Stress Testing of Four Lebanese Banks
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Date
2011
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Abstract
Banks are the pillars of the financial system. If one bank fails, the base is threatened and a domino effect might be provoked. Moreover, the failure could expand outside the borders of the country due to the globalization and liberalization of the financial markets. Therefore, the existence of a single regime, the Basel Accord, to safeguard the financial system was crucial.
One of the purposes of this thesis is to shed light on the rules and regulations set by the Basel Committee on Banking Supervision.
The regular updates of the rules and the regulations reflect the importance of this regime on the economy. The base of these regulations originated by Basel I. the latter was replaced by Basel II, and today, there are serious discussions about Basel III which aims at introducing better risk management approaches.
The evolution of these regulations was essential to the global economy. The common international standards helped the banks all over the world to operate towards the same goal, which is complying with the minimum standards set by the Basel Committee on Banking Supervision.
From the first day of the evolution of the international standards, the Lebanese banks proceeded in taking measures to apply the minimum required standards. The Lebanese banks' financial ratios show that they essentially comply with the minimum required standards.
However, a question perplexed of how the performance of important ratios will be, if a sudden unexpected situation occurs in Lebanon. In other words, will the Lebanese banks be ready to withstand future possible unexpected crashes?
To answer this question, stress testing is performed on a sample of four Lebanese banks. Stress testing, the main objective of this thesis, is one of the requirements of Basel rules and regulations. The stress testing is performed by adopting three stress tests. The first is by looking for the effects of increased asset risk for which banks have control. The second is by studying the effects of unexpected adverse stock movements. And the last is by adopting a standardized measure which is Value at Risk, as recommended by Basel II.
These three stress tests are based on relatively recent contribution of option pricing to valuing the equity of a financial institution.
The results of the stress tests revealed that the sampled Lebanese banks are capable of absorbing unexpected losses for a certain period of time. Additionally, the thesis highlights the importance of the equity of a bank to protect the bank's solvency against the risk of possible losses.
The first part of the thesis covers the evolution of the Basel rules and regulations. The second part covers these rules and regulations implemented within the Lebanese banking sector. The third part presents the adopted approaches and the results of performing stress tests on a sample of Lebanese banks under different scenarios.
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Nadjarian, A. (2011). Stress Testing of Four Lebanese Banks (MBA thesis, Haigazian University)