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Finance
The IUP Journal of Financial Risk Management

March '09
Focus

The three papers in this issue focus on three different types of financial risks - exchange rate risk, mortality risk and default risk.
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Capital Allocation to Meet Mortality Risks for Life Annuities
50
Basel II Capital Requirement Sensitivity to the Definition of Default
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Measuring Efficiency for Volatile Exposure to Exchange Rate Risk Base Supported by Fuzzy DEA Approach

- - Hsien-Chang Kuo and Lie-Huey Wang

This study uses the Fuzzy Data Envelopment Analysis (DEA) to measure the efficiency of the Multinational Corporations (MNCs) of the Taiwan Information Technology (IT) industry, in the face of volatile exposure to exchange rate risk. The Integrated Chip (IC) industry is represented by 48 firms and the Thin Firm Transistor-Liquid Crystal Display (TFT-LCD) industry is represented by 55 firms. The results show that: 10 firms each in both TFT-LCD and IC industries are efficient, while 8 firms in the IC industry and 12 firms in the TFT-LCD industry are relatively inefficient. The remaining 30 firms in the IC industry and 33 firms in the TFT-LCD industry are inefficient. The results also reveal that both large-sized MNCs with a high degree of internationalization and small-sized MNCs with a low degree of internationalization tend to be relatively efficient.

© 2009 Hsien-Chang Kuo and Lie-Huey Wang. All Rights Reserved.

Capital Allocation to Meet Mortality Risks for Life Annuities

- - Annamaria Olivieri and Ermanno Pitacco

This paper investigates the rules for assessing the capital required by a life annuity portfolio to meet the mortality risks, the longevity risk in particular. Risks other than mortality are disregarded. Rules which could be adopted in the internal models have been discussed. Approaches based on a deferral and matching or an asset and liability logic are further developed in this paper, in which rules that could be adopted in internal models have been discussed. For practical purpose, this approach could represent a good compromise, provided that the relevant assumptions are properly disclosed.

© 2009 IUP. All Rights Reserved.
Article Price : Rs.50

Basel II Capital Requirement Sensitivity to the Definition of Default

- - Jirí Witzany

The paper is motivated by a disturbing observation according to which the outcome of the regulatory formula significantly depends on the definition of default used to measure the Probability of Default (PD) and the Loss Given Default (LGD) parameters. Basel II regulatory capital should estimate, with certain probability level, the unexpected credit losses on banking portfolios, and so it should not depend on a particular definition of default that does not change real, historical and expected losses. This paper provides an explanation of the phenomenon based on the Merton default model and tests it using a Monte Carlo simulation. Moreover, it develops an analytical method to model LGD unexpected risk and to combine it with the PD unexpected risk. The developed formula and, in particular, its simplified version could be used to improve the current regulatory formula. The analysis, at the same time, provides a different insight into the issue of regulatory capital sensitivity to the definition of default. Finally, the paper performs a structural model-based simulation to test the hypothesis according to which scoring functions developed with a soft definition of default have weaker predictive power than the ones developed with a hard definition of default.

© 2009 IUP. All Rights Reserved.
Article Price : Rs.50

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Automated Teller Machines (ATMs): The Changing Face of Banking in India

Bank Management
Information and communication technology has changed the way in which banks provide services to its customers. These days the customers are able to perform their routine banking transactions without even entering the bank premises. ATM is one such development in recent years, which provides remote banking services all over the world, including India. This paper analyzes the development of this self-service banking in India based on the secondary data.

The Information and Communication Technology (ICT) is playing a very important role in the progress and advancement in almost all walks of life. The deregulated environment has provided an opportunity to restructure the means and methods of delivery of services in many areas, including the banking sector. The ICT has been a focused issue in the past two decades in Indian banking. In fact, ICTs are enabling the banks to change the way in which they are functioning. Improved customer service has become very important for the very survival and growth of banking sector in the reforms era. The technological advancements, deregulations, and intense competition due to the entry of private sector and foreign banks have altered the face of banking from one of mere intermediation to one of provider of quick, efficient and customer-friendly services. With the introduction and adoption of ICT in the banking sector, the customers are fast moving away from the traditional branch banking system to the convenient and comfort of virtual banking. The most important virtual banking services are phone banking, mobile banking, Internet banking and ATM banking. These electronic channels have enhanced the delivery of banking services accurately and efficiently to the customers. The ATMs are an important part of a bank’s alternative channel to reach the customers, to showcase products and services and to create brand awareness. This is reflected in the increase in the number of ATMs all over the world. ATM is one of the most widely used remote banking services all over the world, including India. This paper analyzes the growth of ATMs of different bank groups in India.
International Scenario

If ATMs are largely available over geographically dispersed areas, the benefit from using an ATM will increase as customers will be able to access their bank accounts from any geographic location. This would imply that the value of an ATM network increases with the number of available ATM locations, and the value of a bank network to a customer will be determined in part by the final network size of the banking system. The statistical information on the growth of branches and ATM network in select countries.

Indian Scenario

The financial services industry in India has witnessed a phenomenal growth, diversification and specialization since the initiation of financial sector reforms in 1991. Greater customer orientation is the only way to retain customer loyalty and withstand competition in the liberalized world. In a market-driven strategy of development, customer preference is of paramount importance in any economy. Gone are the days when customers used to come to the doorsteps of banks. Now the banks are required to chase the customers; only those banks which are customercentric and extremely focused on the needs of their clients can succeed in their business today.

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