Financial risk

About: Financial risk is a research topic. Over the lifetime, 11899 publications have been published within this topic receiving 231404 citations. The topic is also known as: economic risk.

The Influence of Perceived Risks on Banking Managers' Intention to Outsource Business Processes: A Study of the German Banking and Finance Industry

Abstract: Information Technology (IT) is a key productive factor in the banking and finance industry (BFI) as almost the entire production and delivery of services can in principle be digitized. Driven by cost pressure and new competitors, outsourcing IT together with the relevant business processes is a promising way to focus on core competencies and to restructure the corporate value chain. While there is a rich literature on the risks and benefits of IT outsourcing, little is known about the next step of business process outsourcing (BPO) and especially the associated risks. Our main hypothesis is that the perceived risks associated with BPO strongly influence managers' intention to outsource business processes. Based on an empirical survey of BFI managers covering 90% of the cumulated German BFI balance sheet, it is shown that perceived risk does indeed have a significant impact on managers' attitudes towards BPO and that these attitudes strongly influence the outsourcing decision. Financial risks turn out to be a major risk facet, exerting pressure on banks which decide solely in terms of potential cost savings. In addition, the high importance of performance risk requires banks to invest in sophisticated vendor management. Keywords: banking and finance industry, perceived risk, business process outsourcing 1 Introduction The benefits of IT outsourcing in the banking and finance industry (BFI) seem to be quite well understood from both an academic and a practitioner's perspective [Ang and Straub 1998; Baldwin, Irani and Love 2001; Lancellotti, Schein, Spang and Stadler 2003; Adeleye, Annasingh and Nunes 2004]. However, we still lack a thorough and empirically validated understanding of the risks of outsourcing, especially concerning business processes. This raises questions about the impact of risk facets such as financial, strategic, performance and social risks on outsourcing decisions in firms and ultimately challenges the field to propose sound outsourcing decision support that considers benefits and risks in one model. As financial processes are almost fully digitizable, the banking and finance industry heavily relies on information technology. Accordingly, IT has been a strong driver of developments in the BFI with ATMs being a renowned example [Benaroch and Kauffmann 2000]. Powerful information systems have made the processing of large transaction volumes possible (e.g., payments and securities processing), at the same time enabling new E-Commerce products and services like online banking. But despite its long history and the success of many firms, the overall industry structure is still surprisingly unchanged and modern network-like structures like supply chains are widely unknown. A major reason is that outsourcing as the major pillar of restructuring value chains has long been much more complicated or even impossible due to regulatory constraints in the BFI. Recently, a change in regulation tendencies together with further advances in IT has provided banks with the opportunity to use outsourcing as a means to reduce costs and focus on core competencies. This is expected to enable the industry to move towards value network structures as has been successfully done in other industries [Homann, Rill and Wimmer 2004]. While banks have gained some experience in IT outsourcing (ITO) over the past decade, business process out-sourcing (BPO), i.e., procuring a business process together with the relevant IT from the market, is quite a new challenge. BPO is widely seen as an opportunity - enabled by advancements in IT - to make business architectures sufficiently flexible and efficient. Accordingly, BPO is considered to be of substantial importance in the banking and finance industry [Kumar and Hillegersberg 2004; Lammers, Lohndorf and Weitzel 2004]. In fact, a survey of Germany's top 500 banks reveals that 9 out of 10 banks plan to focus on core business functions and that the current wave of BPO in the BFI is just the beginning of a major trend [Wahrenburg, Konig, Beimborn, Franke, Gellrich, Hackethal, Holzhauser, Schwarze and Weitzel 2005]. …

Structure and Asymptotic Theory for Multivariate Asymmetric Volatility: Empirical Evidence for Country Risk Ratings *

Abstract: Following the rapid growth in the international debt of less developed countries in the 1970s and the increasing incidence of debt rescheduling in the early 1980s, country risk has become a topic of major concern for the international financial community. A critical assessment of country risk is essential because it reflects the ability and willingness of a country to service its financial obligations. Various risk rating agencies employ different methods to determine country risk ratings, combining a range of qualitative and quantitative information regarding alternative measures of economic, financial and political risk into associated composite risk ratings. This paper provides an international comparison of country risk ratings compiled by the International Country Risk Guide (ICRG), which is the only international rating agency to provide detailed and consistent monthly data over an extended period for a large number of countries. As risk ratings can be treated as indexes, their rate of change, or returns, merits attention in the same manner as financial returns. For this reason, a constant correlation multivariate asymmetric ARMA-GARCH model is presented and its underlying structure is established, including the unique, strictly stationary and ergodic solution of the model, its causal expansion, and convenient sufficient conditions for the existence of moments. Alternative empirically verifiable sufficient conditions for the consistency and asymptotic normality of the quasi-maximum likelihood estimator are established under non-normality of the conditional (or standardized) shocks. The empirical results provide a comparative assessment of the conditional means and volatilities associated with international country risk returns across countries and over time, enable a validation of the regularity conditions underlying the models, highlight the importance of economic, financial and political risk ratings as components of a composite risk rating, evaluate the multivariate effects of alternative risk returns and different countries, and evaluate the usefulness of the ICRG risk ratings in modelling risk returns.

A financial stability index for Colombia

Abstract: The imbalances of the financial systems have showed the vast economic and social costs generated by financial instability. As a consequence, the development of stress indexes has spread as an alternative to assess the soundness of financial systems. The aim of this paper is to construct a continuous and quantifiable index with the capacity of establishing the stress level of the Colombian financial system as a function of profitability, liquidity and probability of default. Results show that the index determines effectively the stress level of the system. In addition, we performed forecasts of the financial stability index using macroeconomics variables.

Determining the Probability of Default and Risk-Rating Class for Loans in the Seventh Farm Credit District Portfolio

Abstract: Credit risk is the primary risk facing financial institutions. With the proposed guidelines under the New Basel Accord, financial institutions will benefit from better assessing their risks. The probability of default (PD) and risk-rating class is studied for 157,853 loans in the Seventh Farm Credit District Portfolio. Repayment capacity, owner equity, and working capital origination loans are important determinants of the PD. Standard & Poor's (S&P) reported probabilities of default were used to classify each of the loans into a risk-rating class. The average predicted PD is 1.61%, which would fall into the BB- S&P class. Capital management is a significant topic for financial institutions as they prepare to meet new guidelines under the proposed New Basel Accord (Basel Committee on Banking Supervision). The advanced options of the Accord will require financial institutions to assess their credit, market, and operational risk, to link these risks to capital management, and to comply with safety and soundness regulations "for uniform application throughout" the institution (Barry 2001). The goals of the Accord are to tailor risk measurement and capital management to the characteristics of diverse financial institutions and to more finely distinguish segments of their loan portfolios. Credit risk is the primary source of risk to financial institutions. As part of the credit risk assessment, the Accord suggests more granularity in risk-rating classes than currently exists, along with other improvements to existing riskrating systems. Many banks are using more advanced rating systems under the N Allen M. Featherstone is a professor of Agricultural Economics at Kansas State

Sustaining Small and Medium Enterprises through Financial Service Utilization: Does Financial Literacy Matter?

Abstract: In the past, Small and Medium scale enterprises (SMEs), particularly in developing countries, lacked access to financial products and services The SME market was perceived by banks as risky, costly, and difficult to serve However, there exists an array of financial products -microcredit, savings, and loans, insurance, mutual funds - in both the formal and informal sectors in Ghana today for SMEs Opportunities to utilize these financial services are more plentiful than about a decade ago This paper uses a direct measure of financial knowledge to empirically investigate the linkage between financial literacy and utilization of financial services by SMEs However, since people‟s level of knowledge can improve through utilization of financial service, we establish a bi-causality problem In the analysis, two equations were estimated for financial literacy level, and utilization of financial service which includes financial literacy as an endogenous variable The equation determining the level of financial literacy was estimated using the OLS while the equation for the utilization of financial service was estimated using logistic regression The IV method was used to correct for the problem of endogeneity Overall, the results show that there was modest level of financial literacy among small and medium entrepreneurs in Ghana Moreover, it was discovered that the more financially literate entrepreneurs were more likely to utilize financial service than the less literate ones The most commonly utilized financial service was operating a bank account Finally, the instrument for financial literacy, recipient of financial education, also had positive relationship with utilization of financial service