Financialization, bank business models and the limits of post-crisis bank regulation

Abstract

This article argues that major post-crisis regulatory initiatives like the Dodd-Frank Act, the Vickers Report, the Liikanen Review and Basel III capital adequacy and liquidity rules that are shaping the banking industry globally are not likely to be successful in de-risking the banks because they do not explicitly engage with the consequences of shareholder value-driven business models that drive management behaviour in banking. Banks operate in a financialized economy where firms compete in the stock market to deliver unrealistic returns to shareholders. The business models of such financialized banks re-locate risks according to conjunctural market and regulatory arbitrage conditions to achieve the unchallenged return targets and therefore thwart the ideal outcomes aimed at by regulatory initiatives. The section ‘Introduction: Post-crisis regulatory reform initiatives to de-risk and re-capitalise banks’ of this article will describe the de-risking and re-capitalisation measures that were introduced by the post-crisis regulatory initiatives in the United States and Europe. The section ‘Financialized bank business models’ will discuss bank business models in a financialised economy and how the post-crisis regulatory initiatives have failed to address the risks in banking that are associated with maximising shareholder value. The section ‘Post-crisis examples of relocated risks in shareholder value-driven banks’ will examine two post-crisis case studies where JP Morgan Chase and the UK retail banks like Lloyds Group, in pursuit of shareholder value creation, suffered losses from activities that the new regulatory initiatives have failed to identify and regulate.