Building Vulnerability Predictive Indicator for the Banking Sector

Abstract

Abstract For risk and capital measurement, banks and other financial institutions need to meet forthcoming regulatory requirements. However, it is a serious issue to think that meeting regulatory requirements is the sole or even the most important reason for establishing a scientific, sound risk management system. To direct capital to activities with the best risk/reward ratios, managers need reliable risk measures. To stay within the limits imposed by readily available liquidity, by creditors, customers, and regulators, they need estimates of the size of potential losses. They need mechanisms to monitor positions and create incentives for prudent risk-taking by divisions and individuals. Risk measurement deals with the quantification of risk exposures, whereas risk management refers to the overall process by which managers satisfy these needs and follows to define a business strategy, to detect the risks to which are visible, quantifying those risks, and to control and understand the nature of the risks it faces. This research focuses on the economic vulnerability faced by banks in the financial sector in terms of the crises issues perspective of economic distress. Here, the methodology followed is based on the CAMELS framework variables. CAMELS is an abbreviation for: capital adequacy (C), asset (A), management (M), earnings (E), liquidity (L) and sensitivity to market risk (S). Based on these terminologies, a couple of variables should be selected, such as capital asset ratio, non-performing loan, cost income ratio, industry production index, non-interest income, reserve of gold, inflation, stock turnover ratio, real interest rate as component series and return on equity (RoE) as reference series to identify the turning points of economic vulnerability in the banking sector in Bangladesh. Thus, by forecasting the directional changes it could make policymakers aware of changes in the financial markets and banking economy and allow them to undertake preventive steps for remedial purposes. The constructed MPI should have a remarkable lead time of about not less than 6 months on average in case of prediction against the leading for reference Series.By mending the financial efficacy of investment banks. Bangladesh also should improve their corresponding banking system to implement these suggestions.  

Keywords: {'name': 'Macro-prudential Indicator, Return on Equity, Banking sector, Financial Crises'}

Authors & affiliations

Maria Afreen
Affiliation not supplied

Deposited references

Supplied references, not a list of publications citing this article.

DOI: 10.14738/abr.51.2368

Anshuman. (2011). Performance evaluation of banks through CAMELS framework. Scribd.

Boris., V., & Dumicic., M. (2016). Managing Systemic Risks in the Croatian Economy, BIS Paper No 86, Bank for International Settlements. SSRN: https://ssrn.com/abstract=2844269

DOI: 10.1016/j.jfineco.2017.03.003

Bangladesh Bank. (2014). Prudential regulations for banks: Selected issues. Bangladesh Bank Working Paper Series 2014.

Bry, G., & Boschan, C. (1971). Cyclical analysis of time series: Selected procedures and computer programs. Columbia University Press, Technical Paper 20. https:dl.acm.org/doi/book/10.5555/578823

DOI: 10.2139/ssrn.2782692

DOI: 10.2139/ssrn.1165494

DOI: 10.3846/tede.2019.9383

DOI: 10.1111/1468-2354.t01-1-00076

Conference Board (2000). Business Cycle Indicators Handbook. New York: The Conference Board.

DOI: 10.5089/9781475504743.006

European Central Bank. (2007). Annual Report 2007. European Central Bank, Germany.

http: //www.ecb.europa.edu

DOI: 10.1016/S0169-2070(01)00141-8

DOI: 10.1016/j.jfineco.2011.02.006

DOI: 10.5539/ijbm.v8n8p107

DOI: 10.5539/ijef.v9n3p126

Ministry of Finance Bangladesh. (2018). Bangladesh Economic Review. Economic Advisers Wing, Finance Division, Ministry of Finance, Bangladesh.

Ministry of Finance Bangladesh. (2016). Bangladesh Economic Review. Economic Advisers Wing, Finance Division, Ministry of Finance, Bangladesh.

Ministry of Finance Bangladesh. (2009). Bangladesh Economic Review. Economic Advisers Wing, Finance Division, Ministry of Finance, Bangladesh.

DOI: 10.5539/ass.v11n21p78

DOI: 10.5539/ass.v11n21p78

DOI: 10.1016/j.pacfin.2013.08.001

DOI: 10.14419/ijaes.v3i1.4337

DOI: 10.3982/ECTA10762

DOI: 10.1016/j.jfs.2016.11.006

DOI: 10.1016/j.jbankfin.2012.10.017

DOI: 10.1016/j.jimonfin.2020.102156

DOI: 10.1057/imfer.2012.6

DOI: 10.12816/0034356

DOI: 10.1111/exsy.12144

Zhang, W., & Zhuang, J. (2002). Leading Indicators of Business Cycles in Malaysia and the Philippines. Asian Development Bank, Economics and Research Department, Working Paper Series 32.