Global Bank Regulation (eBook)

Principles and Policies

Heidi Mandanis Schooner, Michael W. Taylor (Autoren)

eBook Download: EPUB

2009 | 1. Auflage
352 Seiten
Elsevier Science (Verlag)
978-0-08-092580-6 (ISBN)

Infos

Its focus on the prudential, global regulation of financial institutions drives this book's unique exploration of ,global policy principles. , Integrating theory, history, and policy debates, it provides a high-level, strategic treatment of the regulation of global banking. , With finely focused definitions and an intuitive scope, the authors pay particular attention to the international standards set by bodies such as the Basel Committe on Banking Supervision and the European Union. ,By beginning with the main justifications for the prudential regulation of banks and concluding in 2009, after regulators had proposed significant solutions to the crash, this lucid and engaging account of the principles, policies, and laws related to the regulation of international banking explains why and how governments work so hard on a convergence of rules and regulations.

Defines the over-arching policy principles of capital regulation

Explores main justifications for the prudent regulation of banks

Discusses the 2007-2009 financial crisis and the next generation of international standards of financial institution regulation

Examines tools for ensuring the adequate supervision of a firm that operates across all time zones

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Global Bank Regulation: Principles and Policies covers the global regulation of financial institutions. It integrates theories, history, and policy debates, thereby providing a strategic approach to understanding global policy principles and banking. The book features definitions of the policy principles of capital regularization, the main justifications for prudent regulation of banks, the characteristics of tools used regulate firms that operate across all time zones, and a discussion regarding the 2007-2009 financial crises and the generation of international standards of financial institution regulation. The first four chapters of the book offer justification for the strict regulation of banks and discuss the importance of financial safety. The next chapters describe in greater detail the main policy networks and standard setting bodies responsible for policy development. They also provide information about bank licensing requirements, leading jurisdictions, and bank ownership and affiliations. The last three chapters of the book present a thorough examination of bank capital regulation, which is one of the most important areas in international banking. The text aims to provide information to all economics students, as well as non-experts and experts interested in the history, policy development, and theory of international banking regulation. - Defines the over-arching policy principles of capital regulation- Explores main justifications for the prudent regulation of banks- Discusses the 2007-2009 financial crisis and the next generation of international standards of financial institution regulation- Examines tools for ensuring the adequate supervision of a firm that operates across all time zones

Inhalt

Front cover 1
Half title page 2
Dedication 3
Title page 4
Copyright page 5
Table of contents 6
Introduction: The Global Financial System and the Problems of Regulation 12
The Rationale for Regulation 13
The Regulation of Financial Institutions and Markets 14
The Case for International Regulation 18
Who Sets the Standards? 22
How to Use This Book 23
References 26
Chapter 1: The Changing Nature of Banks 28
Definitions 29
Money, Credit Creation, and Fractional Reserve Banking 30
Financial Innovation and the Changing Nature of Banks 34
Three Distinctive Features of Modern Banking 38
References 44
Further Reading 44
Chapter 2: Panics, Bank Runs, and Coordination Problems 46
The Structure of Banks’ Balance Sheets 47
Coordination Problems and Bank Runs 51
Panic and Contagion in Modern Financial Systems 54
Free Riders and Regulation 59
References 61
Further Reading 61
Chapter 3: Collapsing Dominos and Asset Price Spirals 62
Collapsing Dominos 63
Asset Price Spirals 69
The Global Financial Crisis of 2007–2009 72
References 76
Further Reading 76
Chapter 4: The Financial Safety Net and Moral Hazard 78
The Financial Safety Net 80
Moral Hazard 87
Is There an Alternative? 94
References 97
Further Reading 99
Chapter 5: Sources of Financial Regulation 100
National Laws 101
International Law 103
References 114
Further Reading 115
Chapter 6: Bank Licensing and Corporate Governance 116
The Purpose of Bank Licensing 119
The Fundamentals of Bank Licensing 122
Fitness and Propriety of Bank Management 124
Significant Changes in Ownership 126
Choice of Bank Charter 127
Cross-Border Issues 130
Principles of Sound Corporate Governance 132
Sarbanes-Oxley Act of 2002 134
References 136
Further Reading 137
Chapter 7: Banks in Corporate Groups: Ownershipand Affiliation 138
Bank-Commerce Linkages 139
The Separation of Banking and Finance 148
Changes to Structural Regulation of the Combination of Banking and Other Financial Services 151
References 156
Further Reading 157
Chapter 8: The Rationale for Bank Capital Regulation 158
Why Regulate Bank Capital? 159
Leverage Ratios 162
Risk-Weighted Capital 164
Criticisms of Basel I 168
References 171
Chapter 9: The New Capital Adequacy Framework: Basel II andCredit Risk 174
The Standardized Approach 176
The Internal Ratings-Based (IRB) Approaches 179
Dealing with Financial Innovation 186
References 191
Further Reading 191
Chapter 10: The New Capital Adequacy Framework: Basel II andOther Risks 192
Market Risk 193
Operational Risks 201
Pillar 2 Risks 204
References 209
Further Reading 209
Chapter 11: Direct Limits on Banks’ Risk Taking 210
Credit Concentration Risk 211
Liquidity Risk 220
References 229
Chapter 12: Consolidated Supervision and Financial Conglomerates 232
What Is Consolidated Supervision? 235
The Need for Consolidated Supervision 238
Consolidated Supervision of Cross-Border Banks 242
Financial Conglomerates 243
References 249
Chapter 13: Anti-Money Laundering 250
What Is Money Laundering? 251
The Impact on Banks 252
International Response 253
Banco Delta Asia Case Study 262
References 265
Further Reading 266
Chapter 14: Bank Insolvency 268
The Goals and Types of Bank Insolvency Regimes 270
Legal Framework for Bank Insolvency 272
Determination of Insolvency 272
Administration Orders and Conservatorships 273
Receivership 274
References 285
Further Reading 285
Chapter 15: Institutional Structures of Regulation 286
Institutional and Functional Regulation 287
Rise of the Integrated Regulator 292
Twin Peaks (Objectives) Approach 294
Role of the Central Bank in Bank Supervision 296
Evaluation of Structural Reforms 300
References 303
Further Reading 304
Chapter 16: Regulation After the Global Financial Crisis 306
The Causes of the Crisis 307
Rethinking the Assumptions of Regulation 311
New Directions in Capital Adequacy 313
More Radical Options 316
The International Dimension 319
References 321
Appendix: Introduction to Regulation and Market Failure 324
Externalities 325
Information Asymmetry 327
Index 334

Textauszug

Introduction: The Global Financial System and the Problems of Regulation

This book examines the principles, policy, and law relating to the regulation of international banking. Other regulation textbooks focus on the laws and regulations of one particular country, be it the United States or Britain or some other important banking center. This approach is understandable, since regulations have traditionally been made and applied at the national level. Nonetheless, during the past 30 years, financial systems, markets, and institutions turned global. Each of the leading international banks now operates in dozens of countries and is therefore subject to oversight by dozens of regulatory agencies. Nationally based regulators, in the most developed and in developing countries, have adapted to the new realities of the global financial system through new forms of cooperation and coordination, with international standard-setting bodies forming the core of this response. We believe these developments are fundamental to the understanding and teaching of bank regulation.

Although the government agencies responsible for regulating global markets and institutions remain rooted in national legal systems, they have increasingly sought convergence of their rules and regulations. European Union countries have agreed on common minimum standards and oblige their national regulators (through international treaty) with implementation. In the rest of the world, convergence on minimum standards centers on soft law, with informal international groupings of regulators seeking compliance with their standards through force of example and other forms of moral suasion. The most important such group is the Basel Committee on Banking Supervision (Basel Committee or BCBS), a body that brings together central banks and regulatory agencies from North and South America, Europe, and Asia.

International standards set by bodies like the BCBS and the European Union are the main focus of this book. These standards bridge the gulf between domain (the geographical area over which financial institutions and markets operate) and jurisdiction (the machinery of legislation and regulation that ensures the orderly operation of markets).1 The fact that the regulatory system remains fragmented along national lines while financial institutions operate far beyond the borders of their home countries remains a significant and persistent challenge to regulatory policy. The Global Financial Crisis that began in the summer of 2007 made this issue one of more than mere theoretical relevance.

In this introduction, we begin with a broad overview of the aims and purposes of banking regulation and then discuss how the development of a global financial system complicates the task of regulating firms with border-crossing operations. The fundamental problem is how to ensure adequate supervision of a firm that operates in many different countries, across all time zones. We follow with a brief discussion of the policy networks, including bodies like the BCBS, which assist regulators with this global challenge. The output of these networks, in the form of international standards and agreements, is the main focus of this book. Finally, we end with a brief overview of the book’s structure and how it might be used in teaching courses on the regulation of international banking.

The Rationale for Regulation

Bank regulation is concerned primarily with ensuring that banks are financially sound and well managed. In the United States, this concept is referred to as safety and soundness regulation and in most of the rest of the world as prudential regulation. Although banks are subject to many other forms of regulation, including consumer and investor protection requirements, these regulations receive only our passing attention. The focus of this book is on prudential regulation, and we therefore begin with an explanation of why governments subject banks to prudential regulation.

Governments intervene in the operation of a market economy, whether through taxation or through regulation, for two primary reasons: either to ensure that markets work efficiently or to alter market outcomes to achieve social objectives. With only a few exceptions,2 tax policy is most often used to achieve social objectives. For example, a tax on the wealthy can be used to redistribute wealth to those less fortunate through welfare programs. On the other hand, the general objective of regulation is market efficiency. Since economists usually refer to market inefficiencies as market failures, regulation is often described as an attempt to correct a market failure.

Conventional economic theory recognizes three market failures that generally form the basis for regulatory intervention. The first is the existence of monopoly power. If one or a few firms have the power to restrict competition, they are likely to raise prices, restrict supply, offer poorer service, and restrict innovation. The distortion of the market through the exercise of monopoly power supports anti-monopoly and anti-cartel legislation as far back as the United States’ Sherman Antitrust Act (1890) and as recent as the United Kingdom’s Competition Act 1998.

The second way in which markets can fail is through the existence of externalities or what are sometimes referred to as spillover costs.3 These arise when the economic activities of some participants in a market indirectly affect, positively or negatively, the well-being of others. Positive externalities arise in a wide variety of contexts. For example, a popular restaurant that brings customers to nearby businesses is not compensated for the value of the positive externality it generates. Regulation, however, is typically employed to correct negative, rather than positive, externalities. A negative externality exists when the price of a good does not reflect the true cost to society of producing that good. In the classic example, if a steam train emits sparks that occasionally burn the crops of nearby farmers, the cost of the destroyed crops is a spillover cost (externality) imposed on the farmers by those who use the train. To account for this externality, either the users of the train could be taxed to compensate the farmers or the emission of sparks from a railway locomotive could be regulated, for example, by setting standards for the construction of locomotive chimneys.

The third justification for regulation arises from the existence of information imbalances (“asymmetries”).4 In a well-functioning market, buyers and sellers possess all the information needed to evaluate competing products or services. Buyers and sellers must be able to identify the alternatives available and understand the characteristics of the goods or services offered. Yet, information is a commodity like any other, and markets for information can fail like any other. For example, one of the parties to a transaction may deliberately seek to mislead the other, by conveying false information or failing to disclose key facts. Failures in the market for information justify regulation of various types—for example, food labeling or disclosures in securities offerings.

The Regulation of Financial Institutions and Markets

Regulation over the past three decades has rested on the notion that markets are essentially rational and highly efficient at allocating resources and that markets are generally self-policing and self-correcting. Given these assumptions, regulatory intervention could be justified only to the extent necessary to correct the comparatively rare instances in which markets may fail. In the context of banking, these market failures take two main forms: information asymmetry and systemic risk (a negative externality). Most of the regulations examined in this book represent attempts to correct these two types of market failure.

Information Asymmetries

In the first place, the justification for the regulation of financial institutions and markets arises from the existence of information asymmetries. Information asymmetries are common in many product markets. Many products are complex, are difficult to understand and compare, or involve a substantial investment (e.g., the purchase of a car). What makes financial products different is not the existence of these characteristics, but their nature and intensity. The essence of a financial contract is a promise that money placed in an investment today will be paid back in the future. This contract exists between a depositor and a bank; a policyholder and insurance company; an investor and a mutual fund.

With the bank deposit, the bank promises to return the depositor’s money, with the contractual interest, anytime the depositor demands it (as with a checking account) or at some future date (as with a certificate of deposit). The bank, however, is in a much better position than its depositors to judge the bank’s ability or intention to make good its promise. In the most extreme case, a bank might take deposits that it has no intention of honoring (this happened with the Bank of Credit and Commerce International, a case we study in Chapter 12). Similarly, the depositors’ funds might be used for the benefit of the owners of the firm or to offer higher returns to other depositors (as happens, for example, with Ponzi schemes5). However, even an honest bank may, through poor management or bad judgment, fail to honor its promises, causing depositor losses.

While a depositor should assess the quality of the product offered (i.e., a promise by the bank to repay the deposit, plus an agreed rate of interest), the quality of a...

Produkt-Details

• Erscheint lt. Verlag: 24.11.2009
• Sprache: englisch
• Themenwelt: Recht / Steuern ► EU / Internationales Recht
• Themenwelt: Recht / Steuern ► Wirtschaftsrecht ► Bank- und Kapitalmarktrecht
• Themenwelt: Sozialwissenschaften ► Politik / Verwaltung
• Themenwelt: Wirtschaft ► Betriebswirtschaft / Management ► Finanzierung
• Themenwelt: Betriebswirtschaft / Management ► Spezielle Betriebswirtschaftslehre ► Bankbetriebslehre
• Themenwelt: Wirtschaft ► Betriebswirtschaft / Management ► Unternehmensführung / Management
• Themenwelt: Wirtschaft ► Volkswirtschaftslehre ► Finanzwissenschaft
• Themenwelt: Wirtschaft ► Volkswirtschaftslehre ► Makroökonomie
• ISBN-10: 0-08-092580-4 / 0080925804
• ISBN-13: 978-0-08-092580-6 / 9780080925806