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This paper examines the move towards risk-based supervision of pension institutions in Denmark. Although Denmark has not adopted a comprehensive model to assess risk it has developed a number of building blocks which it uses for risk-based assessment. The motivations for improving risk assessment include a desire to identify emerging problems, and concerns about the solvency of pension institutions. In Denmark there is extensive use of guaranteed minimum returns in both the accumulation and payout phases which create substantial obligations on pension institutions, and focus attention on the integrity and solvency of the institutions which provide them. In conjunction with freeing up investment restrictions and moving towards market valuation of assets, the supervisor has introduced a 'traffic light' stress test model which calculates the effect of several market scenarios - the red test which is the more plausible and the yellow test which is possible but less likely. In addition to the use of the traffic light system, there has been a growing emphasis on the adequacy of internal risk control systems and greater reliance on market discipline. Pension institutions have sought to reduce their exposure to market volatility by better matching of assets and liabilities. There is a much better understanding of the risks inherent in the pension institutions' portfolios, and there has been a substantial increase in the use of hedging instruments.

Banks and Banking Reform --- Debt Markets --- Emerging Markets --- Finance and Financial Sector Development --- Financial Systems --- Insurance and Risk Mitigation --- Investment restrictions --- Market discipline --- Pension --- Pension funds --- Portfolios --- Private Sector Development --- Returns --- Risk control --- Solvency --- Valuation

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When faced with financial crises, authorities worldwide tend to respond aggressively with public support measures. Given the adverse impact on moral hazard and market discipline, support measures involving public money are ideally limited to crisis situations involving systemic risk: a disturbance in the financial system that is serious enough to affect the real economy. This note sets out the main characteristics of a systemic risk assessment framework: a simple analytical framework that can be used by authorities with financial crisis management responsibilities in times of financial crisis to assess the extent to which that particular crisis situation poses systemic risk.

Access to information --- Bankruptcy and Resolution of Financial Distress --- Banks & Banking Reform --- Central banks --- Debt Markets --- Deposit --- Deposit insurance --- Depositors --- Emerging Markets --- Finance and Financial Sector Development --- Financial crises --- Financial crisis --- Financial infrastructure --- Financial institutions --- Financial Intermediation --- Financial shock --- Financial support --- Financial system --- Financial Systems --- International Bank --- Liquidity --- Market discipline --- Moral hazard --- Private Sector Development --- Public funds --- Solvency --- Supervisory agencies

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This paper analyzes the cyclical effects of bank capital requirements in a simple model with credit market imperfections. Lending rates are set as a premium over the cost of borrowing from the central bank, with the premium itself depending on firms' effective collateral. Basel I- and Basel II-type regulatory regimes are defined and a capital channel is introduced through a signaling effect of capital buffers on the cost of bank deposits. The macroeconomic effects of various shocks (a drop in output, an increase in the refinance rate, and a rise in the capital adequacy ratio) are analyzed, under both binding and nonbinding capital requirements. Factors affecting the procyclicality of each regime (defined in terms of the behavior of the risk premium) are also identified and policy implications are discussed.

Access to Finance --- Bank capital --- Banks and Banking Reform --- Borrowing --- Capital adequacy --- Capital markets --- Capital regulation --- Capital requirements --- Contract enforcement --- Currencies and Exchange Rates --- Debt Markets --- Deposits --- Economic Theory and Research --- Finance and Financial Sector Development --- Financial markets --- Financial stability --- Housing --- Inadequate disclosure --- Interest rates --- Macroeconomics and Economic Growth --- Market discipline --- Prudential regulations --- Regulatory framework --- Writedowns

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The structures and processes established within an institution offering Islamic financial Services (IIFS) for monitoring and evaluating Shariah compliance rely essentially on arrangements internal to the firm. By being incorporated in the institutional structure, a Shariah supervisory board (SSB) has the advantage of being close to the market. Competent, independent, and empowered to approve new Shariah-conforming instruments, an SSB can enable innovation likely to emerge within the institution. The paper reviews the issues and options facing current arrangements for ensuring Shariah compliance by IIFS. It suggests a framework that draws on internal and external arrangements to the firm and emphasizes market discipline. In issuing its fatwas, an SSB could be guided by standardized contracts and practices that could be harmonized by a self-regulatory professionals' association. A framework with the suggested internal and external features could ensure adequate consistency of interpretation and enhance the enforceability of contracts before civil courts. The review of transactions would mainly be entrusted to internal review units, which would collaborate with external auditors responsible for issuing an annual opinion on whether the institution's activities has met its Shariah requirements. This process would be sustained by reputable entities such as rating agencies, stock markets, financial media, and researchers who would channel signals to market players. This framework would enhance public understanding of the requirements of Shariah and lead to more effective options available to stakeholders to achieve improvements in Islamic financial services.

Accounting --- Auditing --- Bank --- Banking --- Banking Supervision --- Banks --- Banks and Banking Reform --- Capital Markets --- Corporate Law --- Debt Markets --- E-Business --- Emerging Markets --- Energy --- External Auditors --- Finance --- Finance and Financial Sector Development --- Financial Institutions --- Financial Literacy --- Financial Markets --- Financial Services --- Governance --- Industry --- Insurance --- Interest --- Islamic Finance --- Law and Development --- Market Discipline --- Markets --- Private Sector Development --- Public Sector Corruption and Anticorruption Measures --- Rating Agencies --- Risk

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February 1999 - A study of the banking industries of Argentina, Chile, and Mexico in the 1980s and 1990s finds that across countries and across deposit insurance schemes, market discipline exists even among small insured depositors - who punish risky banks by withdrawing their deposits. Bank fundamentals are at least as important as other factors affecting deposit behavior. Peria and Schmukler examine the banking industries of Argentina, Chile, and Mexico to see if market discipline existed there in the 1980s and 1990s. Using a set of bank panel data, they test for the presence of market discipline by studying whether depositors punish risky banks by withdrawing their deposits. They find that across countries and across deposit insurance schemes, market discipline exists even among small insured depositors-who punish risky banks by withdrawing their deposits. Standardized coefficients and variance decomposition of deposits indicate that bank fundamentals are at least as important as other factors affecting deposits. GMM estimates confirm that the results are robust to the potential endo-geneity of bank fundamentals. This paper-a joint product of Finance, Development Research Group and the Office of the Chief Economist, Latin America and Carribean Region-is part of a larger effort in the Bank to study banking issues affecting developing countries. The study was funded by the LAC Regional Studies Program and by the Bank's Research Support Budget under research project Deposit Insurance Design and Use (RPO 682-90). The authors may be contacted at mmartinezperia@worldbank.org or sschmukler@worldbank.org.

Bank --- Bank Deposits --- Bank Risk --- Banking --- Banking Crises --- Banking Sector --- Banks --- Banks and Banking Reform --- Debt Markets --- Deposit Insurance --- Deposit Insurance Schemes --- Deposits --- Finance and Financial Sector Development --- Financial Intermediation --- Financial Literacy --- Guarantees --- Industry --- Interest --- Interest Rates --- Loans --- Market Discipline --- Monetary Policies --- Moral Hazard --- Prudential Regulations --- Savings