The role of corporate governance in strengthening banks

Nadege Jassaud 30 October 2014

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Background: The recently released ECB balance sheet assessment highlighted nine Italian banks that failed the asset quality review (AQR) and stress tests – before 2014 recapitalisation. Eight of them fall into the categories described in this article (and 14 out of the 15 Italian banks participating in the assessment).

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Topics:  Europe's nations and regions Financial markets

Tags:  Italy, banking, corporate governance, bank governance, stress tests, cooperative banks

How insurers differ from banks: Implications for systemic regulation

Christian Thimann 17 October 2014

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Regulation of the insurance industry is entering a new era. The global regulatory community under the auspices of the Financial Stability Board (FSB) is contemplating regulatory standards for insurance groups that it deems to be of systemic importance. Nine insurance groups received this FSB classification in 2013, and the design of systemic regulation for these groups is now in progress.

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Topics:  Financial markets

Tags:  insurance, reinsurance, banking, financial intermediation, regulation, systemic risk, maturity transformation, BASEL III, investment, capital, capital requirements, bail-in, loss absorption

EU bank deleveraging

Pierluigi Bologna, Arianna Miglietta, Marianna Caccavaio 14 October 2014

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Ever since the global financial crisis made it apparent that financial institutions had increased their leverage substantially (Figure 1), bank leverage has faced intense scrutiny. In the run-up to the crisis, the ballooning of banks’ balance sheets was primarily driven by both a significant increase in lending activities and an abundance of cheap funding. Many banks expanded dramatically, becoming too highly leveraged and ‘too-big-to-fail’, while at the same time accumulating substantial risks.

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Topics:  EU policies Financial markets Global crisis

Tags:  deleveraging, leverage ratios, bank-sovereign link, EU banks, banking, credit, Eurozone crisis

Corporate governance of banks: Risk appetite as a pre-commitment mechanism

Patricia Jackson 13 October 2014

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Since the Global Crisis the authorities have been focusing on how to make banks safer, with changes to capital and liquidity requirements. Corporate governance of banks and the wider risk culture are also in the frame. Laeven and Ratnovski (2014) look at governance and raise three aspects: better risk management, regulation of pay, and enhanced market discipline. Another lens is to consider the effectiveness of the board and in particular its independence. However, several papers (e.g. Erkens et al. 2012 and Adams 2012) have found that this is negatively related to outcomes in the Crisis.

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Topics:  Financial markets Global crisis

Tags:  global crisis, banking, capital requirements, liquidity requirements, risk management, corporate governance, Culture

Finance sector wages: explaining their high level and growth

Joanne Lindley, Steven McIntosh 21 September 2014

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Individuals who work in the finance sector enjoy a significant wage advantage. This wage premium has received increasing attention from researchers following the financial crisis, with focus being put onto wages at the top of the distribution in general, and finance sector wages in particular (see Bell and Van Reenen 2010, 2013 for discussion in the UK context). Policymakers have also targeted this wage premium, with the recent implementation of the Capital Requirements Directive capping bankers’ bonuses at a maximum of one year of salary from 2014.

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Topics:  Financial markets Microeconomic regulation

Tags:  Bankers’ bonuses, banking, wages, Inequality, UK, regulation, asymmetric information, Executive compensation, Finance, task-biased technological change, ICT

Shadow banking and the economy

Alan Moreira, Alexi Savov 16 September 2014

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Shadow banking, what is it good for? At the epicentre of the global financial crisis, shadow banking has become the focus of intense regulatory scrutiny. All reform proposals implicitly take a stance on its economic value.

According to the prevailing regulatory arbitrage and neglected risks views, it doesn’t have any – shadow banking is about evading capital requirements, exploiting ‘too big to fail’, and marketing risky securities as safe to unwitting investors. The right response is to bring shadow banking into the regulatory and supervisory regime that covers insured banks.

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Topics:  Financial markets Global crisis Macroeconomic policy

Tags:  shadow banking, banking, financial crisis, global crisis, regulatory arbitrage, liquidity transformation, financial stability, externalities, collateral, business cycle, financial regulation, financial fragility, liquidity, liquidity crunch

Compliance with risk targets – will the Volcker Rule be effective?

Jussi Keppo, Josef Korte 07 September 2014

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Full compliance?

The Volcker Rule, passed as part of the Dodd–Frank Act in July 2010, has been appraised as one of the most important changes to banking regulation since the global financial crisis. By restricting banks’ business models and prohibiting allegedly risky activities, the rule ultimately aims at increasing resolvability and reducing imprudent risk-taking by banks, and therefore at increasing financial stability. This is done by banning banks from proprietary trading and limiting their investments in hedge funds and private equity.

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Topics:  Financial markets Microeconomic regulation

Tags:  banking, regulation, Volcker rule, Dodd–Frank, banking regulation, proprietary trading, risk, hedging, financial stability

Banks, government bonds, and default: What do the data say?

Nicola Gennaioli, Alberto Martin, Stefano Rossi 19 July 2014

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Recent events in Europe have illustrated how government defaults can jeopardise domestic bank stability. Growing concerns of public insolvency since 2010 caused great stress in the European banking sector, which was loaded with Euro-area debt (Andritzky 2012). Problems were particularly severe for banks in troubled countries, which entered the crisis holding a sizeable share of their assets in their governments’ bonds – roughly 5% in Portugal and Spain, 7% in Italy, and 16% in Greece (2010 EU Stress Test).

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Topics:  Financial markets

Tags:  sovereign debt, financial crises, banking, banks, bonds, sovereign default, credit, bank lending, risk-weighting

Are banks too large?

Lev Ratnovski, Luc Laeven, Hui Tong 31 May 2014

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Large banks have grown significantly in size and become more involved in market-based activities since the late 1990s. Figure 1 shows how the balance-sheet size of the world’s largest banks increased two- to four-fold in the ten years prior to the crisis. Figure 2 illustrates how banks shifted from traditional lending towards market-oriented activities.

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Topics:  Financial markets

Tags:  regulation, economies of scale, bank regulation, banking, Too big to fail, systemic risk, BASEL III, bank resolution, bank capital

Spillovers from systemic bank defaults

Mark Mink, Jakob de Haan 24 May 2014

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Financial-crisis management and prevention policies often focus on mitigating spillovers from the default of systemically important banks. During the recent crisis, governments avoided large bank failures by insuring and purchasing intermediaries’ troubled assets, by providing them with capital injections, and even by outright nationalisations. After the crisis, financial regulators designed additional requirements for those institutions that the Financial Stability Board designated as globally systemically important banks (G-SIBs).

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Topics:  Financial markets

Tags:  financial stability, spillovers, regulation, banking, banks, systemic risk

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