The Debt Delusion: Evolution and Management of Financial Risk

In the twenty-first century, corporations delude themselves that their operations are capitalist. In fact the high levels of debt, based on dubious assets reflect.
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Institutions are classified also to rated institutions and unrated institutions.

The Debt Delusion

Exposures to other multilateral banks are treated in the same manner as exposures to institutions. Two classes are distinguished. Two main distinctions exist, those for residential property and those secured by commercial immovable property. Equity exposures are considered non-dept exposures conveying a subordinated, residual claim on the assets or income of the issuer, or debt exposures and other securities having the same economic substance.

Several risk weight are applied in accordance to asset item. Elements of every class exposure are assigned by a risk weight.

As a consequence new classes of exposures result; these classes are no more designed according to the object of exposures or client; they are designed according to the risk weight. These RWE are the follows regardless the exposure class they belong: Thus we have for every RWE an amount. If we add the amounts included to every RWE we obtain the total exposures of the bank. It is the same total considering the class exposures described in the previous paragraph.

Evolution and Management of Financial Risk

Thus we can have a picture of the risk undertaken for every bank and its comportment during the examined period. If we multiply every RWE ex. This ratio determines the amount of weighted asset, the denominator of the capital adequacy ratio.


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For a real asset of million Euros Meuros , On a next step, we are interested in the evolution of the risk weighted exposures to the total exposures of the bank during the examined period; whether exposures with less risk take a bigger ratio to the total exposures against exposures with more risk or the contrary. The investigation was considered on two levels: On the consolidated level, we considered the average, not the total, because we did not have data for all banks for all the years. In particular, data for the National Bank of Greece are available only for years , and The time period examined is from to This period is the core period of the Greek crisis after the memorandum of understanding that Greece signed with its lenders.

We can say that Greek banks concentrated their loans on financing the Greek public debt and deficit, buying Greek government bonds and treasury bills. Ratio of exposures by risk weighting to the total exposures: The average does not characterize every bank separately. Two banks, Alpha Bank and Piraeus Bank presented the higher ratio throughout the examined period, with the average of the period being A different evolution is observed between the two banks characterized by a decrease in the ratio, during the last two years in the case of Piraeus Bank, contrary to an increase in the case of Alpha Bank, during the last three years.

Ratio of weighted assets to real asset: Part of weighted assets to real asset: A main question is whether the evolution on a consolidated basis reflects the evolution for every bank separately or, on the contrary, differences appear A. Further, a main issue could be the reasons for the evolution and to what extent these reasons are the same for all banks. Importance of risk weighting exposures: Considerable differences appear between banks, in some cases showing a different credit policy during the crisis period. Together, these two categories of exposures are 30 units higher than those in the consolidated average, Table 4.

During the examined period non-homogenous comportment appeared between banks. Two of them concentrate more exposures to high risk, one concentrates more exposures to low risk and another has a more balanced comportment. On the basis of every bank, two parameters are examined: Importance of exposures by risk weighting and 2. Importance of exposures by asset category. The differences in the evolution of the first parameter can be explained by the evolution of the second parameter. In the same period, the bank suffers from the consequences of the crisis in the economy, especially through the non-paid loans, registered as exposures in default, which increased considerably during the examined period, especially in and , Table 6.

Part of weighted class on total exposure: Part of asset categories on total exposure: More than any other bank, Eurobank based its placements on exposures with very limited or zero risk. This fall results from the continuous decrease of loans to central government and central bank, Table 8.


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    7. A similar evolution is observed for high risk weighting loans, which fell in the period , due to the fall of corporate loans of the bank, with the exception of , Eurobank, During the examined period, Eurobank remains a bank focusing on non-risk placements, especially of zero risk, despite their relative fall during the examined period. This evolution is reflected in the first case by the growth of the exposures in default and in the second case by the growth of loans of zero risk to other financial institutions and central governments or central banks, Piraeus Bank, , , and , as well as to international organizations, Table The structure of placements of the bank seems closer to that of Alpha Bank.

    On the other hand, the bank suffers as a result of the non-paid loans, which have a notable growth during the crisis. In the case of the National Bank of Greece, data on risk weighting exposures are limited to the period , while they are extended to the period on exposures by asset category. Financial crisis has accentuated the process of the risk management strategies and the regulatory disclosures according to Basel II requirements. Greek banks face serious problems related to the economic crisis that have arisen due to the exposure in default and the items of high risk not being guaranteed.

    This paper aimed to examine the structure of exposures according to the risk weighting on a consolidated basis and for every bank separately. It also aimed to define whether the evolution of this structure indicates a different credit policy during the crisis. The first case is related to exposures to Central Government and Central banks while the second is mainly related to corporate customers not guaranteed by mortgages or any other guarantee. The exposures influence the need for capital.

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    In the second case, however, the whole amount is calculated to the denominator of the ratio; as a consequence, the capital adequacy ratio is lower; this can create the need for additional capital for the bank. One can observe, nevertheless, that in the case of haircut of Greek bonds, banks suffered losses that influenced their results and therefore their capital, which decreased.

    As a consequence, the capital adequacy ratio becomes lower because of the smaller nominator.

    Two banks, Eurobank and the National Bank of Greece, followed a credit policy with no serious risk, based on zero or low risk placements, such as government bonds and treasury bills. During the period under review, a mixed picture emerges. As a consequences of the recession of Greek economy, the non-paid loans NPL ratio was It has to be noticed that high NPL ratio affected those loans as well; it was The decline in loans to government bonds, but also the problem of non-paid loans, characterizes the evolution of the policy of the two banks, Alpha Bank and Piraeus Bank, during the period.

    Eurobank remains a bank focusing on non-risk placements, especially risk-free, despite the decrease in the importance of these exposures. No significant changes are observed in the case of the policies of the National Bank of Greece, although the bank is suffering from the decline in retail loans and the development of risk exposures.

    These findings differentiate our conclusions than those found by other authors because, in the case of Greek banks, we introduce the effect on the weighted assets. We have concentrated with higher resolution on the structure of the loans and their impact, but also on the policy of the banks during the crisis. Bank Competition and Financial Stability: Evidence from the Financial Crisis.

    Journal of Financial and Quantitative Analysis, 51, Disclosure Pillar III for In Greek [ 4 ] Alpha Bank In Greek [ 5 ] Alpha Bank In Greek [ 6 ] Alpha Bank In Greek [ 7 ] Alpha Bank In Greek [ 8 ] Alpha Bank Bank Exposures and Sovereign Stress Transmission. Bank Risk during the Financial Crisis: International Journal of Economics and Finance, 7, A Brief History of the Basel Committee. Review of the Greek Financial System. Lending Relationships and the Effect of Bank Distress: Journal of Financial and Quantitative Analysis, 50, The Intertwining of Financialisation and Financial Instability pp.

    In Greek [ 19 ] Eurobank In Greek [ 20 ] Eurobank In Greek [ 21 ] Eurobank In Greek [ 22 ] Eurobank In Greek [ 23 ] Eurobank To maintain systemic stability and prevent contagion, more is required than merely ensuring the orderly operation of individual financial institutions. Different regulators—including monetary authorities—must cooperate in order to achieve better, but not necessarily more, regulation.

    Related Proposals

    Better regulation should aim at identifying overleveraging and emerging vulnerabilities, ensuring the adequate pricing of risk, and promoting better incentives for prudent behavior. In pursuing these targets, regulation will require changes to institutional structures, the content of rules, and especially the structures of supervisory agencies. The GFC and the ensuing regulatory scrutiny has increased the demands on financial institutions to rethink their current operating models to gain competitive advantages and drive value for the organisation.

    Some of the key outcomes from the GFC are, namely, market liquidity assumptions of banks need to be revisited; macroeconomic and systemic risk monitoring and assessments will gain greater importance; risk interdependencies need to be considered across risk types, entities and jurisdictions; greater granularity required of risk data and aggregation for large banking groups; risk management needs greater integration to strategic decision processes; and increased demand on risk IT and infrastructure due to evolving regulations.

    The financial services landscape today comprises of, namely, increased regulation and intrusiveness by regulators and governments on the financial services sectors; stock markets around the globe experiencing increased volatility and loss of wealth are still being observed; consumer confidence in financial services has fallen and a general backlash at financial services companies is causing a public relations debacle for Wall Street; firms need to be able to manage the increasing cost of doing business, without sacrificing the customer experience; much of the cause of the financial crisis has been due to an unwillingness of banks to lend to each other, which froze liquidity in the market; and many financial institutions are still reeling from the fallout of the financial crisis, and will continue to do so in the short to medium term.

    Moving forward, it is important for greater linkages between the real and financial economies. The challenge for governments and regulators is to bring the two closer.

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    Effective regulation and supervision supported by strong macroeconomic policies and strategies are essential in linking the two together. The Basel III requirements intend to strengthen the resilience and soundness of the banking system against systemic risks, which have implications on banks and risk management. This regulation has inadvertently caused the cost of capital and liquidity to increase. In light of this New Norm, risk management in financial institutions needs to evolve and focus on the following key areas, namely:.

    The challenge is to identify potential sources of vulnerability and undertake appropriate remedial measures in order to further reduce and possibly eliminate the potential of the next major financial crisis. For any individual country, it is important to maintain macroeconomic and financial discipline given the swiftness with which markets respond to economic and financial developments. However, strong economic fundamentals, while necessary, are not sufficient conditions for the prevention of such crisis.

    The International Financial System as designed in is broken. The present system is a non-system, because the world has shifted to a multi-polar power structure, rather than a uni-polar system where G-7 can dictate standards and structures. Although G20 united in action in to stem the Global Financial Crisis GFC , post-crisis reforms on regulation have become controversial and painfully slow, as different countries and markets. Banks which operate across borders on a significant scale should be required to run local operations as subsidiaries.

    In principle international capital flows could increase global economic efficiency, and foster development, directing capital to its most productive use. In practice capital flows come in different forms with different economic value.