Domenico Curcio

Determinants of banks’ provisioning policies during the crisis : Evidence from the Chinese banking system

Purpose - – The purpose of this paper is to investigate the discretionary use of loan loss provisions in the Chinese banking sector during the global financial crisis. The objective of this paper is twofold: to add new evidence to the scant literature dealing with a peculiar banking sector, such as the Chinese one, and to shed more light on banks’ provisioning behaviour during stressed financial markets conditions. Design/methodology/approach - – Using bank-level balance sheet and financial statements data, the authors test for income smoothing and capital management hypotheses, and detect differences in provisioning decisions of listed banks and unlisted financial intermediaries during turbulent financial markets conditions. Findings - – The authors find support for the income smoothing hypothesis, but not for the capital management one. Chinese listed banks appear to be less risky and less involved in income smoothing to shift their risk, when compared to unlisted credit institutions. Social implications - – The results obtained from this paper help to understand the functioning of bank provisioning regime in the Chinese banking system and how provisioning mechanisms can address the issues associated with the pro-cyclicality of bank capital requirements. Originality/value - – Though referred to a particular banking sector, such as the Chinese one, the results of this paper can provide a tremendous incentive to those national and international authorities that are bound to promote forward-looking provisioning practices. These practices would allow banks to build a buffer of reserves to face the downward pressure on earnings and capital associated with periods of worsening credit quality.

Investigating Implied Asset Correlation and Capital Requirements: Empirical Evidence from the Italian Banking System

The Basel Committee’s reform to strengthen the global capital framework, known as Basel III, takes into account a series of measures to address procyclicality and, consequently, make banks’ capital requirements more stable during the different phases of the economic cycle. The range of possible approaches that Supervisory Authorities could follow to address this issue includes measures such as the use of through-the-cycle probability of default (PD) estimates and/or the calibration of the other risk parameters, i.e., the confidence level and the relation between PD and asset correlation, in an anti-cyclical way. Particularly, this paper aims at detecting further the relation between PD and asset correlation, based on Italian banking system empirical loss data. The authors test the regulatory asset value correlation assumptions through a measure of implied asset correlation that they get by equalling the empirically observed unexpected loss with the regulatory capital requirements. This research sheds more light on the inverse relation between PD and asset correlation, which is one of the main hypotheses the internal ratings based approach is built on, and that has not been modified by the Basel III reform. The paper demonstrates that the sign of this relation depends on the combination of two opposite effects: the “PD effect”, which is consistent with the inverse relation hypothesis and the “PD volatility effect”, which has been neglected by prior literature. According to the provided evidence, if a certain change in the PD comes along with a change in the volatility of the default rate distribution, the inverse relation doesn’t hold.

Life Insurers’ Asset-Liability Dependency and Low-Interest Rate Environment

In this paper we study the relationships between life insurers’ assets and liabilities and investigate how it evolved during the most recent years of unprecedented low interest rates. We use a canonical correlation analysis to measure the relationships among, and between, asset and liability accounts for the main EU life insurers in the years 2007, 2011 and 2015. We find strong and substantial evidence that assets and liabilities have become more independent over time. We argue that the declining trend of market interest rates has contributed to the generalized reduction in the linkage between the asset side and the liability side of EU life insurers, leaving them more exposed to ALM-related risks relative to the period before the financial crisis.