Bank Specific And Macroeconomic Determinants Of Bank Profitability Essay

The banking industry has undergone major upheaval in recent years, largely due to the lingering recessionary environment and increased regulatory environment. Many banks have failed in the face of such tough environmental conditions. These conditions

The idea of “risk” is used in many fields and industries. There has been large efforts made towards the understanding of risk. Since, risk varies so much depending on the field of study, the need for learning about it is warranted. As can be imagined, the importance of risk in a market economy is crucial. In the 1990s, JP Morgan made the Value at Risk (VaR) a central component of its work efforts (Cecilia-Nicoleta, Anne-Marie, & Carmen-Maria, 2011).

Cernauskas, D., & Tarantino, A. (2011). Essentials of Risk Management in Finance. Hoboken: John Wiley & Sons, Inc.

Basel III is a global comprehensive collection of restructured regulatory standards on bank capital adequacy and liquidity. It was developed by the Basel Committee on Banking Supervision to strengthen the regulation, supervision and risk management of the banking sector (bis.org, 2010). It introduces new regulatory requirements on bank liquidity and bank leverage in response to the financial downturn caused by the Global Financial Crisis. Stefan Walter, Secretary General of the Basel Committee on banking supervision said in November 2010:

Credit risk consists of three parts: the size of the exposure at the time of default, the probability of default occurring, and the loss if the credit event occurs (Fraser & Simkins, 2010). Undoubtedly, a combination of a clear strategy, a knowledge of analytical tools, an understanding of the risk management instruments, responsible oversight, and the ability to be intuitive is crucial to risk management (Bethel, 2016). Wells Fargo is one of the most successful banks in the United States in managing risk. Successfully, they have navigated through risk by choosing a course of action determined by their risk management process (Perez, 2014).

Since the onset of the financial crisis 2008, the sovereign debt crisis in western economies and the new financial regulation with Basel III coming up, the financial industry faces the challenge of reinventing itself. The ring-fence for Commercial and Investment Banking, and new economic and regulatory capital requirements will determine the kinds of products banks will be able to distribute. It will have a huge impact in the Investment Banking business, which will suffer tough regulation and supervisory procedures. At the same time, credit risk models will be reviewed because they have failed to predict the crisis of 2008. The current financial and economic crisis doesn’t have any precedent in the past.

In addition new institutions spring up such as the World Bank, the European Union and the European CentralBank which requires still further constraints.Nowadays around a quarter of world trade are multinational corporations. However banking globalization does not mean leaving local, domestic market but “moving to provide banking services inside and outside, maintaining the national position and becoming more effective and active to ensure banking expansion…………it is a motivator of expansion. The job of the management in banks is to maximize the positive effects and minimize the negative ones. With globalization, banks become more at risks from within and from abroad. It becomes important to strengthen the Capital in order to guard against these

It appears to be the conventional wisdom that non-interest income is more stable than interest income and that non-interest earning activities reduce bank risk through diversification of bank earnings. The mixture diversified activities such as interest earning and fee earning activities togather may escort to a more steady profit stream, since the revenues comes from different products in a organisztion are usually imperfectly

To address this deficiency, the Basel Committee on Banking Supervision (BCBS) proposed the post-crisis regulatory capital framework - Basel III, aimed to improve both the quantity and quality of banking organisations regulatory capital and to build additional capacity for loss absorbency into the banking system to withstand markets and economic shocks (BCBS). The importance of capital to a banking organisation cannot be overemphasised, the amount of capital held by a bank determine: (i) the level risk the bank can enter into. (ii) Loss absorbency capacity. (III) The profitability level. (iv) The cost of fund. (v) Investors' confidence, and (vi) the going - concern of the bank. It is vital that banking organisations are able to maintain a balance between their capital risk portfolios. As a result, banks tend to adjust their balance sheet components to achieve an internally set capital

What roles have deregulation, innovation, and globalization played in changing the character of bank management in recent decades? Has the overall outcome of the changes been greater stability in the banking sector? Discuss the respective roles of asset and liability management in modern banking.

The global financial crisis has raised many concerns for the need to restructure the approach of risk and regulation in the financial sector (KPMG 2011). Figure. 4 has shown the structures of Basel III. It aims to increase the capital and liquidity of banks and therefore maintaining the stability in banking sector with full effect in 2019 (Banks For International Settlements 2011).

Efficiency and profitability of banking firms are commonly not consistent over time. Reasonably in Canadian banks both are anticipated to upsurge in recent years compared to preceding years, to keep the pace with the rise in competition tides. Therefore, the main hypothesis to be tested in the dissertation is the consistency between efficiency and profitability of banks in Canada.

The issues identification the type of risk involved both financial institution that related to the credit risk that is credit is the risk of losses owing to the fact that counterparties may be unwilling or unable to fulfil their contractual obligations. Its effect is measured by the cost of replacing cash flows if the other party defaults. This loss encompasses the exposure ,or amount at risk, and the recovery rate, which is the proportion paid back to the lender, usually measured in terms of ‘cents on the dollar’.

Basel III establishes a set of standards for the implementation of a liquidity ratio for international banks , a leverage ratio , counter-cyclical measures , a redefinition of equity and a review of the coverage of certain risks . This set of standards will help to strengthen the resilience of the financial and banking sector in anticipation of further financial and economic stress , regardless of the source. All of its new measures that the Basel Committee has developed to strengthen the regulation, supervision and risk management in the banking sector aims to strengthen transparency and communication within banks,

Banking system stability is mostly built on a number of internal and external characteristics. Wheelock and Wilson (2002) used a rating methodology called CAMEL, shorten from several variables include Capital adequacy, Asset quality, Management quality, Earning, Liquidity, to analyze the probability of bank failures. Their study documented that smaller banks and well-capitalized banks can obtain a higher degree of capacity to maintain stability individually, and comparing to universal banks, they contribute more to the stability of a nation 's banking system. Those variables reflect the internal environment for operations of an individual bank and may be varied while banks choose to diversify their revenue with the conglomeration of