• Journal of Financial Regulation and Compliance

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

Latest documents

  • Effective bank regulation: seven guiding principles

    Purpose This paper is a “viewpoint” article, and as such, the purpose of this paper is to present the author’s opinion and interpretation. Its primary purpose is to propose seven guiding principles for effective bank regulation so that these may be subject to academic criticism. Design/methodology/approach The principal theme of this paper has its origins in archival research into the nature of bank regulation in the UK in 25 to 30 years after the Second World War. This paper draws upon insights gained into the nature of bank regulation in the UK arising from that research. It focuses on what aspects of bank regulation were effective in that earlier period. It then attempts to convert those insights into underlying principles. Findings Seven principles are proposed as the starting point for a discussion as to the principles that should underpin effective bank regulation. The seven principles are set out in the introduction to the paper. Originality/value The framework for the regulation of banks in the UK and in many other countries is a complex one. The general trend in bank regulation in the UK in the past four decades has been technocratic, characterised by a preference for codified rules, which are often detailed and technically complex. It has also been characterised by the establishment, or further development, of intricate regulatory and supervisory structures at national, international and supranational levels. Scholarly attention has understandably been focused on those trends. Rather less attention has been given to the broader principles that might underpin and guide bank regulation. This paper seeks to contribute to that question.

  • The determinants of bank insolvency risk: evidence from Finland

    Purpose This paper aims to contribute to the literature on the determinants of bank-specific insolvency risk. Design/methodology/approach By applying a dynamic two-step System GMM estimator on a novel, representative panel of 339 Finnish unlisted cooperative and savings banks over the period 2002-2018. Findings This study contributes to the literature on the determinants of bank-specific insolvency risk by applying a dynamic two-step System GMM estimator on a novel, representative panel of 339 Finnish unlisted cooperative and savings banks over the period 2002-2018. The key findings suggest that Finnish banks have become less fragile under the renewed EU banking regulation. In particular, the CRD IV has affected banks’ equity levels. This study also captures the detrimental effect of cost inefficiency as well as a positive relationship between the income diversification and insolvency risk. A negative relationship between the GDP growth rate and the insolvency risk is also reported although results suggest that the effect is not immediate. Originality/value This result is discussed together with other macroeconomic factors. The consequent conclusion underlines the fundamental significance of overall macroeconomic dynamics. From the perspective of regulatory harmonization, more research is needed to address the level of homogeneity of macroeconomic dynamics between different geographical and cultural regions.

  • Financial freedom, market power and bank margins in sub-Saharan Africa

    Purpose This paper examines the effect of financial (banking) freedom and market power on bank net interest margins (NIM). Design/methodology/approach The study uses data from 11 sub-Saharan African countries over the period, 2006-2012, and the system generalized method of moments to assess how financial freedom affects the relationship between market power and bank NIM. Findings The authors find that both financial freedom and market power have positive relationships with bank NIM. However, there is some indication that the impact of market power on bank margins is sensitive to the level of financial freedom prevailing in an economy. It appears that as competition intensifies, margins of banks in freer countries are likely to reduce faster than those in areas with more restrictions. Practical implications Competition policies could be guided by the insight on how financial freedom moderates the effect of market power on bank margins. Originality/value This study provides new empirical evidence on how the level of financial freedom affects bank margins and the market power-bank margins relationship.

  • Market power and stability of financial institutions: evidence from the Italian banking sector

    Purpose This paper aims to explore the relationship between bank market power and stability of financial institutions in Italy between 2001 and 2012. The authors first test the existence of a U-shaped relationship between market power and financial stability. Second, they regress the market share indicator on bank risk-taking to underline whether financial stability is affected by increasing or decreasing the market power of banks. Third, they explore whether this relationship is affected by the size, level of capitalization and credit insolvency of banks. Design/methodology/approach Relying on highly territorially disaggregated data at labor market areas level, the authors estimate the impact of bank market power and other explanatory variables on a proxy of risk taking behavior such as the banking “stability inefficiency” derived simultaneously from the estimation of a stability stochastic frontier. Bank market power is taken into account through an individual measure based on loans. Financial stability is calculated through the Z-score. The authors use, as risk-taking measure, the stability inefficiency whose estimation approach is the stochastic frontier analysis. Findings The empirical evidence shows that the inefficiency of financial stability is found to be U-shaped related with respect to the measure of market power. Bank size is an essential factor in explaining the relationship between bank market power and risk-taking. Cooperative banks have fewer incentives to gain market power to better perform in term of risks. The reform of the cooperative banks that took recently place in Italy is not supported by the data. Originality/value The relationship between bank market power and financial stability has been analyzed using a rich sample of cooperative, commercial and popular banks in Italy over the 2001-2012 period. The authors rely on labor market areas being sub-regional geographical areas where the bulk of the labor force lives and works. The paper investigates the market power-stability link considering both cooperative and non-cooperative banks. Indeed, specific attention has been paid on cooperative banks because of their mission in favor of the local community as only few studies, to the best of the authors’ knowledge, examine cooperative banking.

  • Where are Islamic finance indices pointing towards?. Lessons from experimental ‘pockets’ of Islamic financial regulation on international stock markets

    Purpose This paper aims to survey the screening practices and regulatory arrangements that can be gleaned from the experience of Islamic financial indices on international stock markets. Such indices can be regarded as experiments in the demarcation of “pockets” of Sharī‘ah-compliant securities exchange, in the context of non-Sharī‘ah-compliant stock markets. They offer valuable regulatory precedent, with a view to the development of a transnational domain of Islamic financial transactions. Design/methodology/approach The paper leverages the experience of Islamic financial indices for charting the fault lines between the foundational principles of Islamic finance, and those of interest-based investment commonly accepted on international financial markets. It subsequently reviews the most salient regulatory arrangements in place for discriminating between permissible and forbidden securities and modes of trading, as implemented on Islamic financial indices. These include selection criteria for index inclusion, and Sharī‘ah committees with ex ante and ex post supervisory duties. Findings The paper makes a case for viewing Islamic finance indices on international capital markets as capacity-building experiments for the regulation of transnational Islamic financial flows. Originality/value The study rejuvenates the pragmatic approach towards the development of Islamic capital markets, by suggesting that incremental organisational innovations, as developed in connection with Islamic financial indices, can build institutional capacity towards an economy that abides by Islamic values.

  • Examining the role of institutional framework in promoting financial literacy by microfinance deposit-taking institutions in developing economies. Evidence from rural Uganda

    Purpose This paper aims to examine the role of institutional framework of regulative, normative, and cultural-cognitive in promoting financial literacy by microfinance deposit-taking institutions in developing economies with a specific focus on rural Uganda. Design/methodology/approach Data were collected from a total sample of 400 respondents who are clients of promotion of rural initiatives development enterprises microfinance deposit-taking institution using a questionnaire and analysis of moment structures (AMOS) was adopted to analyze the data to examine the role of institutional framework of regulative, normative, and cultural-cognitive in promoting financial literacy by microfinance deposit-taking institutions in developing economies with a specific focus on rural Uganda. Findings The results indicated that institutional framework of regulative, normative, and cultural-cognitive significantly and positively promotes financial literacy by microfinance deposit-taking institutions in developing economies, especially in rural Uganda. The existence of institutional framework of regulative (codified rules and laws), normative (shared beliefs/values and norms), and cultural-cognitive (shared conception and interpretation) promotes financial literacy by microfinance deposit-taking institutions in rural Uganda. The structural equation model constructed by use of AMOS revealed that the institutional framework of regulative, normative, and cultural-cognitive explains 27 per cent of the variation on the role of microfinance deposit-taking institutions in promoting financial literacy in rural Uganda. Research limitations/implications This study was purely cross-sectional with data collected at a specific point in time. Therefore, future studies through longitudinal research design can be adopted to test for the hypotheses derived under this study. In addition, only quantitative data collected by use of a semi-structured questionnaire was used in this study. Further studies may consider the use of interviews to get in-depth responses from the respondents. Practical implications Advocates of financial literacy programs in developing economies should consider the existence of institutional framework of regulative, normative, and cultural-cognitive, which helps in promoting financial literacy by microfinance deposit-taking institutions. Indeed, the existence of state legislation to teach people about how to manage their money can promote financial literacy. Besides, normative behavior among individuals within a social setting can lead to increased likelihood that they will engage and participate in a particular financial literacy drive. Correspondingly, cognition, especially fluid intelligence that changes as people age may also help individuals to invoke several dimensions of cognitive skills to make informed financial decisions. Originality/value The current study adds to the existing body of knowledge by examining the role of institutional framework of regulative, normative, and cultural-cognitive in promoting financial literacy by microfinance deposit-taking institutions in developing economies. There is deficiency in the link between the institutional framework under the theory of institutions and financial literacy, especially in developing economies where there is great need for financial literacy among the poor.

  • Blockchain and insurance: a review for operations and regulation

    Purpose The purpose of this paper is to examine the operational and regulatory positions of the employment of Blockchain in the insurance industry. Blockchain technology has attracted wide interest from various stakeholders. Many theorists are predicting that this technology will disrupt financial services, including insurance. As stated that the development of blockchain is dependent on regulatory acceptance of this technology, it is essential to establish the current state of play with regard to the application and use of blockchain from a commercial and regulatory standpoints. Design/methodology/approach This review encompasses a number of approaches to view the current status of Blockchain applications. From a commercial approach, this research lists the current applications of blockchain within the insurance industry. From a regulatory point of view, the current positions of the EU and national regulatory bodies are enquired upon to establish how they are examining FinTech and Blockchain technologies within their regulatory processes. Findings This review illustrates a number of Blockchain applications in situ from a commercial point of view. From a regulatory setting and following a call from international and EU levels, it appears that various regulatory bodies have begun the process of formulating testing processes for FinTech applications. There are two predominant types in operation, while others are forming points of contact for advice for FinTechs and a small amount who have not begun the process at all. Research limitations/implications This review illustrates the current state of play of blockchain in insurance from a commercial and regulatory point of view. While this has been observational, this review pulls together information from various sources to encapsulate the regulatory positioning of evaluating FinTech and Blockchain technologies for academia, regulatory and industry audiences. Originality/value This review offers a central resource of information with regard to the current state of blockchain technologies in operation and regulatory approaches to this and other FinTech developments.

  • Does the speed of adjustment in regulation and supervision affect financial stability in developing countries?

    Purpose This paper aims to examine the impact of bank regulation and supervision on financial stability. Financial sector reform, especially in developing countries, takes the form of a sudden adjustment in regulation and supervision. The main objective of the paper is to examine whether this fast and sudden adjustment in regulation and supervision has an undesirable impact on financial stability. Furthermore, the paper examines the role of real economic development in determining the impact of financial reform on financial stability. Design/methodology/approach Empirically, on a sample of 57 developing countries over the period 2000-2013, the author explored the impact of bank regulation and supervision on financial stability for different sub-groups of countries. The division is based on the real level of economic development and, most importantly, on the speed of adjustment in regulation and supervision. The study uses the cross-sectional-ordinary least square model. Each country has three observations (average 2000-2004, average 2005-2008 and average 2009-2013), which are convenient, with the date of the three surveys on regulation and supervision (2002-2006-2011). The period of the averages is selected to cover periods before and after the survey as regulation and supervision may be adopted before the survey and as its impact may persist for the period after. Findings The major finding of this study is that it supports the important role of the speed of adjustment in regulation and supervision, and its impact on financial stability. Soft adjustment in regulation and supervision has more positive impact on financial stability than fast adjustment. Activity restrictions have positive and significant impact on financial stability in soft adjustment countries’ group. On the other hand, in countries with fast adjustment, results show negative and statistically significant impact on financial stability, especially for supervisory independence. More time is needed for supervisors to adapt to new regulation and supervision and gain expertise to monitor financial condition of banks in a consistent manner. Results also show that the level of economic development is an important factor when testing the impact of regulation and supervision on financial stability. In lower income countries, more room is available for corruption in lending, which has a negative impact on financial stability. Practical implications This study advocates the necessity of taking the speed of adjustment in regulation and supervision by policymakers in developing countries, while initiating reform in the financial sector. Financial sector reform that takes the form of a sudden adjustment in regulation and supervision may have undesirable results in terms of financial stability. On the other hand, soft adjustment in regulation and supervision, which gives more room for supervisors to adapt and gain expertise, may have more positive impact on financial stability. Originality/value This paper is the first paper to explore new methods of calculating the speed of adjustment in regulation and supervision, and to examine whether the high speed of financial reform in developing countries has an undesirable impact on financial stability.

  • Comparison of advanced economies’ performance in bubbles mitigation

    Purpose This paper aims to analyze the effectiveness of macroprudential and fiscal policies taken from a sample of ten advanced economies in relation to the mitigation of real-estate and credit bubbles by comparing their performance. Design/methodology/approach This comparison is elaborated with a seemingly unrelated regression methodology, which allows the assessment of individual countries’ performance and improves the estimation of the dependent variables versus an individual regression. Findings The analysis concludes that countercyclical measures have been more effective to control the growth of household debt. Furthermore, this study validates that macroprudential measures focused on the residential sector meet their objective of controlling the growth of house prices, whereas those macroprudential measures with more generic targets are effective to control the growth of household debt. Originality/value As opposed to previous panel-regression studies, which have analyzed the performance of macroprudential and fiscal measures in generic terms, this paper compares the performance of these tools in ten advanced economies. Based on the analysis performed, several recommendations are derived for policymakers.

  • Impact of correspondent bank de-risking on money service businesses in Jamaica

    Purpose The paper aims to provide needed quantitative assessments of the impact of the withdrawal of correspondent banking to small emerging economies. It serves to identify the extent to which global anti-money laundering and combatting the financing of terrorism (AML/CFT) standards have influenced global banks’ decision to withdraw correspondent banking from some jurisdictions and the subsequent economic spillover effects on other non-bank financial entities. Design/methodology/approach Separate semi-structured surveys are issued to banks and money services businesses in Jamaica. Analysis of the responses identify the initial impact of de-risking on banks and the subsequent spillover effect on the other aspects of the financial system. Findings Results show significant spillover effects on money services businesses in their ability to transact in foreign currency with local commercial banks. Further, the scale of this impact is greater and costlier for smaller entities. Research limitations/implications The economic consequences of the direct and indirect impact of correspondent bank de-risking are increased concentration risks and the potential expansion of shadow financial activity. Practical implications Tighter AML/CFT standards coupled with action of over-compliance has created unintended consequences for small developing countries across the globe. In Jamaica, commercial banks have either lost correspondent relationships or have had restrictions placed on the types of services available. It creates risks to economic growth and development through the hindrance of access to international financial markets for payments, trade and commerce. Originality/value This study is the first among research on the issue of correspondent bank de-risking to provide quantitative assessments of the impact on local financial systems.

Featured documents