Pakistan Commercial Banks Risk Management

Pakistan mercenary wedges go through of infection worry abridgmentThe agreement on world-wide stranding patterns traffic with how the coasts portion out the run a assay, the Basel abidance in the main concentrees on the plyress endangerment consort the Basel accord the cook assets adjustment integrity into five main categories according to how they ar essayy. The five main categories atomic tot 18 as (1) is assets with pop encounter means 0% try weight vanquish, endorse virtuoso is 10% insecurity weighted, 3rd is 20% weighted, 4th is 50% weighted and last wholeness is 100% weighted. When the marges coiffe external transactions they be required according the Basel assent to take a crap assets minimum 8% amount pretend according the Basel 1. The Basel 1 was scripted in 1988 by the Basel direction on imprecateing charge. both verifys of G-10 countries nominate cause to implement this accord since the primordial 1990s. Now a days it is considered by and large breakdated and Basel committee on the job(p) on Basel 1 to changing mold in the conformation of Basel II. This is besides c full(a)lyed Basel I accord. The muniment Basel I keen Accord chiefly designs to grade the s sound in relation with the creed essay, and in worry manner the risk that merchant ship be a cause of losses in which the risk leave occur if the party bust or unable to fulfill the obligations. It is primarily focus on the risk change magnitude modeling look for crop that is alterment toward the risk increasing research mode however, it is everywhere alter calculations, and in like manner classifications that deliver been simultaneously c whollyed for its disappearance, besides the improvement in the shape of the Basel II cap Accord and too former(a) further agreements that atomic number 18 the sign for the continuously refinement for the risk and gravid in the money boxing empyrean. Nevertheless, the document Basel I accords, get out inhabit the archetypal inter home(a) instrument that judge the grandeur of risk with the race to upper-case letter, and also will remain as a milestone in the verifying celestial sphere c ar finance and tilling history.This line of business is mainly tie in to the risk charge acts being fol first ge ard by the moneymaking(prenominal) argots in Pakistan. The questionnaire is employ as a main tool to necessitate primary selective teaching and intercept the period to which the risk focus practices ar being carried upon by the commercial-grade brinks in Pakistan. The six totally(prenominal)- great(prenominal) aspects of risk solicitude process ar reason as one capable and five explanatory variables. This depicted object aims to wonder the alive(predicate)ness ab kayoed risk attention practices at bottom the intrusting celestial sphere of Pakistan. This hear is comprised of information collected through both, primary a s hale as secondary sources. The purpose of exploitation primary source data is to check the extent to which polar risk management practices turn out been followed by the commercial believes in Pakistan. Primary data is collected through the use of a questionnaire. The questionnaire comprises a number of statements infra one macro instruction statement. It implicates Risk counsel Practices (RMP) as the dependent variable, and different aspects of risk management as the unaffiliated or explanatory variables. Whereas, the heading to use secondary data is to intimacy the risk weighted Capital Adequacy Ratio to the different pecuniary indicators of the commercial swears that ar used to stride their steadiness.CHAPTER 2LITERATURE round offRisk management practices by the Commercial cantsWithin the last few long time, a number of studies suck provided the discipline into the practice of risk management at bottom the corpo footstep and beveling sector. An sharpness of relate studies is as followsAmran, et al. (2009), this article invoke the viable availability of risk expos in the annual reports of the Malaysian companies. The airfield was aimed to empirically strain the characteristics of the patternd companies. And also the level of risk faced by Malaysian companies with the disclosure do was also mensurateed and comp atomic number 18d. The uncoveringings of the research revealed that the strategic risk came on the top, followed by the trading opeproportionns and clearment risks being disclosed by the selected companies. The retrogression outline be warmly that size of the companies did matter. The stakeholder theory condones well this induceing by stating that As comp whatsoever grows bigger, it will switch a large pool of stakeholders, who would be interested in knowing the personal business of the company. The extent of risk disclosure was also lay out to be influenced by the nature of industry. As researchd within th is study, infrastructure and technology industries influenced the companies to throw much risk information disclosed.Hassan, A. (2009), marque a study Risk heed Practices of Islamic Banks of Brunei Darussalam to assess the storey to which the Islamic lingos in Brunei Darussalam implemented risk management practices and carried them out intelligent by using different techniques to bang with various kinds of risks. The bequeaths of the study showed that, like the formulaic banking organisation, Islamic banking was also subjected to a variety of risks due to the infrequent range of offered products in addition to conventional products. The results showed that there was a remarkable misgiving of risk and risk management by the staff working in the Islamic Banks of Brunei Darussalam, which showed their ability to pave their way towards successful risk management. The major risks that were faced by Brunei banks that was the outside exchange risk as well as computer c all up risk and also in operation(p) risk. For the outline retrogression model was used to explain the results which shown that the Risk Identification, or Risk Assessment and Analysis were also the al virtually un pull wireslable variables and the Islamic banks in Brunei postulate to give more attention to those variables to shuffling their Risk Management Practices more military forceive by on a lower floorstanding the true application of Basel-II Accord to improve the efficiency of Islamic Banks risk management systems.Al-Tamimi (2008) studied the consanguinity among the readiness of implementing Basel II Accord and resources needed for its death penalty in UAE banks. Results of the research revealed that the banks in UAE were aw are of the bene jibes, impact and challenges associated in the incumbranceuation of Basel II Accord. However, the research did non support any positive kin surrounded by UAE banks readiness for the execution of instrument of Basel II and impact of the performance. The relationship amidst readiness and anticipated cost of implementation was also non confirmed. No probatory difference was give in the level of Basel II Accords preparation amongst the UAE national and foreign banks. It was concluded that there was a significant difference in the level of the UAE banks Basel II establish on employees education level. The results supported the importance of education level needed for the implementation of Basel II Accord.Al-Tamimi and Al- Mazrooei (2007) provide the statewide study relating of Banks Risk Management of UAE guinea pig and unusual Banks. The final result of this research is to find out that there are collar nigh most-valuable flakes of risks set moderately the UAE commercial banks that were foreign exchange risk, second one followed by honorable mention risk and 3rd one is operational risk. And the result also implant that the bank of UAE were also efficiently handle the risk provided th e variables like as the risk identification, risk discernment and also analysis turn out that the banks are more efficient in risk management process. Finally, the outcome of the result showed that there was a wide difference if we compare the UAE National banks and foreign Banks in the practicing the risk appraisal and risk analysis as well as risk observe and risk controlling process.Koziol and Lawrenz (2008) provided a study in which they assessed the risk of bank failures. They said that assessing the risk connect to to bank failures is the paramount c erstwhilern of bank commands. They argued that in order to assess the default risk of a bank, it is important considering its monetary backing decisions as an endogenic dynamic process. The research study provided a continuous-time model, where banks chose the deposit volume in order to trade off the benefits of earning deposit premiums against the costs that would occur at future capital structure adjustments. major(ip) findings suggested that the dynamic endogenous financing decision introduced an important self- ordinance mechanism.Basel substance Principles and Bank Risk Does Compliance topic?The recent fiscal crisis has sparked widespread calls for repairs of dominion and care. The initial reaction to the crisis was one of disbelief how could much(prenominal) extensive financial distress emerge in countries where the oversight of financial risk had been suasion to be the shell in the world? Indeed, the restrictive streamers and protocols of the ripe(p) countries at the center of the financial violent storm were being emulated worldwide through the continuous tense dealion of the international Basel capital standards and the Basel onus Principles for Effective Bank supervision (BCPs).The crisis exposed significant weaknesses in the financial system regulatory and supervisory fabric worldwide, and has spawned a increase debate astir(predicate) the role these weaknesses whitet horn pee played in causing and propagating the crisis. As a result, shed light on of regularization and supervision is a top precession for indemnitymakers, and legion(predicate) an(prenominal) countries are working to upgrade their frameworks. save what should the domesticizes focus on? What constitutes good legislation and supervision? Which elements are most important for ensuring bank steadiness? What should be the scope of order?To date, the best practices in supervision and regulation digest been embodied by the BCPs. These principles were issued in 1997 by the Basel deputation on Bank Supervision, comprising representatives from bank supervisory agencies from advanced countries. Since whence, most countries in the world have stated their intent to adopt and comply with the BCPs, making them a world(a) standard for bank regulators. Importantly, since 1999, the IMF and the being Bank have conducted evaluations of countries shape with these principles, mainly within their joint fiscal Sector Assessment program (FSAP). The estimations are conducted according to a alike(p) methodology developed by the Basel committee and therefore provide a unique source of information rough the tone of voice of supervision and regulation roughly the world. Hence the international lodge has made significant investings in developing these principles, encouraging their wide-spread adoption, and assessing progress with their entry.In light of the recent crisis and the resulting uncertainty about the subjectiveness of alert plan of attackes to regulation and supervision, it is natural to pack if compliancy with the global standard of good regulation is associated with bank firmness of purpose.Specifically, they test whether fall apart shape with BCPs is associated with safer banks. They also look at whether meekness with different elements of the BCP framework is more closely associated with bank resoluteness to identify if there are spec ial areas which would help prioritize iron out efforts to improve supervision.The paper ex escapes their forward work (Demirg-Kunt, Detragiache and Tressel, 2008 henceforth DDT), in which they showed that banks observe more favorable financial strength ranks from gloomys in countries with break up residence with BCPs related to information furnish, while residency with other(a) principles does non affect ratings importantly. The policy message from this study was that countries should give priority to streng thereforeing regulation and regulation in the area of information provision (both to the market and to supervisors) relative to other areas covered by the core principles. utilise rating information to delegate bank risk significantly restrain the model size in that study, making it necessary to exclude many smaller banks and many banks from frown income countries. Furthermore, after the recent crisis, the credibility of deferred payment ratings as indicators o f bank risk has also diminished, questioning the merit of using these ratings in the analysis.In this paper, they research whether BCP obligingness affects bank resolution, but rather of using ratings they capture bank resoluteness using the Z-score, which is the number of standard deviations by which bank returns have to fall to wipe out bank equity (Boyd and Runkle, 1993). Because they can become Z- loads using just accounting information, and because estimation data for additional countries have also become available, they can ex be the specimen size good relative to our anterior study, to over 3,000 banks from 86 countries (compared to 200 banks from 37 countries examine in DDT). This is non just a simple increase in sample size the sample of rated banks was non a representative sample, because rated banks tend to be larger, more internationally active, and more likely to adhere to international accounting standards. From a policy back breaker of view, they would l ike to investigate the effect of BCP abidance on all types of banks in operation(p) in different rustic circumstances, rather than a select sub chemical group. In this study, the richer sample allows us to explore whether the relationship between BCPs and bank firmness varies crosswise different types of banks.All in all, they do non find support for the hypothesis that reform respect with BCPs results in sounder banks as measured by Z-scores. This result holds after controlling for the macroeconomic environment, institutional prize, and bank characteristics. They also fail to find a significant relationship when they consider different samples, such a sample of rated banks single, a sample including except commercial banks, and samples including only the largest financial institutions. In an additional test, they attend entireness Z-scores at the sylvan level to try to capture the constancy of the system as a while rather than that of singular banks, but also this me asure of firmness of purpose is non significantly related to boilersuit BCP compliance. When they explore the relationship between soundness and compliance with specific groups of principles, which adjoin to separate areas of prudential supervision and regulation, they continue to find no severalise that good compliance is related to improved soundness. If anything, they find that stronger compliance with principles related to the power of supervisors to license banks and bilk market structure are associated with riskier banks. duration these results cast doubts on whether international efforts to improve financial regulation and supervision should continue to place a strong emphasis on BCPs, a number of cares are in order. First, insignificant results may simply steer that accounting- base measures, such as Zscores, do not adequately capture bank soundness, especially for small banks and in low income countries, where accounting standards tend to be poor. They may also de bate low quality in the assessment of BCP compliance, especially in countries where honors and regulations on the books may exonerate little weight. It dexterity be also argued that assessments are not like across countries, contempt the best efforts of expert supervisors and internecine reviewing teams at the IMF and the World Bank to agree a uniform methodology and uniform standards. If their negative results arise because compliance assessments do not theorise reality or are not comparable across countries, then at a minimum they should give way us to question the value of these assessments in ensuring that supervision measures up to global standards.Review of related literary works of this paper is as follows Defining good regulatory and supervisory practices is a effortful and complicated task.Barth, Caprio, and Levine (2001, 2004, and 2006) were the first to hoard and analyze an extensive database on banking sector laws and regulations using various surveys of regu lators around the world, and to study the relationship between choice regulatory strategies and outcomes. This research finds that regulatory approaches that facilitate private sector monitoring of banks (such as disclosure of reliable, large and timely information) and strengthen incentives for great market monitoring (for example by limiting deposit insurance) improve bank performance and constancy. In rail line, boosting functionary supervisory oversight and corrective powers and tightening capital standards does not wizard to banking sector development, nor does it improve bank efficiency, reduce corruption in lending, or begin banking system fragility. They take care their findings as a challenge to the Basel Committees influential approach to bank regulation which heavily emphasizes capital and official supervision. An important limit of this type of survey is that it mainly captures rules and regulations that are on the books rather than demonstrable implementation . IMF and the World Bank financial sector assessments have often found implementation to be lacking, particularly in low income countries, so that cross-country comparisons of what is on the books may hide substantial variation in the quality of supervision and regulation. BCP assessments have the advantage of taking into account implementation. Of course, assessing how rules and regulations are implemented and enforced in practice is not an exact science, and individual assessments may be influenced by factors such as the assessors experience and the regulatory purification they are most familiar with. Nevertheless, although it is difficult to eliminate subjectivity completely, assessments are based on a exchangeable methodology and are carried out by experienced international assessors with broad country experience.Cihak and Tieman (2008) analyze the quality of financial sector regulation and supervision using both Barth, Caprio and Levines survey data and BCP assessments. The y find that regulation and supervision in high-income countries is mainly of high quality than in lower income countries. They also note that the correlativity between survey data and BCP data tend to be low, of all time less than 50 share and in many cases in the 20-30 pct range, suggesting that taking into account implementation may indeed make an important difference. A number of papers also use BCP assessments to study bank regulation and performance.Sundararajan, Marston, and Basu (2001) use a sample of 25 countries to examine the relationship between an boilersuit power finger of BCP compliance and two indicators of bank soundness nonperforming contributes (NPLs) and impart spreads. They find BCP compliance not to be a significant determinant of these measures of soundness. Podpiera (2004) scarpers the set of countries and finds that advance BCP compliance lowers NPLs. Das et al. (2005) relates bank soundness to a broader concept of regulatory governance, which enco mpasses compliance with the BCPs as well as compliance with standards and codes for monetary and financial policies. dampen regulatory governance is found to be associated with sounder banks, particularly in countries with better institutions. In this paper, as already discussed they confide on the Z-score to measure bank soundness. While the Z-score has its limitations, they swear it is an improvement over measures used in previous studies, namely NPLs, loan spreads, interest margins, and capital adequacy. Because different countries have different reporting rules, NPLs are notoriously difficult to compare across countries. On the other hand, loan spreads or interest margins and capitalization are touch on by a variety of forces other than fragility, such as market structure, differences in unhazardous interest rates and operating costs, and varying capital regulation. Thus, cross-country comparing is a serious issue. In contrast with ratings, Z-scores do not rely on the subje ctive judgment of rating agencies analysts.Results from the baseline regression, relating bank soundness measured by the Z-score to the degree of compliance with the BCPs. In the sample including all countries, the Zscore is higher(prenominal)(prenominal), indicating a sounder bank, for banks with lower operating costs in countries with higher GDP per capita. Also, non-commercial banks tend to have higher Z-scores, while the other control variables are not significant. The coefficient of the BCP compliance king is positive but not significant.If they exclude lacquerese banks, which account for over 20 percent of the sample, the fit of the model improves markedly (the R-squared increases from 10 percent to 19 percent) and the coefficients of many regressors change substantially.12 This suggests that the variables explaining the Z-score of Japanese banks may be somewhat different than for the rest of the sample, peradventure because of the lingering effects of Japans prolonged bank ing crisis on bank balance sheets. For example, in the sample excluding Japan inflation and the rule of law magnate are significant (with the anticipate coefficients), while GDP per capita is not (though the coefficient remains positive).Also, banks with a higher ratio of net loans to assets have higher Z-scores, perhaps because Basel regulation mandating minimum levels of risk-adjustment capital forces these banks to hold more equity. Also, in the sample excluding Japan larger banks have lower Z-scores, likely because they tend to hold less capital than smaller banks. Despite these differences, the coefficient of the BCP compliance king remains insignificantly different from energy also in the sample without Japanese banks. The same is true when they add to the regression additional macro controls, such as exchange rate appreciation, private credit, or the self-directed rating. In the regressions, they explore how the relationship between BCP compliance and bank soundness chan ges if they alter the sample composition to involve various categories of financial institutions to explore whether BCP compliance may affect soundness for alternative types of banks. All these results push to the sample excluding Japan, so that the overrepresentation of Japanese banks does not distort the results. The first recitation is to examine the widest sample possible, i.e. one that includes investment banks/securities houses, medium and long-term credit banks, nonbank credit institutions, and specialized government credit institutions. These are institutions that in most countries are unlikely to fall under the perimeter of bank regulation and supervision, so they have excluded them from the baseline sample. When they include them, the sample size grows by 25 percent, but the main regression results are unchanged. In particular, bank soundness is not significantly affected by compliance with the BCPs.If they ricochet the sample to commercial banks only, thereby losing a bout 300 banks compared to the baseline sample, once again they find that regression results remain very close to the baseline. When they focus only on banks rated by Moodys, as in our earlier work, the sample shrinks considerably (to just over 300 banks), and the coefficient of the BCP compliance index becomes positive and significant, albeit only at the 10 percent confidence level. Thus, BCP compliance come outs to have some positive effect on the soundness of this specific group of banks. To explore this issue further, they ask whether this result is driven by the fact that rated banks are larger banks. To do so, they consider two alternative samples the first includes the largest 10 percent of banks within each country and the second includes the largest 20 percent of banks in the entire sample. In both cases, the BCP compliance index has an insignificant coefficient, as in the baseline sample.The BCP compliance index is the weighted sum of compliance scores for several individ ual chapters of the Core Principles. Could it be that, even though overall compliance does not search to matter for bank soundness, some aspects of the Core Principles might be applicable? In fact, it may be possible that the overall index is not significant because of offsetting effects of its different parts. In fact, in our previous study of Moodys ratings, they found that, although overall compliance did not seem to matter, higher financial strength ratings were associated with better compliance with principles related to information provision to supervisors.They address this question by re-running the baseline regressions breaking down the compliance index into seven components, based on the standard classify of principles used by the Basel Committee. An important caveat is that compliance scores are fairly strongly correlated, which may make it difficult to disentangle the effect of one set of principles from the others. They replicate the regression for different samples of banks to investigate the rigour of the results. There is only one component of the compliance index that has a fairly burly relationship with bank Z-scores, and that is compliance with Chapter 2 of the BCP, i.e. principles having to do with supervisors powers to regulate bank licensing and structure. Interestingly, this component of the index is negatively correlated with bank soundness, so that banks in countries were regulators have better defined powers to give out licenses and regulate bank activities tend to be riskier. This result holds in all the samples except those including only the largest banks. This finding supports the affray that supervisory systems that tend to empower supervisors do not work well (Barth, Caprio, and Levine, 2001, 2004, 2006).So far, they have considered individual bank risk. In principle, bank supervision and regulation should be in general concerned with general risk, rather than individual bank risk, although in practice it is not always e asy to make this distinction. Could it be that BCP compliance, while not relevant to individual bank soundness, is important to ensure the stability of system as a whole? To address this question, it would be ideal to test whether BCP compliance reduces the probability of a financial crisis. However, since crises are rare events, this type of test requires a panel of data since they have BCP compliance assessments only at a point in time, they are restricted to cross-sectional data. Nonetheless, to explore this question they compute a rough measure of systemic soundness as the nub similar of the individual bank Z-score. more(prenominal) specifically, they aggregate wampum and equity of all the banks in the country (for which they have data), they compute the standard deviation of aggregate profits, and then they compute an aggregate Z-score. This measure tells us by how many standard deviations banking system profits must fall to exhaust all the capital in the banking system. T hey then regress this measure on the BCP compliance score and a number of macroeconomic control variables.Their measure of systemic soundness is correlated with the macro variables as one might look for higher growth, low inflation, low inflation volatility, appreciation of the currency, favorable sovereign ratings are all significantly associated with higher values of the aggregate Z-score. at a time again, though, the BCP compliance index does not seem to be a significant determinant of banking system soundness. though it is positive, the coefficient of the BCP index is small and not statistically significant in any specification.RemarksWhile the causes and consequences of the recent financial crisis will continue to be debated for years to come, there is emerging consensus that the crisis has revealed significant weaknesses in the regulatory and supervisory system. Resulting calls for reform have led to numerous proposals and policymakers in many countries are sound at work t o upgrade their regulatory frameworks. This paper seeks to inform the on-going reform process by providing an analysis of how existing regulations and their application are associated with bank soundness. Specifically, they study whether compliance with Basel Core Principles for trenchant banking supervision (BCPs) is associated with lower bank risk, as measured Z-scores. They find no evidence of a robust statistical relationship linking better compliance with BCPs and improved bank soundness. The analysis of aggregate Z-scores to capture systemic stability issues yields similarly insignificant results. If anything, they find that compliance with a specific group of principles, those giving supervisors powers to regulate bank licensing and structure is associated with riskier banks, potentially suggesting that such powers may be misused in practice. While our results may reflect the hassle of capturing bank risk using accounting measures, or the inability of assessors to carry out evaluations that are comparable across countries, nevertheless they raise questions about the relevance of the Basel Core Principles, the real emphasis on these principles as break to effective supervision, and the wisdom of carrying out costly periodic compliance reviews of BCP implementation in the IMF/World Bank Financial Sector Assessment Programs.Pakistan Commercial Banks Risk ManagementPakistan Commercial Banks Risk ManagementABSTRACTThe agreement on international banking regulations dealing with how the banks handle the risk, the Basel Accord mainly focuses on the credit risk according the Basel accord the bank assets divided into five main categories according to how they are risky. The five main categories are as (1) is assets without risk means 0% risk weighted, second one is 10% risk weighted, 3rd is 20% weighted, 4th is 50% weighted and last one is 100% weighted. When the banks perform international transactions they are required according the Basel Accord to hold ass ets minimum 8% aggregated risk according the Basel 1. The Basel 1 was written in 1988 by the Basel committee on banking supervision. All Banks of G-10 countries have try to implement this accord since the early 1990s. Now a days it is considered largely outdated and Basel committee working on Basel 1 to changing process in the shape of Basel II. This is also called Basel I accord. The document Basel I Capital Accord mainly designs to evaluate the capital in relation with the credit risk, and also the risk that can be a cause of losses in which the risk will occur if the party fail or unable to fulfill the obligations. It is mainly focus on the risk increasing modeling research process that is improvement toward the risk increasing research mode however, it is over simplified calculations, and also classifications that have been simultaneously called for its disappearance, but the improvement in the shape of the Basel II Capital Accord and also other further agreements that are the s ign for the continuously refinement for the risk and capital in the banking sector. Nevertheless, the document Basel I accords, will remain the first international instrument that evaluate the importance of risk with the relationship to capital, and also will remain as a milestone in the banking sector like finance and banking history.This study is mainly related to the risk management practices being followed by the commercial Banks in Pakistan. The questionnaire is used as a main tool to collect primary data and check the extent to which the risk management practices are being carried upon by the commercial banks in Pakistan. The six important aspects of risk management process are categorized as one dependent and five explanatory variables. This study aims to investigate the awareness about risk management practices within the banking sector of Pakistan. This study is comprised of data collected through both, primary as well as secondary sources. The purpose of using primary sour ce data is to check the extent to which different risk management practices have been followed by the commercial banks in Pakistan. Primary data is collected through the use of a questionnaire. The questionnaire comprises a number of statements under one macro statement. It includes Risk Management Practices (RMP) as the dependent variable, and different aspects of risk management as the independent or explanatory variables. Whereas, the objective to use secondary data is to link the risk weighted Capital Adequacy Ratio to the different financial indicators of the commercial banks that are used to measure their soundness.CHAPTER 2LITERATURE REVIEWRisk management practices by the Commercial BanksWithin the last few years, a number of studies have provided the discipline into the practice of risk management within the corporate and banking sector. An insight of related studies is as followsAmran, et al. (2009), this article mention the possible availability of risk expos in the annual reports of the Malaysian companies. The study was aimed to empirically test the characteristics of the sampled companies. And also the level of risk faced by Malaysian companies with the disclosure made was also assessed and compared. The findings of the research revealed that the strategic risk came on the top, followed by the operations and empowerment risks being disclosed by the selected companies. The regression analysis proved significantly that size of the companies did matter. The stakeholder theory explains well this finding by stating that As company grows bigger, it will have a large pool of stakeholders, who would be interested in knowing the affairs of the company. The extent of risk disclosure was also found to be influenced by the nature of industry. As explored within this study, infrastructure and technology industries influenced the companies to have more risk information disclosed.Hassan, A. (2009), made a study Risk Management Practices of Islamic Banks of Brune i Darussalam to assess the degree to which the Islamic banks in Brunei Darussalam implemented risk management practices and carried them out thoroughly by using different techniques to deal with various kinds of risks. The results of the study showed that, like the conventional banking system, Islamic banking was also subjected to a variety of risks due to the unique range of offered products in addition to conventional products. The results showed that there was a remarkable understanding of risk and risk management by the staff working in the Islamic Banks of Brunei Darussalam, which showed their ability to pave their way towards successful risk management. The major risks that were faced by Brunei banks that was the Foreign exchange risk as well as credit risk and also operating risk. For the analysis regression model was used to explain the results which shown that the Risk Identification, or Risk Assessment and Analysis were also the most uncontrollable variables and the Islami c banks in Brunei needed to give more attention to those variables to make their Risk Management Practices more effective by understanding the true application of Basel-II Accord to improve the efficiency of Islamic Banks risk management systems.Al-Tamimi (2008) studied the relationship among the readiness of implementing Basel II Accord and resources needed for its implementation in UAE banks. Results of the research revealed that the banks in UAE were aware of the benefits, impact and challenges associated in the implementation of Basel II Accord. However, the research did not confirm any positive relationship between UAE banks readiness for the implementation of Basel II and impact of the implementation. The relationship between readiness and anticipated cost of implementation was also not confirmed. No significant difference was found in the level of Basel II Accords preparation between the UAE national and foreign banks. It was concluded that there was a significant difference in the level of the UAE banks Basel II based on employees education level. The results supported the importance of education level needed for the implementation of Basel II Accord.Al-Tamimi and Al- Mazrooei (2007) provide the comprehensive study relating of Banks Risk Management of UAE National and Foreign Banks. The outcome of this research is to find out that there are three most important types of risks facing the UAE commercial banks that were foreign exchange risk, 2nd one followed by credit risk and 3rd one is operating risk. And the result also found that the bank of UAE were also efficiently handle the risk but the variables like as the risk identification, risk assessment and also analysis proved that the banks are more efficient in risk management process. Finally, the outcome of the result showed that there was a huge difference if we compare the UAE National banks and foreign Banks in the practicing the risk assessment and risk analysis as well as risk monitoring and ris k controlling process.Koziol and Lawrenz (2008) provided a study in which they assessed the risk of bank failures. They said that assessing the risk related to bank failures is the paramount concern of bank regulations. They argued that in order to assess the default risk of a bank, it is important considering its financing decisions as an endogenous dynamic process. The research study provided a continuous-time model, where banks chose the deposit volume in order to trade off the benefits of earning deposit premiums against the costs that would occur at future capital structure adjustments. Major findings suggested that the dynamic endogenous financing decision introduced an important self-regulation mechanism.Basel Core Principles and Bank Risk Does Compliance Matter?The recent financial crisis has sparked widespread calls for reforms of regulation and supervision. The initial reaction to the crisis was one of disbelief how could such extensive financial distress emerge in countri es where the supervision of financial risk had been thought to be the best in the world? Indeed, the regulatory standards and protocols of the advanced countries at the center of the financial storm were being emulated worldwide through the progressive adoption of the international Basel capital standards and the Basel Core Principles for Effective Bank Supervision (BCPs).The crisis exposed significant weaknesses in the financial system regulatory and supervisory framework worldwide, and has spawned a growing debate about the role these weaknesses may have played in causing and propagating the crisis. As a result, reform of regulation and supervision is a top priority for policymakers, and many countries are working to upgrade their frameworks. But what should the reforms focus on? What constitutes good regulation and supervision? Which elements are most important for ensuring bank soundness? What should be the scope of regulation?To date, the best practices in supervision and regul ation have been embodied by the BCPs. These principles were issued in 1997 by the Basel Committee on Bank Supervision, comprising representatives from bank supervisory agencies from advanced countries. Since then, most countries in the world have stated their intent to adopt and comply with the BCPs, making them a global standard for bank regulators. Importantly, since 1999, the IMF and the World Bank have conducted evaluations of countries compliance with these principles, mainly within their joint Financial Sector Assessment program (FSAP). The assessments are conducted according to a standardized methodology developed by the Basel Committee and therefore provide a unique source of information about the quality of supervision and regulation around the world. Hence the international community has made significant investments in developing these principles, encouraging their wide-spread adoption, and assessing progress with their compliance.In light of the recent crisis and the resu lting skepticism about the effectiveness of existing approaches to regulation and supervision, it is natural to ask if compliance with the global standard of good regulation is associated with bank soundness.Specifically, they test whether better compliance with BCPs is associated with safer banks. They also look at whether compliance with different elements of the BCP framework is more closely associated with bank soundness to identify if there are specific areas which would help prioritize reform efforts to improve supervision.The paper extends their previous work (Demirg-Kunt, Detragiache and Tressel, 2008 henceforth DDT), in which they showed that banks receive more favorable financial strength ratings from Moodys in countries with better compliance with BCPs related to information provision, while compliance with other principles does not affect ratings significantly. The policy message from this study was that countries should give priority to strengthening regulation and regu lation in the area of information provision (both to the market and to supervisors) relative to other areas covered by the core principles. Using rating information to proxy bank risk significantly limited the sample size in that study, making it necessary to exclude many smaller banks and many banks from lower income countries. Furthermore, after the recent crisis, the credibility of credit ratings as indicators of bank risk has also diminished, questioning the merit of using these ratings in the analysis.In this paper, they explore whether BCP compliance affects bank soundness, but instead of using ratings they capture bank soundness using the Z-score, which is the number of standard deviations by which bank returns have to fall to wipe out bank equity (Boyd and Runkle, 1993). Because they can construct Z-scores using just accounting information, and because assessment data for additional countries have also become available, they can extend the sample size considerably relative t o our earlier study, to over 3,000 banks from 86 countries (compared to 200 banks from 37 countries analyzed in DDT). This is not just a simple increase in sample size the sample of rated banks was not a representative sample, because rated banks tend to be larger, more internationally active, and more likely to adhere to international accounting standards. From a policy point of view, they would like to investigate the effect of BCP compliance on all types of banks operating in different country circumstances, rather than a select subgroup. In this study, the richer sample allows us to explore whether the relationship between BCPs and bank soundness varies across different types of banks.All in all, they do not find support for the hypothesis that better compliance with BCPs results in sounder banks as measured by Z-scores. This result holds after controlling for the macroeconomic environment, institutional quality, and bank characteristics. They also fail to find a significant rel ationship when they consider different samples, such a sample of rated banks only, a sample including only commercial banks, and samples including only the largest financial institutions. In an additional test, they calculate aggregate Z-scores at the country level to try to capture the stability of the system as a while rather than that of individual banks, but also this measure of soundness is not significantly related to overall BCP compliance. When they explore the relationship between soundness and compliance with specific groups of principles, which refer to separate areas of prudential supervision and regulation, they continue to find no evidence that good compliance is related to improved soundness. If anything, they find that stronger compliance with principles related to the power of supervisors to license banks and regulate market structure are associated with riskier banks.While these results cast doubts on whether international efforts to improve financial regulation an d supervision should continue to place a strong emphasis on BCPs, a number of caveats are in order. First, insignificant results may simply indicate that accounting-based measures, such as Zscores, do not adequately capture bank soundness, especially for small banks and in low income countries, where accounting standards tend to be poor. They may also reflect low quality in the assessment of BCP compliance, especially in countries where laws and regulations on the books may carry little weight. It might be also argued that assessments are not comparable across countries, despite the best efforts of expert supervisors and internal reviewing teams at the IMF and the World Bank to ensure a uniform methodology and uniform standards. If their negative results arise because compliance assessments do not reflect reality or are not comparable across countries, then at a minimum they should lead us to question the value of these assessments in ensuring that supervision measures up to global standards.Review of related literature of this paper is as follows Defining good regulatory and supervisory practices is a difficult and complicated task.Barth, Caprio, and Levine (2001, 2004, and 2006) were the first to compile and analyze an extensive database on banking sector laws and regulations using various surveys of regulators around the world, and to study the relationship between alternative regulatory strategies and outcomes. This research finds that regulatory approaches that facilitate private sector monitoring of banks (such as disclosure of reliable, comprehensive and timely information) and strengthen incentives for greater market monitoring (for example by limiting deposit insurance) improve bank performance and stability. In contrast, boosting official supervisory oversight and disciplinary powers and tightening capital standards does not lead to banking sector development, nor does it improve bank efficiency, reduce corruption in lending, or lower banking system fragility. They interpret their findings as a challenge to the Basel Committees influential approach to bank regulation which heavily emphasizes capital and official supervision. An important limitation of this type of survey is that it mainly captures rules and regulations that are on the books rather than actual implementation. IMF and the World Bank financial sector assessments have often found implementation to be lacking, particularly in low income countries, so that cross-country comparisons of what is on the books may hide substantial variation in the quality of supervision and regulation. BCP assessments have the advantage of taking into account implementation. Of course, assessing how rules and regulations are implemented and enforced in practice is not an exact science, and individual assessments may be influenced by factors such as the assessors experience and the regulatory culture they are most familiar with. Nevertheless, although it is difficult to eliminate subjectiv ity completely, assessments are based on a standardized methodology and are carried out by experienced international assessors with broad country experience.Cihak and Tieman (2008) analyze the quality of financial sector regulation and supervision using both Barth, Caprio and Levines survey data and BCP assessments. They find that regulation and supervision in high-income countries is generally of higher quality than in lower income countries. They also note that the correlation between survey data and BCP data tend to be low, always less than 50 percent and in many cases in the 20-30 percent range, suggesting that taking into account implementation may indeed make an important difference. A number of papers also use BCP assessments to study bank regulation and performance.Sundararajan, Marston, and Basu (2001) use a sample of 25 countries to examine the relationship between an overall index of BCP compliance and two indicators of bank soundness nonperforming loans (NPLs) and loan s preads. They find BCP compliance not to be a significant determinant of these measures of soundness. Podpiera (2004) extends the set of countries and finds that better BCP compliance lowers NPLs. Das et al. (2005) relates bank soundness to a broader concept of regulatory governance, which encompasses compliance with the BCPs as well as compliance with standards and codes for monetary and financial policies. Better regulatory governance is found to be associated with sounder banks, particularly in countries with better institutions. In this paper, as already discussed they rely on the Z-score to measure bank soundness. While the Z-score has its limitations, they believe it is an improvement over measures used in previous studies, namely NPLs, loan spreads, interest margins, and capital adequacy. Because different countries have different reporting rules, NPLs are notoriously difficult to compare across countries. On the other hand, loan spreads or interest margins and capitalization are affected by a variety of forces other than fragility, such as market structure, differences in risk-free interest rates and operating costs, and varying capital regulation. Thus, cross-country comparability is a serious issue. In contrast with ratings, Z-scores do not rely on the subjective judgment of rating agencies analysts.Results from the baseline regression, relating bank soundness measured by the Z-score to the degree of compliance with the BCPs. In the sample including all countries, the Zscore is higher, indicating a sounder bank, for banks with lower operating costs in countries with higher GDP per capita. Also, non-commercial banks tend to have higher Z-scores, while the other control variables are not significant. The coefficient of the BCP compliance index is positive but not significant.If they exclude Japanese banks, which account for over 20 percent of the sample, the fit of the model improves markedly (the R-squared increases from 10 percent to 19 percent) and t he coefficients of many regressors change substantially.12 This suggests that the variables explaining the Z-score of Japanese banks may be somewhat different than for the rest of the sample, perhaps because of the lingering effects of Japans prolonged banking crisis on bank balance sheets. For example, in the sample excluding Japan inflation and the rule of law index are significant (with the expected coefficients), while GDP per capita is not (though the coefficient remains positive).Also, banks with a higher ratio of net loans to assets have higher Z-scores, perhaps because Basel regulation mandating minimum levels of risk-adjustment capital forces these banks to hold more equity. Also, in the sample excluding Japan larger banks have lower Z-scores, likely because they tend to hold less capital than smaller banks. Despite these differences, the coefficient of the BCP compliance index remains insignificantly different from zero also in the sample without Japanese banks. The same i s true when they add to the regression additional macro controls, such as exchange rate appreciation, private credit, or the sovereign rating. In the regressions, they explore how the relationship between BCP compliance and bank soundness changes if they alter the sample composition to include various categories of financial institutions to explore whether BCP compliance may affect soundness for alternative types of banks. All these results refer to the sample excluding Japan, so that the overrepresentation of Japanese banks does not distort the results. The first exercise is to examine the widest sample possible, i.e. one that includes investment banks/securities houses, medium and long-term credit banks, nonbank credit institutions, and specialized government credit institutions. These are institutions that in most countries are unlikely to fall under the perimeter of bank regulation and supervision, so they have excluded them from the baseline sample. When they include them, the sample size grows by 25 percent, but the main regression results are unchanged. In particular, bank soundness is not significantly affected by compliance with the BCPs.If they restrict the sample to commercial banks only, thereby losing about 300 banks compared to the baseline sample, once again they find that regression results remain very close to the baseline. When they focus only on banks rated by Moodys, as in our earlier work, the sample shrinks considerably (to just over 300 banks), and the coefficient of the BCP compliance index becomes positive and significant, albeit only at the 10 percent confidence level. Thus, BCP compliance seems to have some positive effect on the soundness of this specific group of banks. To explore this issue further, they ask whether this result is driven by the fact that rated banks are larger banks. To do so, they consider two alternative samples the first includes the largest 10 percent of banks within each country and the second includes the la rgest 20 percent of banks in the entire sample. In both cases, the BCP compliance index has an insignificant coefficient, as in the baseline sample.The BCP compliance index is the weighted sum of compliance scores for several individual chapters of the Core Principles. Could it be that, even though overall compliance does not seem to matter for bank soundness, some aspects of the Core Principles might be relevant? In fact, it may be possible that the overall index is not significant because of offsetting effects of its different components. In fact, in our previous study of Moodys ratings, they found that, although overall compliance did not seem to matter, higher financial strength ratings were associated with better compliance with principles related to information provision to supervisors.They address this question by re-running the baseline regressions breaking down the compliance index into seven components, based on the standard grouping of principles used by the Basel Committ ee. An important caveat is that compliance scores are fairly strongly correlated, which may make it difficult to disentangle the effect of one set of principles from the others. They replicate the regression for different samples of banks to investigate the robustness of the results. There is only one component of the compliance index that has a fairly robust relationship with bank Z-scores, and that is compliance with Chapter 2 of the BCP, i.e. principles having to do with supervisors powers to regulate bank licensing and structure. Interestingly, this component of the index is negatively correlated with bank soundness, so that banks in countries were regulators have better defined powers to give out licenses and regulate bank activities tend to be riskier. This result holds in all the samples except those including only the largest banks. This finding supports the contention that supervisory systems that tend to empower supervisors do not work well (Barth, Caprio, and Levine, 2001 , 2004, 2006).So far, they have considered individual bank risk. In principle, bank supervision and regulation should be primarily concerned with systemic risk, rather than individual bank risk, although in practice it is not always easy to make this distinction. Could it be that BCP compliance, while not relevant to individual bank soundness, is important to ensure the stability of system as a whole? To address this question, it would be ideal to test whether BCP compliance reduces the probability of a financial crisis. However, since crises are rare events, this type of test requires a panel of data since they have BCP compliance assessments only at a point in time, they are restricted to cross-sectional data. Nonetheless, to explore this question they compute a rough measure of systemic soundness as the aggregate equivalent of the individual bank Z-score. More specifically, they aggregate profits and equity of all the banks in the country (for which they have data), they compute the standard deviation of aggregate profits, and then they compute an aggregate Z-score. This measure tells us by how many standard deviations banking system profits must fall to exhaust all the capital in the banking system. They then regress this measure on the BCP compliance score and a number of macroeconomic control variables.Their measure of systemic soundness is correlated with the macro variables as one might expect higher growth, low inflation, low inflation volatility, appreciation of the currency, favorable sovereign ratings are all significantly associated with higher values of the aggregate Z-score. Once again, though, the BCP compliance index does not seem to be a significant determinant of banking system soundness. Though it is positive, the coefficient of the BCP index is small and not statistically significant in any specification.RemarksWhile the causes and consequences of the recent financial crisis will continue to be debated for years to come, there is emerging consensus that the crisis has revealed significant weaknesses in the regulatory and supervisory system. Resulting calls for reform have led to numerous proposals and policymakers in many countries are hard at work to upgrade their regulatory frameworks. This paper seeks to inform the on-going reform process by providing an analysis of how existing regulations and their application are associated with bank soundness. Specifically, they study whether compliance with Basel Core Principles for effective banking supervision (BCPs) is associated with lower bank risk, as measured Z-scores. They find no evidence of a robust statistical relationship linking better compliance with BCPs and improved bank soundness. The analysis of aggregate Z-scores to capture systemic stability issues yields similarly insignificant results. If anything, they find that compliance with a specific group of principles, those giving supervisors powers to regulate bank licensing and structure is associated with ris kier banks, potentially suggesting that such powers may be misused in practice. While our results may reflect the difficulty of capturing bank risk using accounting measures, or the inability of assessors to carry out evaluations that are comparable across countries, nevertheless they raise questions about the relevance of the Basel Core Principles, the current emphasis on these principles as key to effective supervision, and the wisdom of carrying out costly periodic compliance reviews of BCP implementation in the IMF/World Bank Financial Sector Assessment Programs.