• Journal of Financial Regulation and Compliance

Publisher:
Emerald Group Publishing Limited
Publication date:
2011-12-21
ISBN:
1358-1988

Latest documents

  • 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.

  • Shareholder empowerment, steps forward and steps back. Comparative analysis of the US and UK regulations

    Purpose
 The global financial crisis of 2007-2008 prompted a significant debate on corporate governance and shareholder empowerment. A question arises as to whether shareholders ought to be further empowered to have a greater influence over the companies’ activities. Yet, it is not self-evident that shareholder empowerment ensures better-run companies’ corporate activities. Thus, the purpose of this paper is to critically examine, identify and explain the corporate regulation forms and control collectively to evaluate the effectiveness of shareholder empowerment fully.
 Design/methodology/approach
 To do so, this paper sets out a comparative analysis approach between two jurisdictions, the UK and Delaware in the USA. The paper further addresses by undertaking three case studies; Barclays Plc which illustrated the Comply or Explain role, AVIVA (2012) that concentrated on the impact of the shareholder revolt, and the case of Hills Stores Co. v. Bozic (2000), which involved a claim brought by shareholders on the grounds of a breach of fiduciary duty.
 Findings
 This paper argues that the shareholder empowerment theoretically provides an effective means through which corporate activities can be regulated. However, to do this, account must be taken that a distinction should be made between long-term and short-term investors to encourage shareholder engagement by responsible long-term investors. Furthermore, the shareholders can exercise their powers effectively and influence the Board’s decision to award executive compensation.
 Originality/value
 This paper offered two distinct contributions: assessing whether in times of crisis shareholder empowerment represents a way to regulate corporate activities and by assessing the distinction between the perception of shareholder empowerment and the reality in practice.

  • An agency theory approach towards bribery

    Purpose
 This paper aims to discuss the role of agency theory in combatting bribery in multinational corporations. It is shown how a combination of bonus and malus payments could help to create the right incentives for agency.
 Design/methodology/approach
 Based on the analysis of 15 formal and 15 informal expert interviews with both prevention experts and corrupt individuals, concrete ways of more effectively combatting bribery have been developed.
 Findings
 As a result, it is suggested that matrix systems could help to adjust incentives systems to take compliance issues into account. It is found that multinational corporations should eliminate.
 Research limitations/implications
 This study’s findings are limited to the perspectives of 30 interviewees. Hence, it is possible that a study with a larger sample conducted in different countries or at a different time would have led to different results.
 Practical implications
 The identification of the potential role of incentive systems in compliance mechanisms is meant to provide compliance officers and legislators with valuable insights into why the current prevention schemes are ineffective. This can help to both improve compliance mechanisms.
 Originality/value
 While the empirical findings are based in Europe, the results could be applied globally.

  • A new approach to research and theory development for financial firms-building a “house with windows”

    Purpose
 The paper aims to rethink empirical models and theory used in explaining banks and financial institutions (FIs) and to enhance the process of theory construction. This is a provisional response to Colander et al. (2009) and Gendron and Smith-Lacroix’s (2013) call for a new approach to developing theory for finance and FIs.
 Design/methodology/approach
 An embryonic “behavioural theory of the financial firm” (BTFF) is outlined based on field research about banks and FI firms and relevant literature. The paper explores “conceptual connections” between BTFF and traditional finance theory ideas of financial intermediation. It does not seek to “integrate” finance theory and alternative theory in “meta theory” and has a more modest aim to improve theory content through “connections”.
 Findings
 The “conceptual connections” provide a means to develop ideas proposed by Scholtens and van Wensveen (2003). They are part of a “house with windows” intended to provide systematic means to “take data from the outside world” whilst continuously recognising “the complexities of the context” (Keasey and Hudson, 2007) to both challenge and build the core ideas of FT.
 Research limitations/implications
 The BTFF is a means to create “conversations” between academics, practitioners and regulators to aid theory construction. This can overcome the limitations of such an embryonic theory.
 Practical implications
 The ideas developed create new opportunities to develop finance theory, propose changes in banks and FIs and suggest changes in the focus of regulation.
 Originality/value
 Regulators can use the expanded conceptual framework to encourage theory development and to enhance accountability of banks and FIs to citizens.

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