Showing papers on "Financial risk published in 2012"

Strong Evidence for Gender Differences in Risk Taking

Abstract: Are men more willing to take financial risks than women? The answer to this question has immediate relevance for many economic issues. We assemble the data from 15 sets of experiments with one simple underlying investment game. Most of these experiments were not designed to investigate gender differences and were conducted by different researchers in different countries, with different instructions, durations, payments, subject pools, etc. The fact that all data come from the same basic investment game allows us to test the robustness of the findings. We find a very consistent result that women invest less, and thus appear to be more financially risk averse than men.

Corporate Governance Lessons from the Financial Crisis

Abstract: The turmoil that struck financial institutions in 2007 has, by the end of 2011, significantly deteriorated the fundamentals of the global economy, eroding trust in sustainability of the markets, solvency of banks and even the credibility of sovereign states and monetary unions. Whether this is the most serious financial crisis since the Great Depression only history will tell, but it is clear by now that the damage to the global economy has been extraordinary. This chapter looks into some of the corporate governance lessons that could prevent this from happening again and presents the main findings and conclusions of the OECD Corporate Governance Committee as reflected in several OECD publications as well as in G.Kirkpatrick (2010).Corporate governance rules and practices of many of the financial institutions that collapsed have often been blamed to be partly responsible for the crisis. The failures of risk management systems and incentive schemes that encouraged and rewarded high levels of risk taking are key factors in this context. Since reviewing and guiding risk policy is a key function of the board, these deficiencies point to ineffective board oversight. And since boards are accountable to shareholders, they also have been put under the spotlight, as many of them seemed to have no interest in expressing their views on the functioning of companies as long as returns were within targets.Corporate governance failures are surely not the cause of the crisis, but they did not prevent and may have even facilitated some of the risky and misguided corporate practices that had such severe effects once the downturn started. Importantly, much of what we have learnt from the demise of some of these financial institutions can serve as an important lesson for non-financial corporations in general. Some of the key lessons from the corporate governance perspective are described in this article.This paper is structured as follows. In the first section we describe the macro-economic as well as the corporate governance dimension of the financial crisis, particularly the way remuneration practices, risk management procedures, limited board oversight as well as shareholder passivism contributed to the poor performance of some major banks. The second section explains how existing corporate governance principles and national corporate governance codes have been re-evaluated against this background, and some of the recent developments are presented. We finish offering some general conclusions.

Mobile banking adoption of the youth market: Perceptions and intentions

Abstract: Purpose – This study aims to investigate consumers' mobile banking adoption through an integration of the technology acceptance model (TAM) with work on perceived benefits and perceived risks.Design/methodology/approach – Data were collected from 435 university students who were non‐users but future prospects, and analyzed by structural equation modeling (SEM).Findings – It was found that perceived usefulness, perceived social risk, perceived performance risk and perceived benefit directly affect attitudes towards mobile banking, and that attitude is the major determinant of mobile banking adoption intention. In addition, no direct relationship between perceived usefulness and intention to use, perceived ease of use and attitude, financial risk, time risk, security/privacy risk and attitude was detected.Research limitations/implications – This study reflects the perceptions of non‐users and university students – potential future prospects – in an emerging country. The main theoretical contribution of this...

The impact of corporate social performance on financial risk and utility:a longitudinal analysis

Abstract: This study focuses on the wealth-protective effects of socially responsible firm behavior by examining the association between corporate social performance (CSP) and financial risk for an extensive panel data sample of S&P 500 companies between the years 1992 and 2009. In addition, the link between CSP and investor utility is investigated. The main findings are that corporate social responsibility is negatively but weakly related to systematic firm risk and that corporate social irresponsibility is positively and strongly related to financial risk. The fact that both conventional and downside risk measures lead to the same conclusions adds convergent validity to the analysis. However, the risk-return trade-off appears to be such that no clear utility gain or loss can be realized by investing in firms characterized by different levels of social and environmental performance. Overall volatility conditions of the financial markets are shown to play a moderating role in the nature and strength of the CSP-risk relationship.

Intermediary leverage cycles and financial stability

Abstract: We present a theory of financial intermediary leverage cycles within a dynamic model of the macroeconomy. Intermediaries face risk-based funding constraints that give rise to procyclical leverage. The pricing of risk varies as a function of intermediary leverage, and asset return exposure to intermediary leverage shocks earns a positive risk premium. Relative to an economy with constant leverage, financial intermediaries generate higher consumption growth and lower consumption volatility in normal times, at the cost of endogenous systemic financial risk. The severity of systemic crisis depends on intermediaries’ leverage and net worth. Regulations that tighten funding constraints affect the systemic risk-return trade-off by lowering the likelihood of systemic crises at the cost of higher pricing of risk.

Design under uncertainty of hydrocarbon biorefinery supply chains: Multiobjective stochastic programming models, decomposition algorithm, and a Comparison between CVaR and downside risk

Abstract: A bicriterion, multiperiod, stochastic mixed-integer linear programming model to address the optimal design of hydrocarbon biorefinery supply chains under supply and demand uncertainties is presented. The model accounts for multiple conversion technologies, feedstock seasonality and fluctuation, geographical diversity, biomass degradation, demand variation, government incentives, and risk management. The objective is simultaneous minimization of the expected annualized cost and the financial risk. The latter criterion is measured by conditional value-at-risk and downside risk. The model simultaneously determines the optimal network design, technology selection, capital investment, production planning, and logistics management decisions. Multicut L-shaped method is implemented to circumvent the computational burden of solving large scale problems. The proposed modeling framework and algorithm are illustrated through four case studies of hydrocarbon biorefinery supply chain for the State of Illinois. Comparisons between the deterministic and stochastic solutions, the different risk metrics, and two decomposition methods are discussed. The computational results show the effectiveness of the proposed strategy for optimal design of hydrocarbon biorefinery supply chain under the presence of uncertainties. © 2012 American Institute of Chemical Engineers AIChE J, 2012

Short-Term Wholesale Funding and Systemic Risk: A Global Covar Approach

Abstract: In this paper we identify some of the main factors behind systemic risk in a set of international large-scale complex banks using the novel CoVaR approach. We find that short-term wholesale funding is a key determinant in triggering systemic risk episodes. In contrast, we find no evidence that a larger size increases systemic risk within the class of large global banks. We also show that the sensitivity of system-wide risk to an individual bank is asymmetric across episodes of positive and negative asset returns. Since short-term wholesale funding emerges as the most relevant systemic factor, our results support the Basel Committee's proposal to introduce a net stable funding ratio, penalizing excessive exposure to liquidity risk.

Financial Expertise of the Board, Risk Taking, and Performance: Evidence from Bank Holding Companies

Abstract: Financial expertise among independent directors of U.S. banks is positively associated with balance-sheet and market-based measures of risk in the run-up to the 2007-2008 financial crisis. While financial expertise is weakly associated with better performance before the crisis, it is strongly related to lower performance during the crisis. Overall, the results are consistent with independent directors with financial expertise supporting increased risk-taking prior to the crisis. Despite being consistent with shareholder value maximization ex ante, these actions become detrimental during the crisis. These results are not driven by powerful CEOs who select independent experts to rubber stamp strategies that satisfy their risk appetite.

Risk Aversion

Abstract: There's some risk aversion at play in cybersecurity; risk aversion is why a General Counsel will say that if you might have lost data, then you have to act as if you did lose it. Risk aversion is why some firms (and some people) keep no records. We're living in a time when legislatures want to force risk reductions in cyberspace. It's altogether likely that any legislature that acts will do so by setting up some sort of agency to oversee the process of risk reduction in cyberspace. Risk reduction agencies are purposefully risk averse and immortal, which guarantees that their enforcement power inevitably demands diseconomic risk reductions.

Financial Advice: A Substitute for Financial Literacy?

Abstract: A lack of financial literacy can hamper the ability of individuals to make well-informed financial decisions. For people who exhibit problems with financial decision making, financial advice has the potential to serve as a substitute for financial knowledge and capability. However, data from the 2009 FINRA Financial Capability Survey indicate that advice more often serves as a complement to, rather than a substitute for, financial capability: individuals with higher incomes, educational attainment, and levels of financial literacy are most likely to receive financial advice.

Why Publicly-Financed Health Insurance Schemes Are Ineffective in Providing Financial Risk Protection

Abstract: This paper provides early and robust evidence on the impact of publicly-financed health insurance schemes on financial risk protection in India’s health sector. It conclusively demonstrates that the poorer sections of households in intervention districts of the Rashtriya Swasthya Bima Yojna , Rajiv Aarogyasri of Andhra Pradesh, and Tamil Nadu Health Insurance schemes experienced a rise in real per capita healthcare expenditure, particularly on hospitalisation, and an increase in catastrophic headcount – conclusive proof that

Environmental Credit Risk Management in Banks and Financial Service Institutions

Abstract: How do Canadian banks integrate environmental risks into corporate lending and where are they located compared with their global peers? In this paper we report a mixed method analysis of the integration of environmental risks into the credit management. The qualitative and quantitative analyses suggest that all analyzed Canadian commercial banks, credit unions and Export Development Canada manage environmental risks in credit management to avoid financial risks. Some of the institutions even connect environmental and sustainability issues with their general business strategies. Compared with other countries, Canadian banks are best in class, as all six Canadian commercial banks, comprising over 90 percent of Canadian assets, systematically examine environmental risks for credits, loans and mortgages. We conclude that Canadian banks are proactive regarding environmental examinations of loans and that there is a need for a more accountancy related reporting on environmental risk management in financial institutions. Further research is needed to be able to calculate costs and benefits of integrating environmental and sustainability issues into the credit risk management. Copyright © 2011 John Wiley & Sons, Ltd and ERP Environment.

Risk management practices of conventional and Islamic banks in Bahrain

Abstract: Purpose – The purpose of this paper is to report empirical evidence regarding the risk management practices of banks operating in Bahrain.Design/methodology/approach – A sample of bankers was surveyed through a questionnaire and the results used to examine if the risk management practices are significantly associated with the type of bank (conventional or Islamic) and if those practices are positively affected by understanding risk, risk management, risk identification, risk assessment analysis, risk monitoring and credit risk analysis. Several statistical and econometric methods were used to the test the hypotheses.Findings – Banks in Bahrain are found to have a clear understanding of risk and risk management, and have efficient risk identification, risk assessment analysis, risk monitoring, credit risk analysis and risk management practices. In addition, credit, liquidity and operational risk are found to be the most important risks facing both conventional and Islamic banks. Furthermore, the risk manag...

Who Takes Risks When and Why: Determinants of Changes in Investor Risk Taking

Abstract: Between September08 and June09, a period with significant market events, we surveyed UK online-brokerage customers at three-months intervals for their willingness to take risk, three-months expectations of returns and risks for the market and their own portfolio, and self-reported risk attitude. This unique dataset allowed us to analyze how these variables changed over time, and whether changes in risk taking were related to changes in expectations and/or risk attitudes. Risk taking changed substantially during the period, as did return and risk expectations. Numeric assessments of return and risk expectations were only weakly correlated with corresponding subjective judgments. Consistent with the risk-as-feelings hypothesis, changes in risk taking were associated with changes in subjective expectations of market portfolio risk and returns, but less with changes in numeric expectations.

Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies

Abstract: We construct a Risk Management Index (RMI) to measure the strength and independence of the risk management function at bank holding companies (BHCs). U.S. BHCs with higher RMI before the onset of the financial crisis have lower tail risk, lower non-performing loans, and better operating and stock return performance during the financial crisis years. Over the period 1995 to 2010, BHCs with a higher lagged RMI have lower tail risk and higher return on assets, all else equal. Overall, these results suggest that a strong and independent risk management function can curtail tail risk exposures at banks.

Agricultural Decisions after Relaxing Credit and Risk Constraints (IGC Working Paper)

Abstract: The investment decisions of small‐scale farmers in developing countries are conditioned by their financial environment. Binding credit market constraints and incomplete insurance can reduce investment in activities with high expected profits. We conducted several experiments in northern Ghana in which farmers were randomly assigned to receive cash grants, grants of or opportunities to purchase rainfall index insurance, or a combination of the two. Demand for index insurance is strong, and insurance leads to significantly larger agricultural investment and riskier production choices in agriculture. The binding constraint to farmer investment is uninsured risk: when provided with insurance against the primary catastrophic risk they face, farmers are able to find resources to increase expenditure on their farms. Demand for insurance in subsequent years is strongly increasing with farmer’s own receipt of insurance payouts, with the receipt of payouts by others in the farmer’s social network, as well as with recent poor rain in their village. Both investment patterns and the demand for index insurance are consistent with the presence of important basis risk associated with the index insurance, with imperfect trust that promised payouts will be delivered, as well as with overweighting recent events.

Financial early warning system model and data mining application for risk detection

Abstract: One of the biggest problems of SMEs is their tendencies to financial distress because of insufficient finance background. In this study, an early warning system (EWS) model based on data mining for financial risk detection is presented. CHAID algorithm has been used for development of the EWS. Developed EWS can be served like a tailor made financial advisor in decision making process of the firms with its automated nature to the ones who have inadequate financial background. Besides, an application of the model implemented which covered 7853 SMEs based on Turkish Central Bank (TCB) 2007 data. By using EWS model, 31 risk profiles, 15 risk indicators, 2 early warning signals, and 4 financial road maps has been determined for financial risk mitigation.

Towards a Framework for Quantifying Systemic Stability

Abstract: This paper describes a prototype quantitative framework for gauging systemic risk which explicitly characterizes banks’ balance sheets and allows for macro credit risk, interest income risk, market risk, network interactions, and asset-side feedback effects. In presenting our results, we focus on projections for systemwide banking assets in the United Kingdom, considering both unconditional distributions and stress scenarios.We show how a combination of extreme credit and trading losses can precipitate fundamental defaults and trigger contagious default associated with network effects and fire sales of distressed assets. Despite the joint normality of all risk factors, the model generates a bimodal asset distribution.

Corporate Governance and Risk Management: The Role of Risk Management and Compensation Committees

Abstract: This paper examines the role of compensation and risk committees in managing and monitoring the risk behaviour of Australian financial firms in the period leading up to the global financial crisis (2006-2008). This empirical study of 716 observations of financial sector firms demonstrates how the coordination of risk management and compensation committees reduces information asymmetry. First, we show that the compensation committee motivates risk-taking, revealed by the positive association with risk. In contrast, a large risk committee reduces risk-taking. Next, we show that firms experiencing increasing risk benefit from a compensation committee when directors are independent, have professional qualifications, industry and board experience and frequent meetings and a large risk committee. Finally, when a director is a member of both committees there is a positive association between risk and firm performance thus reducing information asymmetry between committees. A director with dual committee membership is able to oversee the association between the firm’s risk exposure and the proportion of risk-taking incentives in compensation packages. The findings have theoretical and practical implications for the current debate on how to improve the governance of financial institutions.

The impact of credit risk management on financial performance of commercial banks in Nepal

Abstract: This study try to explore various parameters pertinent to credit risk management as it affect banks’ financial performance. Such parameters covered in the study were; default rate, cost per loan assets and capital adequacy ratio. Financial report of 31 banks were used to analyze for eleven years (2001-2011) comparing the profitability ratio to default rate, cost of per loan assets and capital adequacy ratio which was presented in descriptive, correlation and regression was used to analyze the data. The study revealed that all these parameters have an inverse impact on banks’ financial performance; however, the default rate is the most predictor of bank financial performance. The recommendation is to advice banks to design and formulate strategies that will not only minimize the exposure of the banks to credit risk but will enhance profitability.

Diagnosing the Financial System: Financial Conditions and Financial Stress

Abstract: We approach the task of monitoring financial stability within a framework that balances the costs and benefits of identifying future crisis-like conditions based on past U.S. financial crises. Our results indicate that the National Financial Conditions Index (NFCI) produced by the Federal Reserve Bank of Chicago is a highly predictive and robust indicator of financial stress at leading horizons of up to one year, with measures of leverage playing a crucial role in signaling financial imbalances. At longer forecast horizons, we propose an alternative sub-index of the NFCI that captures the relationship between non-financial leverage, financial stress, and economic activity.

The Impact of Information Technology Investments on Downside Risk of the Firm: Alternative Measurement of the Business Value of IT

Abstract: We examine the effect that investments in information technology IT have on downside risk profiles of companies that made public announcements of their investments in technology. Given the limitations of financial and decision theory perspectives on risk, we adopt the strategic management perspective that stresses downside risk as an important alternative measure of firm performance. We examine whether different types of IT investments have a differential impact on firm downside risk. Drawing on the resource-based view of the firm and the real options perspective, we find evidence that IT investments and their timing influence organizational downside risk. Transformational and informational IT investments lead to a reduction in downside risk only if they lead to strategic IT investments in the industry. For competitive necessities such as IT investments that automate business functions, a reduction in downside risk is realized by investing in parity with industry participants. Our study contributes to the literature by offering an alternative perspective on the benefits of IT investments, particularly where no apparent incremental financial results may be evident. It also generates insights on IT investment strategies that may help firms keep up with or stay ahead of the competition.

Socially Responsible Investment

Abstract: Socially responsible investment (SRI) – sometimes termed “ethical investment” – refers to the practice of integrating social, environmental, or ethical criteria into financial investment decisions. Whereas conventional investment focuses upon financial risk and return from stocks and bonds, SRI includes other goals or constraints. It is the nature of the source, and not just the size, of the financial return that is of concern in SRI. This article introduces the principal investment strategies generally pursued under SRI, and then focuses specifically on the ethical dimension – that is, whether current SRI practices constitute an ethically justified, perhaps even ethically superior, way of investing.