Template-Type: ReDIF-Article 1.0 Author-Name: Petr Dvořák Title: What to Expect from Basel III? Abstract: Dear readers, I would like to dedicate the third edition of European Financial and Accounting Journal to contemplate what could be anticipated from Basel III. The development and global impact of financial crisis have been so intense that it could not remain without politic and regulatory response. Thus the officials come up with the new proposals for more strict regulations that would prevent the financial crisis of comparable size from recurring. What changes will the enforcement of Basel III bring to the banks and what might be expected from them? In short, the equity capital should increase and its quality should improve. This should become evident in a greater stability of the financial system. The increase in minimum capital (strictly speaking, the global minimum capital standards) will be required from banks in two basic ways. The first lies in implementation of a conservation buffer at 2.5% above the regulatory minimum, which should be instrumental to absorb additional bank losses when the economy does not flourish and banks would make greater losses consequently. Banks shall not have automatically the obligation to create this kind of capital, nevertheless if they fail to obey, they will be subjected to explicit restrictions on paying dividends to shareholders and bonuses to the managers. Banks will more likely to avoid such situation, thus it could be expected, that they will implement the capital increase voluntarily. The second form is countercyclical capital buffer, which should reduce criticized weakness of the current Basel II, namely its rather pro-cyclical nature. The application of this buffer will be in competence of national regulators, who shall be able to increase the capital ratio by 2.5 percent if the volume of credits in economy grows faster than GDP. The capital increase should take place in the banks in advance in the time economy growth and on the contrary in recession this generated capital will be used for to cover losses. The capital increase is mostly considered necessary because the current capital buffer has turned up to be entirely insufficient. On the other hand it should be noted that the planned capital increase cannot ensure the survival of all banks during the another financial crisis because the decline in assets values may of course be higher than the banks would be capable to absorb even from increased capital. The significant role will be played also by the assets valuation because banks could reach a new required level of capital ratio through a capital increase but also by reducing risk-weighted assets. The valuation and taking into account the risks involved is of a crucial importance for their determination. In addition to the quantitative increase in capital Basel III puts more emphasis on its qualitative composition. This is reflected in the fact that the global minimum capital standards ratio based on common equity - capital increases. Thus banks will have to obtain new capital required also by an expansion of the authorized capital. In a theoretical point of view it should contribute to increase commitment of shareholders to bank functioning of banks. The practical impact is questionable in this respect, since the financial crisis has shown us that the liability of shareholders in a number of large banks in particular did not work.The banks under the prospect of higher appreciation often launched themselves into relatively high-risk operations that endangered the very existence of the banks (and in some cases led to their downfall), and the shareholders did not prevent them from doing so. The whole problem is not that simple as it seems to us today. It should be noted that what is clear to everyone now, before the crisis it appeared very differently. Sophisticated methods of risk measurement, an objective rating valuations, elaborated regulation - these are just some characteristics that no one questioned too much before the crisis and which given a rise to rather positive expectations in their way. It is difficult to blame shareholders now that they did not identify the high risks in that time. The problem is not that simple as it seems to be. Based on this experience it is therefore not possible to assume that higher impact on shareholders in consequence of higher proportion of authorized capital in the banks shall bring from their part significant pressure to reduce the risk undergone by these banks. Maybe it would work for currently known instruments and associated risks but the development cannot stopped and there new instruments may bring new problems. So what can be expected from the new rules? For sure it shall bring the higher ability of banks to cope with potential losses due to more capital reserves. On the other hand, we have already learned enough from the history that absolutely no regulation ensure to provide fully stable system and it is doubly true about the financial system. Therefore, at the end it shall be decisive from the behavior of all entities resulting from their inside motivation. And as their behavior will never be adequately guarded at all nor regulation can fully enforce such a caution. It can only regulate it in a certain way. Basel III shall stand in good stead to financial system but what shall be its real implications and to what extent shall the aims be fulfilled which its creators input into it, or, conversely, how considerably banks shall seek to find (open up possibilities) and apply by which they shall endeavour to avoid new rules. This shall be possible to evaluate in the horizon of 10-15 years. A timetable for Basel III implementation is allocated till 2019. Pages: 4-6 Volume: 2010 Issue: 3 Year: 2010 File-URL: http://www.vse.cz/efaj/download.php?jnl=efaj&pdf=51.pdf File-URL: http://www.vse.cz/efaj/51 File-Format: text/html Handle: RePEc:prg:jnlefa:v:2010:y:2010:i:3:id:51:p:4-6 Template-Type: ReDIF-Article 1.0 Author-Name: Jaroslav DAŇHEL Author-Name: Eva Ducháčková Author-Name: Jarmila Radová Title: Theoretical Economics Faces a Serious Challenge Abstract: The authors of the article point out that the theory of economics has failed to yield a solid theoretical background in such critical situations as the transformational period of post-communist economies and the period of the current financial and economic crisis. While classical liberal or Keynesian concepts are failing, theorists cannot look to mathematical modeling for help. The challenge for today’s theoretical economists is to find a new concept for today’s global era. Keywords: Determinism of stage of the Word, Decision making of economic subjects, Multifunction of mathematical models, Regulatory on financial market Classification-JEL: D740, D810, D820, G22 Pages: 7-14 Volume: 2010 Issue: 3 Year: 2010 File-URL: http://www.vse.cz/efaj/download.php?jnl=efaj&pdf=52.pdf File-URL: http://www.vse.cz/efaj/52 File-Format: text/html Handle: RePEc:prg:jnlefa:v:2010:y:2010:i:3:id:52:p:7-14 X-File-Ref: http://www.vse.cz/RePEc/prg/jnlefa/references/52 Template-Type: ReDIF-Article 1.0 Author-Name: Karel BRŮNA Title: Monetary Policy Implementation and Liquidity Management of the Czech Banking System Abstract: Implementation of monetary policy assumes that monetary policy instruments stabilize O/N interest rates to the proximity of main policy rate to archive monetary targets. The function of stabilizing mechanism is based on simple rule that the volume of liquidity in the banking system is held in line with the demand of banks for reserves. In this paper main factors of banking system liquidity are analyzed in the context of bank’s imperfect intertemporal substitution of reserves and with respect to predictibility of O/N interest rates volatility. Analysis of O/N PRIBOR and CZEONIA reference interest rates prove Czech National Bank’s ability to stabilise O/N interest rates disregard overall excess liquidity in the banking system. It also identified structural changes acting in the money market like reduced instability of demand for reserve and decreased volatility of O/N interest rates due to introduction of credit facility or increased volatility of the spread between O/N interest rates and repo rate due to reduction of frequency of repo tenders. Rapid increase in the volatility of differences between OMO target and bank’s supply of excess reserves is also resulting in the weakening of a direct relationship between O/N PRIBOR dynamics and repo tenders. Keywords: Monetary policy implementation, Liquidity management, Interest rates Classification-JEL: E43, G12 Pages: 15-41 Volume: 2010 Issue: 3 Year: 2010 File-URL: http://www.vse.cz/efaj/download.php?jnl=efaj&pdf=53.pdf File-URL: http://www.vse.cz/efaj/53 File-Format: text/html Handle: RePEc:prg:jnlefa:v:2010:y:2010:i:3:id:53:p:15-41 X-File-Ref: http://www.vse.cz/RePEc/prg/jnlefa/references/53 Template-Type: ReDIF-Article 1.0 Author-Name: Tomáš HERYÁN Author-Name: Daniel STAVÁREK Title: How Related are Interbank and Lending Interest Rates? Evidence on Selected European Union Countries Abstract: This paper investigates the nature of the causal relationships among interbank market interest rates and corporate loans interest rates in four countries from the euro area (Austria, Belgium, France and Italy), and in the Czech Republic. The paper also estimates a development of bank credit margin in banking industries of these countries in period from January 2004 to March 2010. Using Johansen cointegration and Granger causality tests on monthly data we investigate long-term as well as short-term causalities between the interest rates. The results suggest that interest rate relationships differ in all selected countries, and also that foreign majority owners of the Czech banks could affect interest rate policy of the subsidiaries to offset losses realized by the parent banks. Keywords: Cointegration, Granger Causality, Interbank Interest Rates, Lending Interest Rates, European Union Classification-JEL: C32, E40, E43, E52, F36 Pages: 42-55 Volume: 2010 Issue: 3 Year: 2010 File-URL: http://www.vse.cz/efaj/download.php?jnl=efaj&pdf=54.pdf File-URL: http://www.vse.cz/efaj/54 File-Format: text/html Handle: RePEc:prg:jnlefa:v:2010:y:2010:i:3:id:54:p:42-55 X-File-Ref: http://www.vse.cz/RePEc/prg/jnlefa/references/54 Template-Type: ReDIF-Article 1.0 Author-Name: Tomáš Buus Author-Name: Jaroslav BRADA Title: Can Profit-shifting be Resolved by Penalization? Abstract: We examine contemporary practice of transfer pricing rules enforcement in this paper. We have used neoclassical microeconomic framework with transfer price estimated via comparable uncontrolled price method. We have found that if vertically integrated multinational enterprise (MNE) has possibility to evade tax through transfer pricing, then it produces higher quantity of final product, than it would if no possibility of tax evasion existed. Secondly we have found that although nowadays’ transfer pricing rules require use of enforcement instruments (penalty), there is no penalty high enough to extinguish tax evasive transfer pricing totally, and if market for the product produced in country with high tax rate is perfectly competitive or there is monopolistic competition, no optimal penalty can be found. That changes at oligopolistic, monopolistic or duopolistic market of that product - there we could find optimal penalty. Keywords: Transfer prices, Multinational enterprises, Tax evasion Classification-JEL: D21, D29, G39 Pages: 56-74 Volume: 2010 Issue: 3 Year: 2010 File-URL: http://www.vse.cz/efaj/download.php?jnl=efaj&pdf=55.pdf File-URL: http://www.vse.cz/efaj/55 File-Format: text/html Handle: RePEc:prg:jnlefa:v:2010:y:2010:i:3:id:55:p:56-74 X-File-Ref: http://www.vse.cz/RePEc/prg/jnlefa/references/55 Template-Type: ReDIF-Article 1.0 Author-Name: Iveta ŘEPKOVÁ Title: Structural Determinants of the Total Loans Volume in the Czech Republic Abstract: The aim of this paper is to analyze the structural determinants of the total loans volume in the Czech banking sector. Analysis of five selected characteristics is realized in period 2000-2008. It used the OLS regression analysis for estimate of model. The regression analysis showed that the concentration of the credit market and the profitability calculated as the return on assets (ROA) has positive impact to total loans and the quality of portfolio has negative impact to total loans. If the share of classified loans to total loans is decreasing, total loans volume is rising and if concentration ratio of the credit market and return of assets are rising, total loans volume is also rising. Keywords: Banking sector, Total loans, Concentration, Interest rate, Profitability, Return on Assets (ROA), Regression analysis, Ordinary least squares (OLS) Classification-JEL: C58, G21 Pages: 75-83 Volume: 2010 Issue: 3 Year: 2010 File-URL: http://www.vse.cz/efaj/download.php?jnl=efaj&pdf=56.pdf File-URL: http://www.vse.cz/efaj/56 File-Format: text/html Handle: RePEc:prg:jnlefa:v:2010:y:2010:i:3:id:56:p:75-83 X-File-Ref: http://www.vse.cz/RePEc/prg/jnlefa/references/56 Template-Type: ReDIF-Article 1.0 Author-Name: Mohamed El Hedi AROURI Author-Name: Aldo LÉVY Author-Name: Duc Khuong NGUYEN Title: ROE and Value Creation under IAS/IFRS: Evidence of Discordance from French Firms Abstract: This paper re-examines the effects that adoption of the International Financial Reporting Standards (IFRS) has had on financial reporting of French listed firms. By analysing the 2004 financial statements of CAC 40 companies, we show that the transition to the IAS/IFRS has a significant impact on the return on equity (ROE) of considered firms by increasing it by 25 basis points on average, compared to the French GAAP. This finding thus suggests an amplified degree of discordance between the ROE, as a crucial measure of firm performance, and the value creation process following the IFRS adoption. From a theoretical viewpoint, Merton (1987)’s capital asset pricing model (CAPM) with incomplete information, which claims its convergence to its traditional version through the reduction of information costs, cannot in fact be valid, owing to divergences in the assessment of a firm’s performance. Keywords: IAS/IFRS, Return on equity, Financial leverage Classification-JEL: L25, M41 Pages: 84-112 Volume: 2010 Issue: 3 Year: 2010 File-URL: http://www.vse.cz/efaj/download.php?jnl=efaj&pdf=57.pdf File-URL: http://www.vse.cz/efaj/57 File-Format: text/html Handle: RePEc:prg:jnlefa:v:2010:y:2010:i:3:id:57:p:84-112 X-File-Ref: http://www.vse.cz/RePEc/prg/jnlefa/references/57 Template-Type: ReDIF-Article 1.0 Author-Name: Asli Gunduzay TÜREL Title: Timeliness of Financial Reporting in Emerging Capital Markets: Evidence from Turkey Abstract: Timely financial reporting is an essential ingredient for a well-functioning capital market. The objectives of this study are two-fold. First, to measure the extend of timeliness in a developing country, Turkey. Second, to establish the impact of both company specific and audit related factors on timeliness of financial reporting in Turkey. This study reports on the results of an empirical investigation of the timeliness of financial reports by 211 non-financial companies listed on the Istanbul Stock Exchange. The descriptive analysis indicates that 59% of the companies that prepares separate financial statements and 66% of the companies that prepares consolidated financial statements release their financial statements less than the maximum time allowed after the financial yearend. 28% of the companies that prepares separate financial statements and 16% of the companies that prepares consolidated financial statements exceeded the regulatory deadline. The multivariate regression analysis indicates that both sign of income, audit opinion, auditor firm and industry affect timeliness. The findings indicate that the companies that report net income, that have standard audit opinion, and that are operating in manufacturing industry release their financial statements earlier. On the other hand, it is found that the companies that are audited by big four audit firms are late reporters. Keywords: Accounting, Financial reporting, Timeliness, Turkey Classification-JEL: M4, M40, M41 Pages: 113-133 Volume: 2010 Issue: 3 Year: 2010 File-URL: http://www.vse.cz/efaj/download.php?jnl=efaj&pdf=58.pdf File-URL: http://www.vse.cz/efaj/58 File-Format: text/html Handle: RePEc:prg:jnlefa:v:2010:y:2010:i:3:id:58:p:113-133 X-File-Ref: http://www.vse.cz/RePEc/prg/jnlefa/references/58