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Article
Publication date: 11 November 2013

Sebastian Schich

The purpose of this article is to support current efforts by policymakers to limit the value of implicit bank debt guarantees that they are perceived as providing. It does so by…

1743

Abstract

Purpose

The purpose of this article is to support current efforts by policymakers to limit the value of implicit bank debt guarantees that they are perceived as providing. It does so by analyzing the determinants of the value of such guarantees and by proposing a framework for categorizing and analyzing the host of different financial regulatory reform measures recently adopted and proposed.

Design/methodology/approach

The starting point is the observation that public authorities have provided the guarantor-of-last-resort function in more explicit form as part of the financial safety net. This choice has inadvertently further entrenched the perception that bank debt benefits from an implicit guarantee and, in the meantime, policymakers have decided to limit the value of such guarantees. To support these efforts, the present articles use a valuation framework based on concepts of contingent claims analysis to model the value of insurance of risky bank debt when the sovereign providing the guarantee can itself be risky. This framework allows one to monitor any progress made in reducing the value of these guarantees. It is applied here to a measure of implicit external (mostly from the sovereign) support for the debt of a panel of 184 large worldwide banks headquartered in 23 countries for the period from 2007 to 2012.

Findings

Consistent with the implications of the conceptual model, the empirical evidence suggests that implicit bank debt support is higher, the lower the bank's stand-alone creditworthiness and the higher the sovereign's creditworthiness. The result is consistent with previous work that showed that the decline in the value of implicit bank debt guarantees most recently observed owes much to reduced strength of the sovereigns seen as providing the guarantees. Obviously, a more desirable way to limit the value of implicit bank debt guarantees is to foster the intrinsic strength of banks. Alternative categories of policy measures aim at withdrawing the guarantee function or charging for its use.

Originality/value

The author is not aware of any similar work using a rigid theoretical and empirical framework to structuring the policy discussion on bank regulatory reform.

Details

Journal of Financial Regulation and Compliance, vol. 21 no. 4
Type: Research Article
ISSN: 1358-1988

Keywords

Article
Publication date: 28 October 2019

Christiane Hellstern

The purpose of this paper is to examine from a comparative perspective, the impact of structural banking reforms on the legal frameworks for the corporate governance of credit…

Abstract

Purpose

The purpose of this paper is to examine from a comparative perspective, the impact of structural banking reforms on the legal frameworks for the corporate governance of credit institutions.

Design/methodology/approach

This facilitates a functional analysis of the resulting corporate governance structures, which in turn provides the basis for an analysis of conceptual concerns with regard to the independence of the separate entity.

Findings

The paper points out that structural banking reforms come with significant implications for existing corporate governance structures of credit institutions. The resulting corporate governance structures rise conceptual concerns with regard to both the effectiveness of the independence of the separate entity and the objectives of structural banking reforms generally.

Practical implications

The paper shows that the implementation of structural banking reforms is a complex operational issue and process for the banking groups and the regulators. The challenge will be to establish and upheld the ring fence in a way to lower the risk of intra-group contagion. There is a great need for regulatory and supervisory policies that reinforce the settled ring fence obligations.

Originality/value

This paper’s value lies in providing analysis of the implications of structural banking reforms for the corporate governance of credit institutions. The relevant statutory frameworks as such set only the core components of the new structure. Defining and implementing the design is left to the discretion of the regulators.

Details

Journal of Financial Regulation and Compliance, vol. 28 no. 4
Type: Research Article
ISSN: 1358-1988

Keywords

Article
Publication date: 4 November 2013

Adrian Blundell-Wignall and Caroline Roulet

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…

Abstract

Purpose

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.

Design/methodology/approach

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.

Findings

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.

Originality/value

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.

Details

Journal of Financial Economic Policy, vol. 5 no. 4
Type: Research Article
ISSN: 1757-6385

Keywords

Abstract

Details

Research in Finance
Type: Book
ISBN: 978-1-78190-759-7

Abstract

Details

Tools and Techniques for Financial Stability Analysis
Type: Book
ISBN: 978-1-78756-846-4

Book part
Publication date: 1 July 2015

Michel Roux

Contrary to what its title might suggest, this chapter does not develop an alternative vision of finance. On the basis of the financial world as it currently operates, we propose…

Abstract

Contrary to what its title might suggest, this chapter does not develop an alternative vision of finance. On the basis of the financial world as it currently operates, we propose to identify the paradoxes and the likely evolution of a banking and financial system evolving. Based on the facts, this chapter seeks to extend the discussions initiated in the last chapter, entitled “Socially responsible banks?” of our book “The management of the bank,” published by Vuibert editions. The frantic pace of innovation and the requirements of regulators encourage banks to review their organization and their governance. This chapter attempts to position the bank between two paradoxes: on one side, the crises have not made more responsible banks. The facts remain: rates and currency manipulation, embezzlement rules on bonuses, even if some are still under financial assistance of the United States. On the other hand, the “finance otherwise” innovates, disturbs, and upsets. Creative players such as collaborative funding or virtual currencies are not really threatening to the big banks. But in the past, marked by their personnel costs and infrastructure cannot meet the agility of these new entrants “crowdfunding,” and other online payment methods have backed the Web. These innovations really threaten banks that do not lack the resources to adapt. And if tomorrow, the banks no longer existed? Behavior changes and already a growing number of clients save, borrow, and lend the use of means of payment to settle their online purchases without using the services of traditional financial institutions! A certainty, “finance otherwise,” will play a stimulatory role. The speed and magnitude of change is such that it becomes necessary for banks and financial institutions to adapt to these new technologies to increase or simply maintain their business. Based on the facts, the chapter explores and analyzes the developments that may become sustainable for a banking system reluctant to lose the monopoly of the distribution of credit and means of payment. The “end of the banks,” is a “provocative” subject but insufficiently addressed in the economic literature.

Details

Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons
Type: Book
ISBN: 978-1-78441-779-6

Keywords

Article
Publication date: 10 July 2017

Dirk Schoenmaker

Large global banks were at the heart of the global financial crisis. In response to the crisis, the Financial Stability Board published an integrated set of policy measures, such…

1092

Abstract

Purpose

Large global banks were at the heart of the global financial crisis. In response to the crisis, the Financial Stability Board published an integrated set of policy measures, such as capital surcharges, to address the systemic and moral hazard risks associated with global systemically important banks (G-SIBs). Almost 10 years later, it is time to take stock of the impact of these measures. This paper answers three questions on what happened to the G-SIBs. First, have they shrunk in size? Second, are they better capitalised? Third, have they reduced their global reach?

Design/methodology/approach

This paper looks at the individual G-SIBs and compares the situation before the crisis with the current situation. In this methodology, the differences because of changes at individual banks and changes in the ranking within the group (composition effect) are disentangled. Data have been collected on these banks from SNL Financial (banking database) and annual reports.

Findings

First, a substantial increase in capital levels is seen, though the distribution is uneven. China and USA are leading the pact with leverage ratios (Tier 1 capital divided by total assets) of around 7 per cent for their large banks, whereas Europe and Japan are trailing behind with ratios between 4 and 5 per cent. Second, a strong composition effect is identified: a shift of business from the global European banks to the more domestic Asian banks, which are gradually increasing their global reach. The US banks keep their strong position. So, the decline in cross-border banking is largely because of a composition effect (i.e. a reshuffle of the global banking champions league) and far less due to a reduced global reach of individual banks.

Research limitations/implications

From the results on capital, recommendations are made on capital requirements (see below at social implications).

Social implications

It is noted that the euro area, Japan, Sweden and Switzerland trail behind with a leverage ratio between 4 and 5 per cent. It is recommended these countries bring the leverage ratio of their largest banks more in line with international practice.

Originality/value

The effects of the reform after the global financial crisis on the large global banks have not been researched in detail. This paper split the results by country of incorporation (home country). This gives interesting differences, which the paper relates to specific policies (or lack of policies) in these countries.

Details

Journal of Financial Regulation and Compliance, vol. 25 no. 3
Type: Research Article
ISSN: 1358-1988

Keywords

Abstract

Details

The Banking Sector Under Financial Stability
Type: Book
ISBN: 978-1-78769-681-5

Article
Publication date: 7 April 2015

Santiago Carbó-Valverde, Harald A. Benink, Tom Berglund and Clas Wihlborg

The purpose of this paper by the European Shadow Financial Regulatory Committee (ESFRC) is to provide an account of the financial crisis in Europe during the period 2010-2013 and…

1938

Abstract

Purpose

The purpose of this paper by the European Shadow Financial Regulatory Committee (ESFRC) is to provide an account of the financial crisis in Europe during the period 2010-2013 and an analysis of how the relevant authorities reacted to the crisis.

Design/methodology/approach

These actions included measures taken by central banks, governments or fiscal authorities, and by regulatory or supervisory bodies. In a previous study covering the regulatory developments during the financial crisis up until 2009, issues such as the implementation of Basel III rules in Europe and the (mostly ad hoc and unilateral) resolution mechanisms set in most European countries to fight the crisis were covered. This study focuses on developments since 2010 with a focus on the concerns and actions that emerged with the sovereign debt crisis in the euro area. In particular, the transition from the European Financial Stability Facility to the European Stability Mechanism is assessed. The focus after 2012 has progressively turned to the challenges of the European banking union.

Findings

These issues are jointly covered, along with some updates on the views of the ESFRC on recent advances in other areas, such as solvency regulation. All in all, the authors find that the weaknesses of the global financial system remain to be addressed, and they believe that the banking union is one of the main tools and opportunities for an improved and efficient crisis management in Europe.

Originality/value

The paper aims at contributing to the study of financial regulation after the banking crisis. The experience of the euro zone in this context is assessed in this article from a wide range of perspectives.

Details

Journal of Financial Economic Policy, vol. 7 no. 1
Type: Research Article
ISSN: 1757-6385

Keywords

Content available
Article
Publication date: 1 November 2002

18

Abstract

Details

Journal of European Industrial Training, vol. 26 no. 8
Type: Research Article
ISSN: 0309-0590

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