Risk management with a duration gap approach in dual banking systems /
Risk management is a worldwide phenomenon that is continuously evolving. The Islamic commercial banks (ICBs) deal with a variety of peculiar risks in their risk management process. One of them is benchmark rate risk or rate of return risk (ROR) in the banking book, which is addressed in Pillar 2 und...
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| Main Author: | |
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| Format: | Thesis |
| Language: | English |
| Published: |
Kuala Lumpur :
IIUM Institute of Islamic Banking and Finance, International Islamic University Malaysia,
2017
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| Subjects: | |
| Online Access: | Click here to view 1st 24 pages of the thesis. Members can view fulltext at the specified PCs in the library. |
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| Summary: | Risk management is a worldwide phenomenon that is continuously evolving. The Islamic commercial banks (ICBs) deal with a variety of peculiar risks in their risk management process. One of them is benchmark rate risk or rate of return risk (ROR) in the banking book, which is addressed in Pillar 2 under the Basel Committee on Banking Supervision (BCBS) and the Islamic Financial Services Board (IFSB). Benchmark rate risk, if not properly managed, has the potential to inflict substantial danger and harm on an ICB's earnings, capital base, and funding cost. Consequently, the IFSB, under Pillar 2 has outlined the importance of the assessment of ROR risk through duration gap approach, for a standardised benchmark rate shock. However, existing studies on risk management practices reveal significant gaps, and as such, there are no studies which specifically highlight the assessment of ROR risk, under Pillar 2, for ICBs, through duration gap model. The purpose of the study is to undertake a comparative analysis of dual banking systems to assess asset-liability management practices with the duration gaps in ICBs and conventional commercial banks (CCBs), in the context of fluctuating benchmark rates. Based on this purpose, the study develops four specific objectives, which are then transformed into six research questions. These research questions are examined through various quantitative techniques such as Duration Gap Model, Panel Generalized Method of Moments (GMM), supported by Fixed Effect and Random Effect Regression, with a sample of 100 commercial banks (50 ICBs and 50 CCBs) and 10 non-ICBs (i.e. Islamic investment companies and banks), from 13 countries, for the period 2005-2015. The study provides empirical evidence regarding the estimation and determination of duration gap. The study found that ICBs are exposed to increasing ROR risk due to their larger duration gaps and severe liquidity mismatches. The ICBs not only have a tendency of higher duration gaps compared to CCBs, they also have more cross-sectional and times-series variations. The study also found significant regional and cross-sectoral differences in terms of duration gap and ALM. In terms of NW risk for increasing benchmark rate, the study found that the ICBs are 2.15 times more vulnerable compared to the CCBs, and a significant number of ICBs failed the stress test of the 20% threshold prescribed by the IFSB. After employing the parametric and robustness tests, the results of the study are found to be statistically significant. The study makes profound contributions to the literature and suggests various policy recommendations for the ICBs and their supervisors. These recommendations include, inter alia, diversification of assets and liabilities, review of growing maturity mismatches and business model, consistent maturity analysis breakdown, Sharī'ah-compliant hedging tools, broadening the risk management tools, delinking the use of the benchmark rate, regulations on liquidity mismatches and duration gaps, consolidated and risk-based supervision, and management of the ROR risk under Pillar 2 of the BCBS and the IFSB. Key words: ALM, Duration Gap, NW risk, ICAAP, ICBs, Pillar 2, ROR, GMM |
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| Physical Description: | xx, 373 leaves : illustrations ; 30cm. |
| Bibliography: | Includes bibliographical references (leaves 303-323). |