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The purpose of this paper is to empirically investigate the causal relationship between banking efficiency and capital market development in 86 countries between 2006 and 2011.

The authors follow the two-stage framework: data envelopment analysis (DEA) with the use of financial ratios is used to arrive at efficiency scores of the banks in the first stage. Thereafter, those efficiency scores will be linked with the development level of the capital markets of the corresponding country in the second stage using the generalised method of moments in a simultaneous equations model.

The authors found that banking systems around the world were still inefficient, suggesting that it would take time for the global banking system to recover after the global financial crisis 2007/2008. More importantly, the findings demonstrated that the larger the capital market is, the less efficient its banking system would be. In contrast, banking efficiency can positively influence the development of the capital market.

The data are unbalanced and limited to 86 countries; the study did not analyse the productivity change over time of those banking systems; and it would be useful to test the first-stage DEA with different sets of variables as well as different assumptions.

The paper suggests that for any economy around the world, an improvement in banking performance and efficiency rather than capital market development should be a priority, alongside with monitoring inflation.

The paper provides an unbiased analysis of the causal relationship between the banking sector and the capital market.

This paper aims to investigate the impact of capital requirements and bank competition on banks' risk-taking behavior in the Middle East and North Africa (MENA) region.

The study combines both descriptive and analytical approaches. It considers panel data sets and adopts panel data econometric techniques like fixed effects/random effects and generalized method of moments estimator.

Regulatory capital and market competition have different effects according to the bank’s type (Islamic or conventional). The results show that the capital adequacy ratio has a significant impact on the credit risk of conventional banks (CBs) while this effect is irrelevant for Islamic banks (IBs). However, market competition plays a significant role in shaping risk-taking behavior of Islamic banking institutions. Our results indicate that banks with strong market power may pursue risky strategies in the face of increased regulatory pressure (e.g. increased minimum capital requirements). The results were robust to alternative profitability measures and endogeneity checks.

The most important limitation is the lack of data for some banks and years, and this paper had to exclude some variables because of missing observations. The second limitation concerns the number of IBs in the sample. However, this can be overcome by including more countries from MENA and other regions where Islamic banking is a growing phenomenon.

Our findings call for a change in Islamic banking’s traditional business model based on the prohibition of interest. The analysis indicates that market concentration moderates the association between capital requirements and the insolvency risk of IBs but not CBs. Therefore, regulatory authorities concerned with improving financial stability in the MENA region should set up their policies differently depending on the level of banking market concentration. Finally, bank managers are requested to apply a more disciplined approach to their lending decisions and build sufficient capital conservation buffers to limit the impact of downside risk from the depletion of capital buffers during the pandemic.

This study addresses banks’ risk-taking behavior and stability in the MENA region, which includes banks of different types (Islamic and conventional). This paper also contributes to the literature on bank stability by identifying the most critical factors that affect bank risk and stability in the MENA region, which can be relevant in the context of the new global (COVID-19) crisis.

Basel III and the capital stress testing introduced new requirements and new definitions while retaining the structure of the pre-2010 requirements. The total number of requirements increased, making it difficult to determine which and how many constraints are binding. The purpose of this paper is to discuss the new financial regulations in the post-financial crisis period, focusing on the capital and liquidity regulations.

The authors explore the impact of financial regulations using various data sources – financial and accounting data from Y-9C Reports. Market data such as daily bond trading from TRACE through the Wharton Data Research Services and Treasury yield from the Bloomberg. The authors use regression analysis to examine the roles of capital adequacy and liquidity regulations.

The authors’ analysis in this paper suggest that Basel III, CET1 and Level 1 HQLAs requirements post-financial crisis have reshaped the balance sheets of large financial institutions, with some differential impacts on traditional versus capital markets banks. These changes appear to respond to the binding constraints (CET1 being a preponderance of required regulatory capital, Level 1 HQLAs a majority of required HQLAs and the expense of both) created by these new requirements, which also appear to have constrained asset growth at such institutions. Consistent with the authors’ view, their results suggest that the new requirements are less constraining for large traditional banks (such institutions show a rapid increase in CET1 capital to steady-state levels by 2012 and strong retail deposit rebuilding resulting in a relatively low required HQLA) and much more so, particularly the liquidity requirement, for the capital markets banks (such institutions show continuous building of CET1 capital over the post-crisis observation period, declines in the share of trading assets and increases in the share of HQLAs combined with efforts to increase retail deposits). Credit risk spreads rose dramatically during the financial crisis of 2008-2009. Although decreased, they remain higher and with greater dispersion (for both groups of banks) than pre-crisis. Preliminary regression analysis suggests that the market responds to changes in measured liquidity, rather than the regulatory capital ratios, when pricing bank risk (as reflected on bond spreads).

The estimation is based on historical relationship in the data. We must be cautious in extrapolating the results in a different environment.

There appears to be an arbitrage between HQLA and retail deposits. Capital markets banks and traditional banks follow different business models as evident in the analysis in this paper.

Market pricing suggests that the liquidity measures are more transparent and easier to understand. Capital ratios are not as easy to interpret.

Original research. To the authors’ knowledge, there is no paper that examines impacts of capital and liquidity regulations after the crisis at capital markets banks vs traditional banks – using both accounting data and market data.

The purpose of this paper is to analyze a particular segment of the US “shadow banking” market and its revival since the recent credit crisis, namely, lending to the private Middle Market, defined as financings of $5-100 million to non-public, unrated operating entities or pools of assets with not more than $50 million in earnings before interest, taxes, depreciation and amortization.

The analysis includes a review survey of a segment of capital markets and primary evidence from direct participation in two examples of actual private, non-bank lending between 2011 and 2012 executed by a Middle Market US investment bank.

While there have been considerable challenges, historically, in providing credit for small-and mid-sized businesses in the USA, private Middle Market capital is (post the recent credit crisis) finding opportunities, notwithstanding, constraints imposed by market and other forces, including systemic crises, cyclical forces and changes in regulatory regimes.

Any generalization is limited due to the absence of disaggregated survey data for the US capital markets and the limited examples examined.

The capital markets segment and non-bank financial institutions examined in this paper are developing as an alternative source of credit/lending from commercial banks for mid-sized companies.

The mid-sized firms financed by the shadow credit market are a significant source of job creation in the US economy making non-bank credit a lifeline to job growth in the financial crisis.

Direct participation is unique to the firms studied. Value is in developing a general framework to analyze different segments of the capital market.

This paper studies the current realities of the Islamic banking system of Brunei Darussalam from the perspective of the theories of modern financial intermediation and Islamic financial contracting. The limited information on the banking system of Brunei Darussalam reveals that the first phase of the Islamic banking experimentation has been successful, as Islamic banks command roughly 11.5 per cent of the market share. The financial services industry, however, remains extremely competitive and Islamic banks face formidable challenges from conventional banks. Islamic banks can proliferate if they: advance towards the second phase by gradually consolidating retail banking with investment banking; establish vital links with local and foreign institutions; and use ijtihad in modern financial engineering to optimally design loans while simultaneously reducing their risk exposure. An efficient Islamic financial system can allocate limited capital resources to the most profitable ventures and assist in wealth creation. This can foster the growth not only of Negara Brunei Darussalam but also of the regional economies, particularly at this crucial juncture when Asian economies are reeling from the current financial crisis.

Mexico’s 1994 peso devaluation and ensuing crisis surprised the markets and caught international markets and many policy makers off‐guard. Some of the contributing factors were due to structural deficiencies and institutional rigidities, while others dealt with public policy issues. In addition, Mexico’s membership to the North American Free Trade Agreement (NAFTA), and ensuing rapid trade liberalization and deregulation of capital market and banking, were paramount to the peso crisis. Financial deregulation in Mexico, as in Korea and other crisis countries of Asia, took place before adequate, prudential regulation and supervision were in place. The result was excessive build‐up of bank credits driven by moral hazard. This paper deals with various factors leading to the peso crisis and presents the logical sequence of the unfolding of the events by analyzing the structural and institutional factors. Also, major developments in the post‐crisis period are discussed.

This paper aims to investigate whether stock markets can reduce the output costs of banking crises. The work is motivated by Alan Greenspan’s claim that capital markets serve as a financial “spare tire” in the event of a banking crisis.

We test the impact of stock market capitalization, liquidity and turnover on the output losses of 76 banking crises in 66 countries over the period of 1975-2008.

Our results indicate that stock markets can mitigate the effect of banking crises on economic activity. There is also some evidence that foreign equity holdings lower output costs.

These results suggest that the development of equity markets will contribute to reducing the costs of banking crises. Such development, however, should be accompanied by adequate supervisory and regulatory oversight.

Our analysis is the first direct empirical investigation of the impact of stock markets on the output costs of banking crises. This paper demonstrates that equity markets can lessen the severity of such crises.

The Independent Banking Commission (Vickers) Report is not only one of the most significant developments in the banking regulatory and supervisory context in the UK in recent times but is also one that would considerably impact banking and capital markets functions and trends in this decade. The purposes of this paper are two‐fold: to analyse the interim Vickers Report within the larger paradigm of the prudential banking regulatory approach in the UK, particularly in the context of the debate of bailing out banks that are too‐big‐to‐fail; and to critically examine the recommendation of the Report in the context of the failure of Northern Rock in 2007. The central focus of the paper is to analyse the probable impact and shortcomings of the key recommendation of the Vickers Report, i.e. requirement to hold an additional capital buffer in order to separately ring‐fence retail functions and retail deposits of universal banks and financial institutions operating in the UK.

The method used is a combination of legal examination and case‐study based analysis. This paper sees the failure of Northern Rock as essentially a consequence of supervisory lapses by the FSA and raises relevant critical questions as to the efficacy of the recommendation of the Vickers Report in the context of such supervisory lapses and failures. While relying primarily on official publications in the public domain, journal articles, academic writings, and, newspaper articles, this paper explores the related regulatory and financial implications of the Vickers Report recommendation in the backdrop of the banking crisis in the UK.

The paper concludes that the key recommendation of the Vickers Report, to ring‐fence retail functions universal banks operating in the UK, goes only mid‐way in securing the twin objectives of stability and safety that the Report has set out to achieve.

The present Report is an interim one and the final version of the Report is expected in September. Further, various oversight reports and recommendations by the FSA and other bodies are expected as a follow‐up to the final Report. The key recommendation of the requirement for universal banks operating in the UK to hold additional capital for ring‐fencing their retail functions and deposits is not expected to undergo any substantial modification or revision in the final Report.

This paper is of immense significance to bankers, supervisors, lawyers, auditors, consultants, researchers, jurists, and, those engaged in or with various issues and sectors in financial and banking regulation.

This paper compares the performance of the big four UK banks and four Australian banks between 2004‐2009. The banks are chosen according to the total assets as listed in The Banker magazine 2009. The purpose is to analyse why UK banks were more vulnerable to the financial crisis of 2007‐2009 than Australian banks. The consequence of this study is what improvements can be made in relation to liquidity, leverage, loan to deposit, asset quality and capital ratios.

The author adopts an empirical approach and gathers data from the annual reports of the big four UK banks and Australian banks and the database “Factiva” and the Financial Times. The data contains liquidity, debt, capital, asset quality and profitability ratios during 2004‐2009.

The author's data show UK banks had on average higher cash ratios, higher leverage ratios, higher loan to deposit ratios, higher capital ratios, lower asset quality, lower ROA but higher ROE than the Australian banks.

The results support the findings in the Financial Development Index 2011 of the World Economic Forum. UK banks should ameliorate its ranking on financial stability by improving the quality of loans and capital.

The analysis is of use to regulators who are contemplating the need for reforms aimed at improving financial ratios of banks. Basel III Accord has introduced some recommendations but has its limitations.

This paper's value lies in providing analysis of the top four UK and Australian banks' performances during 2004‐2009. There is room for improvement in providing a more stable financial environment in the UK.

The study examines the roles of capital rules, macro variables and bank business models in determining the safety of banks as measured by the “distance-to-default” (DTD) with the purpose of drawing implications for regulation of bank capital and business models.

A panel regression study using pre- and post-crisis data for 108 US and European banks is used to explore the issue empirically. A new technique is also used to back out the amount of capital banks would have needed during the crisis to keep the “DTD” in the very safe zone.

The simple leverage ratio has a strong relationship with “DTD”, while the Basel ratio does not. The most important business model features are derivatives and wholesale funding, which have a strong negative relationship with “DTD”. Trading and available-for-sale securities have a positive influence. Calculations show that it is not possible for any reasonable capital rule to compensate for the risks created by business model features encompassing large derivative-based activities. Bank separation policies are essential.

The micro evidence-based analysis as an approach to bank regulation and business model requirements stands in contrast to the ad hoc way policy has been constructed before and after the crisis. The empirical evidence supports separation based on the balance sheet size of derivatives and a leverage ratio instead of the complex Basel risk-weighted capital approach. The current approaches to structural separation are criticised constructively, and some evidence-based suggestions for improving bank business models to reduce systemic risk are made.