Contents of Volume 3, Number 2

December 2007

An Interval Weighting Assignment Model for Credit Analysis

C.A. Bana e Costa, J. Carlos Lourenço, J. Oliveira Soares

Abstract: This paper revisits the problem of building a multicriteria hierarchical additive model for credit analysis. The precise objective of the model is to assist a commercial bank in the analysis and assignment of credit applications (specifically corresponding to medium and long-term corporate loans) to different risk categories. Two basic forms of the model are discussed: one is based on fixed criteria weights, while the other allows for intervals of variation for the weights, from which different assignment rules are derived. The paper shows that the flexibility of the interval weighting model may be an important contribution for the success of its implementation within financial institutions.

IAS 39 and Supervision of Bank’s Capital Adequacy

A. Tsamis, A. Kaperonis

Abstract: The paper examines the reasons that led to the direct involvement of bank supervision authorities in the process of consultation concerning implementation of international accounting standards and also attempts a comparative evaluation of the different views and positions maintained by the International Accounting Standards Board and the Basel Committee on Banking Supervision during the discussions concerning the amendments to IAS 39, Financial Instruments: Recognition and Measurement. Special focus is given to the concerns of the Basel Committee about the possible implications of the proposed amendments on the procyclicality of the banks’ solvency ratio, through the perspective of modern macroeconomic reality and the structural changes in the function of international money markets. The basic position of the article is that the involvement of the prudential supervision authorities in the harmonization of accounting standards stems directly from the Basle II Accord on bank capital adequacy and its options available to banks concerning the use, under Pillar 1, of their internal ratings systems for measuring credit risk and the related capital requirements. Given that bank internal risk measurement systems differ, the use by banks of the above options will inevitably violate the level playing field principle in capital adequacy supervision. This development, however, is counteracted by Pillar 3 of the same Accord that requires each bank to provide specific disclosures about risk management and capital measurement thus, rendering financial disclosures and thereby market discipline a supplementary mechanism of capital adequacy supervision process and a means to ensure that banks maintain the same levels of capital as a cushion against potential losses arising from equivalent risk exposures. Concerning the procyclicality issue, we support the view that the excess liquidity injected in capital markets, in the last 5 years, by the recycling of external trade surpluses of emerging Asian countries, especially China, and the means provided by the exponential growth of credit derivatives in transferring credit risk off bank balance sheets, tend to lessen the relative importance of the procyclicality factor in the overall dynamics shaping banks’ lending variables and capital ratios, compared with the past. In particular, we claim that the sustained maintenance of interest rates at historically low levels, due to the excess liquidity created by the aforementioned recycling of Asian surpluses, and the potential provided by credit derivatives for the diffusion of large corporate credit risks from bank balance sheets to a wider circle of institutional investors and unregulated funds (i.e. hedge funds), have helped create a favorable risk outlook for the banking system and the quality of its loan portfolios, reflected on persistently downward trends in credit spreads despite the economic uncertainty associated with intense international competition, dramatic shifts in the division of labor and growing financial imbalances

Seasonality in Stock Returns: Evidence from New Emerging Equity Markets in the Middle East Region

B. Abu Zarour

Abstract: This paper examines three calendar effects (day of the week effect, month of the year effect, and the Halloween indicator) for nine emerging markets in the Middle East region, using daily data of the general indices during the period 1992-2005. In accordance with similar studies substantial evidence of “day of the week”, “monthly”, and “half yearly” effects are found. However, the style of the first two anomalies is not consistent with the existing literature. For instance, for most markets, the first trading day of the week was found to be positive and significantly different from the rest of the week’s returns, while several months of the year were found to be significantly positive. One explanation could be given on the basis of the surplus liquidity between investors, especially Gulf Cooperation Council investors, as a result of the sharp rise in oil prices.

Dynamics on Athens Stock Exchange: Implications for Sector Portfolio Diversification

M. Giannopoulos, P. Giannopoulos, Th. Patra, V. Thomas

Abstract: The present paper focuses on the behaviour of the Athens Stock Exchange (ASE) over the 1989-2003 period, and examines the presence of long-term and short-term dynamics among the major indices. Cointegration tests based on the Engle-Granger, Phillips-Hansen, Error Correction Models and VAR-based models examine the existence of long-term relationships in the ASE. In addition, Granger non-causality tests examine the presence of short-term dynamics. The empirical evidence presented suggests the absence of long-term relationships among the major ASE sector indices. This empirical evidence contradicts what is generally expected but is in favour of the weak-form of market efficiency in the ASE. In addition, the absence of long-term dynamics implies that investors with long-term investment horizons could benefit from investments across all the sectors in the ASE. This result has important implications for sector portfolio diversification for institutional investors and pension fund managers.