Bank Risks, Regulatory Interventions and Deconstructing the Focus on Credit Risk

Anthony Okafor ,Javier Fadul

doi:10.7176/rjfa/10-8-09

Abstract

The risks that banks face have been exacerbated by the globalization and liberalization of the financial markets. The liberalization of the financial markets has exposed banks to a plethora of risks such as credit risk, liquidity risk, operational risk, counterparty risk, regulatory risk, systematic and reputational risks. A recurring discourse in the risk management literature is the perceived concentration of regulatory authorities on credit risk. This topic is reconsidered in this paper to critically evaluate the different risk types and to interrogate the assertion that regulatory authorities have focused more on credit risks of banks while shying away from other possible risks that banks face. Reviewing contemporary literature and regulatory interventions, we conclude that contrary to the claims that regulatory interventions have focused on credit risk of banks, attempts have been made to address in broad terms the gamut of risks that banks face. Keywords: Bank risks, Regulatory interventions, Credit risk DOI : 10.7176/RJFA/10-8-09 Publication date : April 30 th 2019

Highlights

The globalization of the financial markets has led to one of the most significant changes in modern banking since the great depression, and this has brought about changes in banking services and the amount of risks banks face (Raluca, 2012)
Attempts will be made to critically evaluate regulatory interventions, especially the assertion that regulatory authorities have focused more on credit risks of banks while shying away from other possible risks that banks face
Regulatory interventions have focused on a broad spectrum of risks faced by banks

Summary

Introduction

The globalization of the financial markets has led to one of the most significant changes in modern banking since the great depression, and this has brought about changes in banking services and the amount of risks banks face (Raluca, 2012). The focus of regulatory authorities has been to improve the quality of regulations through a rigorous application of cost-benefit principles (Malyshev, 2008) This implies that regulatory interventions are directed at areas of highest impact which probably gives credence to the view that regulatory bodies have focused on the management of some risk types to the exclusion of other risks faced by banks. The framework focused on the risk to banks assets, that is, the likelihood that counterparty might default but failed to account for other threats that banks are exposed to This led to the criticism that regulators and rating agencies focused on the capital ratios of the banks but are not sensitive to the overall risks that banks face (Danielsson & Zigrand, 2015). Before the introduction of the operational risk component of the Basel II, the UK Banking Act of 1987 already provided a framework for deposit taking and managing a bank’s operating environment (Power, 2003, p.5)

Conclusion

Findings

Discussion