity, board aspects of governance, and board control. The study recommends that corporate governance principles and mechanisms be enhanced to improve the financial performance of commercial banks