الفهرس 
Basel Accords and its impacts on Credit Risk ManagementOnly 14 pages are availabe for public view
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Abstract
Banks are among the important financial institutions in the economy of every country, as they are playing an important role in both the economy and society. Financial services are provided efficiently by banks to gain profit. The main role of the banks is making the community’s deposits and investments surplus used by lending it to borrowers for various investment purposes. The main role played by banks is the asset transformation.
The main function of banks is to attract funds and to resell or invest it, thus, banks have to take the risk as investing cannot be done without risks. Additionally, banks are required to gain margins, so banks must make a tradeoff between risk and profit, as business grows mainly through taking the risk, therefore, the greater the risk, the higher the profit.
Banks manage their risks for maximizing their profitability and gaining a competitive advantage. Banks have to manage different risks, and risk management requires banks to deal with their risks through different processes including identifying, understanding, measuring, and managing. There are three main sources of risk identified by Basel II Capital Accord, which are: credit risk, market risk, and the operational risk.
Credit risk is among the critical risks faced by banks. A loss may occur to a bank due to the default of a small number of customers, as in terms of potential losses, the credit risk is considered among the most explicit risks by the nature of banks’ activity. Credit risk management is considered as a fundamental issue in the process of financial risk management. Banking and financial industry pay greater attention to the Credit risk analysis and risk assessment, due to the financial turmoil and the changes in the regulations introduced by Basel II.
Banks are required to have the ability to distinguish between good customers and bad ones to be a successful player in the credit industry and banking. Both the predicting and the mitigating of default events are essential for appropriate credit risk management, which can be solved by employing suitable quantitative models, without depending on human expert for judgments. The implementation of the suitable credit risk model is directly related to the optimal allocation of capital resources and it has driven the interest of both academic and industrial communities. The main target of Basel Capital Accords is to provide an illustration of how credit risk management techniques are transformed into capital adequacy for banks.
There are many problems found in the Basel II Accord especially in credit risk management. Basel II has been criticized for being procyclical, as banks are required to increase their capital during periods of increasing risks. Therefore, banks decrease their lending when capital is scarce, aggravating the financial crisis potentially. In addition to that, the average level of capital required by the Basel II was insufficient. As a result, improvements have been introduced through Basel III in some aspects which claimed for a fundamental contribution to the financial crisis in Basel II. The objective of these reforms is raising the resilience of banks to periods of stress, through enhancing banks’ ability to absorb shocks which may arise from financial or economic stress.
Research Problem
A combination of capital and liquidity standards has introduced by Basel III, aiming to increase the resilience of the financial sector against crisis and stress. Basel III accord combines enhancements of both the micro and the macroprudential level. At the micro level of financial institutions, it adds some improvements, including strengthening the quality and the level of capital. At the macroprudential level, Basel III promotes the greater stability of the financial system by establishing the appropriate capital level to address the procyclicality of the financial system.
Basel III accord has made many contributions to risk management in the banking industry; however, there are still some problems in implementing these regulations. Basel III is supposed to have some negative impacts on banking profitability, in addition to the raising barriers to the entrance which may lead to competition reduction. Large banks seem to benefit from Basel III, while it seems to harm the small ones resulting in monopoly establishing in the banking system. Large banks which can meet the new requirements in Basel III will be more profitable due to the fewer competitors.
National authorities are responsible for the Implementation process of Basel III requirements, especially countercyclical capital buffer activation, within the general guidance from the international agreement. Systematic risk will be limited through different tools, as jurisdictions with effective supervision and the international peer reviews will surely ensure international consistency.
The development of an efficient banking sector is crucial for the growth of the economy, as it is the largest conduit for the domestic savings’ mobilization, the main external capital’s source for firms, and the key player in the payment system. Consequently, the development of an efficient banking sector is essential for the Egyptian banking sector which dominates the financial market and is dominated by public banks.
The CBE has prepared and implemented the Banking Sector Reform Program, through which banks have been restructured, their capital has been raised, and their risk management has been strengthened. It is worth mentioning that the program was mainly fruitful as regards the program of implementing Basel II in the Egyptian banking sector which has ended successfully. The banking reforms introduced by the CBE have prepared Egypt to absorb the shock resulting from the financial crises. Moreover, its financial sector is quite shallow and less connected to the global financial sector. In fact, the better performance that was temporarily recorded against the financial crisis emanated from a shallow financial sector and a relatively low level of foreign trade, not only to sound economic policies.
In order to acquire the knowledge of the impacts of Basel III implementation on credit risk management and banking sector, the researcher addresses the following questions:
1. What are the main risks faced by the banking institutions and what are the main approaches to risk management?
2. What are the points of weakness in Basel II that are blamed for the occurrence of the financial crisis?
3. What are the impacts of the implementation of Basel III Accord on credit risk management?
4. What are the consequences of the implementation of Basel III requirements on the Egyptian banking sector?
5. What are the impacts of both bank-specific variables, and macro variables on the non-performing loans in the Egyptian banking sector?
Research Hypotheses
1. There is a negative impact of Basel III implementation on the Banking sector.
2. There are no negative impacts of Basel III implementation on the Egyptian banking sector and economy.
3. There is no significant relationship between the non-performing loans ratio as the dependent variable and all the independent variables included in the study.
Research Objectives
1. Highlighting the general features of the Basel III Accord and its requirements.
2. Pointing out the consequences of the implementation of the Basel III Accord.
3. Exploring the impacts of the Egyptian banking sector reform program.
4. Assessing the determinants of Non-Performing loans in the Egyptian banking sector.
Research Limitations
Geographic limitations: the study examines the determinants of Non-Performing loans in the Egyptian banking sector.
Time limitations: the study examines the determinants of Non-Performing loans in the Egyptian banking sector in the time period of (2008-2017) on a quarterly basis.
Research Methodology
The researcher followed the deductive approach through the use of historical, descriptive, and empirical analysis tools.
Historical analysis: the researcher has traced the developments in Basel Accords, and credit risk management strategies.
Descriptive analysis: the researcher has described the main changes in the Egyptian banking sector and Basel III requirements.
Empirical analysis: the researcher has used the ARDL model to examine the determinants of the Non-Performing loans ratio in the Egyptian banking sector.
The Research Plan
Chapter 1: Basel accords and its impacts on credit risk management
Section 1: Banking Credit Risk Management.
Section 2: Basel I, II and Credit Risk Management.
Section 3: the general features of Basel III.
Chapter 2: The Egyptian banking sector and the implementation of Basel requirements
Section 1: the Macroeconomic situation of the Egyptian Economy.
Section 2: The Egyptian Banking sector overview.
Section 3: the application of the Basel Accord on the Egyptian Banking. sector.
Chapter 3: The determinants of Non-Performing loans in the Egyptian banking sectors
Section 1: Macroeconomic and institutional determinants of Non-Performing loans.
Section 2: The econometric analysis of NPLs in the Egyptian banking sector.
Hypotheses Results
1. It cannot be rejected that there is a negative impact of Basel III implementation on the Banking sector.
2. It cannot be accepted that there are no negative impacts of Basel III implementation on the Egyptian banking sector and economy.
3. It cannot be rejected that there is no significant relationship between the non-performing loans ratio as the dependent variable and all the independent variables included in the study.
Research Conclusion
1. The contributions of Basel III accord to risk management in the banking industry can’t be denied, but there are still some problems to implement and improve these regulations.
2. The accord is supposed to reduce bank profitability which reflects the main misunderstanding of how a market economy functions.
3. Raising barriers to entrance will reduce competition. At least, large banks which can meet the obligatory requirements should be even more profitable than before because of fewer competitors.
4. In spite of the fact that the Egyptian banking sector is adequately prepared to meet capital adequacy requirements, but there are some factors that lagged the recovery of the Egyptian banking sector:
• The Egyptian banks have not yet recovered from the memory of bad debts.
• The Egyptian banks prefer to keep their assets in the form of the high yield sovereign bonds.
• The sovereign rating, whereby Egypt was downgraded several times by the three major credit rating firms to stand at 4 levels below the investment category.
• The high level of inflation that is the result of the overdependence of the economy on food imports, the prices of which are expected to keep on rising as world demand increases.
5. the Egyptian banking sector succeed in decreasing NPL ratios and improving capitalization levels thanks to the banking sector reforms applied by the CBE, which worked mainly on decreasing Non-performing loans in the Egyptian banking sector.
Research Recommendations
1. The Egyptian banks are still smaller than foreign banks so it is required more improvements to strengthen the capital base in the Egyptian banks to enable them to become more effective and competitive globally.
2. The internal rating base is essential, because it is the most convenient method for developing the qualitative and quantitative criteria by the supervision authorities and a way of identifying the methods of internal auditing and control in banks.
3. Banks have to adopt the new models which designed to measure and estimate exposures of that type of risk.
4. Banks have to decrease their investments in Treasury bills, and direct their lending activities to SMEs and service sector, which responsible for creating jobs for the youth sector.
5. Post the implementation of Basel III, regular assessment of the capital adequacy ratio is required by banks to perform in addition to a comprehensive review of risks.
6. The need for granting incentives to state banks by the CBE to increase and direct their loans to the service sector and SMEs, which is responsible for creating jobs for the youth.
7. More attention has to be paid for minimizing credit risk as it considered as the main reason for the low loan-deposit ratio in Egyptian banks that inherently deprives the economy of employment opportunities.