Insider perspectives on European banking challenges in the post-crisis regulation environment

Abstract

The purpose of this paper is to make a highly topical and practical contribution by investigating the interplay between capital and liquidity risk management and managerial decision making in banking, following the Basel III introduction for enhancing the safeguards against systemic risk. Specifically, we attempt to gauge the experience and assess the degree of tensions among banking practitioners’ perspectives on the reformed banking liquidity practice and risk-capital management in light of the newly introduced increased capital and liquidity requirements, which are to become fully and unilaterally effective as of 2019. As currently seen the liquidity provision requirement has become a distinct form of ‘sharing’ financial risks in the global economy, which includes the supply of capital from its issuers. This article reviews the issue from a European perspective attempting to gain insight into: (1) the suggestion that the new regulations lack internal consistency owed to their complexity, which creates the potential for both inter- and intra-company regulatory capital arbitrage and credit constriction; and (2) the suggestion that increased capital and liquidity requirements may have a significant impact on bank behaviour and/or certain business model segments. Both of the above can potentially distort managerial behaviour through altering managerial incentives and hence fail to adequately regulate bank behaviour. With regard to the liquidity requirements, whilst we do not attempt to quantifiably assess the degree to which liquidity regulations (the liquidity coverage ratio in particular—LCR henceforth) affect returns on equity/assets to banks, our interviews are used as a triangulating measure for complementing quantitative studies that can provide a further insight into the perception of affecting managerial incentives. We aim to add to, update, and enrich the studies around the vital research question of whether the new regulation and liquidity standards can achieve their ultimate objective of upholding financial soundness and stability. Therefore, this research is important to complete the extant literature on updated insiders’ perspectives that investigate the effectiveness of the new regulatory framework imminently to be fully applicable by 2019. Where the views of the professionals who have voiced their concerns, support, and/or proposals provide for a material contribution, these have also been provided.