Journal of Financial Regulation and Compliance
- Emerald Group Publishing Limited
- Publication date:
- Nbr. 27-3, July 2019
- Nbr. 27-2, May 2019
- Nbr. 27-1, February 2019
- Nbr. 26-4, November 2018
- Nbr. 26-3, July 2018
- Nbr. 26-2, May 2018
- Nbr. 26-1, February 2018
- Nbr. 25-4, November 2017
- Nbr. 25-3, July 2017
- Nbr. 25-2, May 2017
- Nbr. 25-1, February 2017
- Nbr. 24-4, November 2016
- Nbr. 24-3, July 2016
- Nbr. 24-2, May 2016
- Nbr. 24-1, February 2016
- Nbr. 23-4, November 2015
- Nbr. 23-3, July 2015
- Nbr. 23-2, May 2015
- Nbr. 23-1, February 2015
- Nbr. 22-4, November 2014
- Quantifying the potential impact of a green supporting factor or brown penalty on European banks and lending
Purpose The European Parliament and Commission are considering introducing a green supporting factor (GSF) or brown penalty (BP) for capital reserve requirements. This paper aims to estimate the potential impact such a policy intervention may have on both capital reserves of European banks and the cost and availability of capital to “green” and “brown” investments. Design/methodology/approach The paper draws on the existing empirical and theoretical literature on the impacts of changes to capital reserve requirements on the real economy. It applies these estimates on the particular policy intervention currently being discussed at EU level to estimate the potential range of impacts on the cost of capital - measured in basis points - and the availability of capital - measured in per cent changes to lending. Findings A GSF would have a limited effect on overall capital requirements of banks compared to a BP - given the larger universe of assets on which such a penalty would be applied. The estimated effect is a reduction in capital requirements associated with a GSF of around €3-4bn based on baseline “green” definitions. In terms of cost of capital, the paper estimates a reduction of 5 to 26 basis points for green projects (with inverse expected effects for a BP). In terms of availability of capital, analysing a BP suggests a potential reduction in lending to brown assets of up to 8 per cent. Originality/value The paper provides direct evidence, with the first quantitative analysis of the potential impact of the current policy proposition discussed at EU-level.
- Ignoring personal moral compass: factors shaping bankers’ decisions
Purpose The purpose of this paper is to increase our understanding of the challenges the banking industry continues to face from an ethics standpoint more than a decade after the credit crisis. Since 2007, there has been renewed interest in the way professional ethics is integrated within the banking culture. With a public that has become more sensitive towards ethical and corporate governance failures, the banking industry has been at the receiving end of strong ethical criticism. Yet, in spite of the regulatory response to the crisis, ethics is still a major issue in an industry where the corporate governance systems implemented by companies have failed to control employee behaviours, even in institutions branding themselves as ethical banks. Design/methodology/approach This paper studies factors inside and around institutions in the banking industry that impact the moral anomie in bankers’ professional environment. This paper applies an ordinary least square regression analysis, preceded by exploratory and confirmatory factor analysis, to test the hypothesised relations between anomie and the factors proposed. Findings The results show that long-term orientation, strategic aggressiveness and competitive intensity do have an influence on anomie. These results are compared to previous research applied in non-financial industries and prompt the strengthening of corporate governance systems in financial companies with aggressive corporate cultures. Originality/value The paper therefore introduces the factors that lead bankers to ignore the morals they gained from society and provide a better understanding of the reasons behind the deviant behaviours that caused the crisis a decade ago. It represents a crucial first step for future policymaking that fills an important gap in the financial regulation literature. Indeed, the lack of understanding of the factors dictating behaviours in the industry meant that regulatory changes in the past decade have mostly focussed on technical aspects of the problem (e.g. new capital structure requirements) and produced few answers to address the ethical challenges.
- The impact of public scrutiny on executive compensation
Purpose This paper aims to examine the impact of public scrutiny on chief executive officer (CEO) compensation at Standard & Poor’s (S&P) 500 firms. Design/methodology/approach This paper uses the unique opportunity provided by the 2008 financial crisis and, in particular, government support and legislated compensation restrictions in the US Department of the Treasury’s Troubled Asset Relief Program (TARP). It aggregates monetary and non-monetary executive compensation information from 2006 to 2012, with firm- and manager-level data. It presents univariate summary compensation results and uses multivariate regression analysis to isolate the impact of public scrutiny and legislated compensation restrictions on executive pay. Findings Overall, the results are consistent, with increased public scrutiny having a lasting impact on perks and temporary impact on wage and legislated compensation restrictions having a temporary impact on wage. Changes in specific perk items provide evidence on which perks firms perceive as excessive and which provide common value. Originality/value The paper contributes to the discussion of perks as excess by introducing a novel data set of perk compensation at S&P500 firms and by studying how firms choose to alter levels of specific perk items in response to increased public scrutiny and legislated compensation restrictions. The paper contributes to the literature on executive pay as there has been little inquiry into the impact of public scrutiny on compensation. Public scrutiny could be an important source of external governance if firms change behavior in response to explicit and implicit scrutiny costs.
- Asymmetric return response to expected risk: policy implications
Purpose As investors’ fear has an impact on their risk-return tradeoff, this fear leaves markets susceptible to sudden and large fluctuations. The purpose of this study is to suggest regulators to amend their precautionary methods to recognize the difference in investor behavior for high-risk periods versus low-risk periods. Design/methodology/approach The authors empirically show the difference in investor response to changes in expected risk as a function of level of risk. They then show different return patterns for high-risk and low-risk days. Their approach is implemented to evaluate whether investors’ reaction is the same to changes in risk during high-risk versus low-risk periods. Findings The results indicate that the negative return response to incremental increases in risk is significantly higher for periods of high versus low expected risk, with high defined as risk levels above long-run normal. Research limitations/implications Investors’ increased response to changes in risk exposes financial markets to higher likelihood of sudden and larger fluctuations during high-risk periods. Regulator-imposed circuit breakers are designed to protect markets against such market crashes. However, circuit breakers are not designed to account for investor behavior changes. The results show that circuit breakers should be different for high- versus low-risk periods. Practical implications A circuit breaker that is designed to protect investors against large drops should be amended to have a lower threshold during high-risk periods. Originality/value The contribution is, to the authors’ knowledge, the first research effort to evaluate the effects of differences in investor behavior on investor reactions and regulator imposed fail-safes. During the times of extreme market risk, the proposed changes may enable circuit breakers function their intended purposes.
- An update on self-regulation in the Canadian securities industry (2009-2016). Funnel in, funnel out and funnel away
Purpose This paper aims to analyze the processing of complaints against investment advisors and Member firms through the Investment Industry Regulatory Organization of Canada (IIROC) enforcement system between 2009 and 2016. The paper used the misconduct funnel to show the number of complaints that are “funneled in,” and how these complaints are subsequently “funneled out” and “funneled away” at the investigation and prosecution stages of IIROC enforcement system. Design/methodology/approach The paper uses data from IIROC enforcement annual reports from 2009 to 2016. A combination of descriptive statistics and correlation matrices was used to analyze the data. Findings The findings indicate that while IIROC “funneled in” more complaints, a significant proportion of complaints were “funneled out” of its enforcement system and funneled “away” from the criminal justice system. Fines imposed were often not collected from individual offenders. IIROC, it seems, is ineffective in handling the more serious and systematic industry problems. Practical implications It is hard not to see the findings from this study being used by the provincial securities commissions and the federal government to support the call for a national securities regulator in Canada. Originality/value This is the first study of its kind to systematically analyze the enforcement performance of IIROC.
- Reviewing Pillar 2 regulations: credit concentration risk
Purpose This paper aims to analyse the recent changes to the Pillar 2 regulatory-prescribed methodologies to classify and calculate credit concentration risk. Focussing on the Prudential Regulation Authority’s (PRA) methodologies, the paper tests the susceptibility to bias of the Herfindahl-Hirscham Index (HHI). The empirical tests serve to assess the assumption that the regulatory classification of exposures within the geographical concentration is subject to potential misuse that would undermine the PRA’s objective of obtaining risk sensitivity and improved banking competition. Design/methodology/approach Using the credit exposure data from three global banks, the HHI methodology is applied to the portfolio of geographically classified exposures, replicating the regulatory exercise of reporting credit concentration risk under Pillar 2. In doing so, the validity of the aforementioned assumption is tested by simulating the PRA’s Pillar 2 regulatory submission exercise with different scenarios, under which the credit exposures are assigned to different geographical regions. Findings The paper empirically shows that changing the geographical mapping of the Eastern European EU member states can result in a substantial reduction of the Pillar 2 credit concentration risk capital add-on. These empirical findings hold only for the banks with large exposures to Eastern Europe and Central Asia. The paper reports no material impact for the well-diversified credit portfolios of global banks. Originality/value This paper reviews the PRA-prescribed methodologies and the Pillar 2 regulatory guidance for calculating the capital add-on for the single name, sector and geographical credit concentration risk. In doing so, this paper becomes the first to test the assumptions that the regulatory guidance around the geographical breakdown of credit exposures is subject to potential abuse because of the ambiguity of the regulations.
- Supervision of lost pension accounts and unclaimed benefits
Purpose The purpose of this paper is to investigate how private pension supervisors in selected jurisdictions monitor and address lost pension accounts and unclaimed pension assets or benefits and draw supervisory implications. Design/methodology/approach This paper is based on the survey on private pension schemes of selected International Organisation of Pension Supervisors member jurisdictions. Findings This paper finds that there are differences in severity of the issue of lost pension accounts and unclaimed pension benefits among jurisdictions, and that pension supervisors/regulators differ with regard to awareness of and approaches taken to handle this issue. Some jurisdictions show a well-established systematic approach to deal effectively with the problem of lost pension accounts or unclaimed benefits, while other jurisdictions are yet to recognise and tackle the issue. Originality/value To the best of the authors’ knowledge, this is the first larger cross-country study on lost pension accounts and unclaimed benefits in private pension schemes. The paper presents international comparison of this issue in 32 different jurisdictions and provides examples of good supervisory or regulatory practices.
- Banks, climate risk and financial stability
Purpose This paper aims to quantify the (syndicated) loan exposure to elevated environmental risk sectors of the banking system in the USA, EU, China, Japan and Switzerland at US$1.6tn and to highlight its importance, which ranges from 3.8 (USA) to 0.5 per cent (China) in terms of total national banking assets. The paper highlights the relevance of exploring prudential policy responses, including a harmonized taxonomy, statistical and reporting framework that could contribute to internalizing the negative externalities associated with climate risks by both banks and their supervisors. Among the prudential supervisory tools, credit registers facilitate the assessment of environmental risk drivers in “carbon stress tests.” This paper also presents a framework of analysis for the regulatory treatment of climate-related risks. Design/methodology/approach Similarly to Weyzig et al. (2014), this paper uses financial databases on the banks’ role as book runners for syndicated loans; that is, as the lead arrangers who also provide a large share of the actual lending. Loans are outstanding on December 31, 2014, and the paper assumes linear amortization of loans issued before that date and with maturity after that date. This study includes the largest banks from the above-mentioned countries with financial information available in SNL Financial and EU banks with financial information available in the ECB database on December 31, 2014. By assessing the relative share of the ten largest (or total reporting if less) banks’ exposure to each high environmental risk sector in relation to their total assets, these findings can be extrapolated across sectors in the respective country. Findings This paper quantifies the loan exposure to elevated environmental risk sectors of the banking system in the USA, EU, China, Japan and Switzerland in US$1.6tn, broadly in line with the findings of Battiston et al. (2017) and Weyzig et al. (2014). This paper also explores prudential policy approaches and tools. In addition to the lack of taxonomy of “brown” vs “green,” the paper identifies the limitations to assess the risks involved in the transition to a low-carbon economy: supervisory reports that do not make full use of the existing international statistical framework (e.g. EU COREP and FINREP); lack of harmonized reporting requirements of environmental risks; lack of credit registers as tools to perform carbon stress-testing; and supervisors’ governance framework that do not internalize environmental risks (e.g. proposed revision of the Basel Core Principles of Banking Supervision). As per the stress-testing, the paper presents two examples. The paper presents a framework of analysis for the regulatory treatment of climate-related risks. The author identifies two critical elements of such framework if prudential regulation of environmental risks is to be considered: the consideration or not of climate risk as credit risk and the impact of environmental risks over probabilities of default over the entire business cycle. Research limitations/implications No internationally accepted “official” taxonomy of high environmental risk sectors exists. This paper uses Moody’s (2015a) classification of sectors according to their environmental risk exposure. This paper’s exposures do not reflect the real risk exposure of these institutions and the banking industry as a whole because, as explained in Page 6, these values are without regard to bilateral loans and guarantees and securitizations of loans; in the case of loans to power generation companies, renewable sources are not excluding and, similarly, for the production of electric vehicles, loans are not excluded. Furthermore, this paper does not assess banks’ exposures to sovereigns subject to high environmental risks and bonds and equity issued by corporations operating in high environmental risk sectors. Practical implications Contribution to the present policy debate on how to regulate banks’ exposure to high environmental risk and how to manage the transition to a low-carbon economy. Social implications This paper can increase awareness of the banking sector transition risks to a low-carbon economy. Originality/value This paper quantifies banks direct exposures to high environmental risk sectors using an ample definition of sectors exposed to environmental risk. The author suggests policy actions to assess the environmental risks. The author defines a regulatory framework for banks to internalize the negative externalities of environmental risks.
- CCP resolution, loss allocation and shareholders’ rights
Purpose Central clearing counterparties’ (CCPs) specific loss allocation mechanism is reflected in the specific resolution regime designed at the international level. At the same time, international guidance texts require equity to bear losses first in resolution. This creates a tension that immediately exposes resolution authorities to potential claims from CCPs’ shareholders. The purpose of this paper is to seek possible options to solve that tension, thereby enabling a workable and credible resolution regime for CCPs. Design/methodology/approach The paper analyses the current tension between the no creditor worse-off (NCWO) counterfactual for CCPs and the “equity bears first losses in resolution” principle. It then considers six different options to solve this tension, ranging from a revision of insolvency law to the modification of the loss-allocation structure. Findings The paper concludes that additional layers of capital contribution, adapting the contractual arrangements or articles of incorporation and/or the creation of a specific NCWO counterfactual for shareholders could help in solving the identified tension. Practical implications The paper presents options on how to design a workable and credible resolution regime for CCPs that would enable resolution authorities to exercise their powers and have the flexibility to intervene at an early stage in recovery to prevent the exhaustion of available financial resources, without being unduly exposed to claims. Originality/value The paper contributes to the literature on CCP resolution. It is one of the first to analyse the articulation between the loss-allocation structure of CCPs, the NCWO principle and shareholders’ rights. We hope that this paper will encourage further literature to develop on this important subject.
- When benchmark rates change: the case of Islamic banks
Purpose This paper aims to examine the issue that arises in the context of benchmark rate (or interest rate) changes made for reasons of monetary policy in a jurisdiction with a significant presence of Islamic banks. Changes, especially increases, in the prevailing interest rate made by central banks raise issues of asset-liability management for banks, which typically have longer maturities on the asset side than on the liabilities side, resulting in exposure to interest rate risk for conventional banks, and what is known as rate of return (RoR) risk for Islamic banks, which for reasons of compliance with Islamic religious law (Shari’ah) do not use interest in their operations. Islamic banks use various financial instruments which reflect the cost of funds by means of contracts of sale on credit or of leasing or forms of partnership, which allow them to earn returns on their funds and to pay returns to customers who deposit funds with them. Design/methodology/approach The methodology of this study consisted of a descriptive analysis of the relevant characteristics of Islamic banks and their economic and regulatory environments, illustrated by a case study approach applied to two jurisdictions, namely, Sudan and Malaysia. Findings In jurisdictions where Islamic banks represent a significant share of the market for financial services, if the contracts used in Islamic financing allow for periodic adjustments of the profit rate or lease rental, this could result in a significant impediment to the full implementation of monetary policy and hence to the maintenance of financial stability. Originality/value This study is (to the best of authors’ knowledge) the first thorough analysis in the literature of the issues arising from the exposure of Islamic banks to RoR risk and has clear implications for regulatory and central bank policy.
- Global financial regulation in the “New International Economic Order”. The unfulfilled promise of equitable economic governance
Purpose In 1974, the UN General Assembly adopted a landmark resolution proclaiming the establishment of a New International Economic Order. One of the basic aims of this declaration was to enhance the voice and participation of developing countries in the international economic decision-making ...
- Regulatory issues in blockchain technology
Purpose This paper aims to examine the key regulatory challenges impacting blockchains, innovative distributed technologies, in the European Union (EU) and the USA. Design/methodology/approach A qualitative perspective underpins the study. This paper relies on primary data from...
- Reputation risk management in financial firms: protecting (some) small investors
Purpose - This paper aims to provide an explanation and evidence for the recent lack of retail financial product failures in Canada in the face of a (formal) regulatory failure. Design/methodology/approach - The paper applies the...
- The Law relating to syndicated loan agreements and its application in commercial practice
Purpose The purpose of this paper is to articulate the law relating to syndicated loan agreements and what legal experts and parties need to safeguard against inherent pitfalls in its usage and practice. The research design of this paper has two strands: an examination of generic issues...
- Analysis on corporate governance compliance standards in New Zealand – a qualitative study on disclosures using content analysis and interviews
Purpose This paper aims to provide more insights into the standard of corporate governance in New Zealand. The study intends to uncover how a small country with a well-developed economy with a good system of law and order, good institutional set up and law enforcements and implements the...
- Is commercial bank lending in South Africa procyclical?
Purpose This paper aims to examine the relationship between commercial bank lending and business cycle in South Africa. This paper attempts to know whether commercial bank lending in South Africa is procyclical. Design/methodology/approach The model assumed that the lending behaviour ...
- Self-regulation and compliance enforcement practices by the Investment Dealers Association in Canada. 1984 to 2008
Purpose This paper aims to examine the enforcement practices of the Investment Dealers Association of Canada (IDA) and argue that self-regulation simply does not work in the financial sector, as the sanctions available are neither applied with sufficient severity nor are the responsibilities...
- The measurement and regulation of shadow banking in Ireland
Purpose The purpose of this paper is to study financial vehicle corporations (FVCs) and other special purpose vehicles (SPVs) in Ireland. Design/methodology/approach The paper is based on a database of FVCs that are a central part of the shadow banking sector in Ireland. The database ...
- The efficacy of market abuse regulation in the UK
Purpose The purpose of this paper is to ascertain the efficacy of Financial Services and Markets Act (FMSA) (2000) in deterring illegal insider trading in target companies around the time of a merger and aquisition announcement. Design/methodology/approach The author uses an event...
- Emergence of Fintech and cybersecurity in a global financial centre. Strategic approach by a regulator
Purpose This paper aims to explore how the regulator of a global financial centre (GFC) under an international trend of adopting emerging technologies for financial services (Fintech) articulates such opportunities and risks strategically. Design/methodology/approach With a...