Financial Regulatory Authorities Research Articles

Cost-Benefit Analysis and the Structure of the Administrative State: The Case of Financial Services Regulation

The viability and desirability of conducting cost-benefit analysis of financial regulation is a subject of intense academic debate. Opponents claim that such analysis is feasible for environmental regulation but not for financial regulation because of the difference in the benefits that require monetization in the respective areas. This Article argues that the recent debate misses an important part of the problem. In large part, cost-benefit analysis of financial regulation cannot currently be performed successfully because of institutional shortcomings, not analytical difficulties. Compared to Executive Branch agencies, independent agencies, like the major financial regulatory agencies, lack the capacity to do cost-benefit analyses of acceptable quality. Fortunately, there are good Executive Branch models that could be exported to the financial regulatory agencies. In particular, the Financial Stability Oversight Council could implement a robust coordinating role diffusing macroeconomic expertise, learning from the experience of the Interagency Working Group set up to estimate the damage of one ton of carbon dioxide emissions. Moreover, the President could extend to independent agencies his Executive Order vesting in the Office of Information and Regulatory Affairs the responsibility to review significant federal regulations. Though no President has yet taken this step, in part because of fears of a congressional backlash, the time might now be ripe to do so. And, the financial regulatory agencies could learn from the experience of the Environmental Protection Agency in building significant economic expertise to aid the preparation of cost-benefit analyses.The Article also considers the role of judicial review. It takes issue with the influential argument that OIRA review can serve as an alternative to judicial review, showing that such an outcome would be inconsistent with settled principles of administrative law. But OIRA review can lead to more deferential judicial review, by serving as a signal that reviewing courts are likely to find reassuring.

Moral Hazard in Insurance Claiming from a Korean Natural Experiment

This paper presents evidence on moral hazard in auto insurance using a panel data set on all auto insurance companies in Korea. In January 2010, Korean financial regulatory authorities suddenly changed the automobile bonus-malus system such that the threshold of the premium surcharge for collision coverage was increased by 300 per cent, while insured parties’ payments of loss remains unchanged. One year later, however, claimants were required to bear 20 per cent of the loss. This sudden and exogenous regulatory change provides an ideal environment to analyse moral hazard because of the natural setting of the experiment. The empirical results obtained through a fixed-effects model indicate that a rise in the threshold led to a rapid increase in the loss ratio, and the subsequent imposition of coinsurance requirements decreased the loss ratio even after controlling for the number of accidents and claims.

Financial Regulation and Supervision Post the Global Financial Crisis

China and East Asia have survived the global financial crisis of 2007-9 reasonably unscathed. China has achieved a real rate of growth of 9.1 percent in 2009 and 11.1 percent year-over-year in the first half of 2010. Other economies in East Asia, such as Singapore, South Korea and Taiwan, have also begun to recover. India has also performed well. However, the same cannot be said of the United States and Europe, which are still mired in economic recession with low growth rates but high unemployment rates. What caused the global financial crisis of 2007-2009? The principal causes were: (1) Easy money in the United States; (2) Failures of regulation and supervision; and (3) Defects in the institutional design of the financial sector. One principal cause of the global financial crisis is regulatory and supervisory failure in the United States and Europe. What lessons can financial regulatory agencies draw from the 2007-2009 global financial crisis? What do financial regulatory agencies need to do to avoid the repetition of the same mistakes and prevent the recurrence of the same crises? This paper will focus on (1) How financial regulation and supervision should be strengthened so as to avoid failures in the future; and (2) How the institutional design of the financial sector can be enhanced so as to facilitate its successful regulation and supervision. What are the objectives of financial regulation and supervision? They are:(1) Protection of consumers (depositors and borrowers);(2) Protection of creditors and investors from fraud;(3) Ensuring competitiveness of the financial markets and hence their efficiency; and(4) Prevention of systemic failure. Why were the serious regulatory failures that allowed the global financial crisis to occur possible? The first fundamental reason is the overly strong faith on the part of the U.S. financial regulators that whatever could go wrong “the market would take care of it.” It turned out that the market, in the absence of proper regulatory oversight, could not take care of it. The second fundamental reason is a phenomenon known as regulatory capture — over time the regulatory agencies have been “captured” by those firms they are supposed to regulate, through lobbying and other efforts by the latter, and are thus frequently persuaded to relax regulatory requirements in favour of these firms.

An Analysis of Penalties Under ASIC Administered Legislation: Scoping the Issues

This working paper is the first published output of an eighteen month (December 2014 – June 2016) research project conducted by staff at the Melbourne Law School that examines enforcement and penalties regimes under legislation administered by the Australian Securities and Investments Commission (ASIC). During 2015 and early 2016 the project will conduct a review of selected penalties over a ten year period from 2005 to 2014. This paper is an introductory publication that scopes the issues that will be examined in the course of the project. The paper begins with a brief overview of the project and identifies topics that will be considered as the project progresses. Part II discusses key findings in ASIC’s Report 387: Penalties for Corporate Wrongdoing which compares the penalties available to ASIC in relation to comparable regulators in other jurisdictions. Part III examines current debates about corporate wrongdoing and the adequacy of penalties, including the impact of recent parliamentary inquiries. Part IV explains ASIC’s regulatory and enforcement functions and briefly discusses the policy rationales that underlie such functions. Part V presents a preliminary set of data on ASIC’s enforcement activity sourced from its six monthly Enforcement Reports. Part VI makes initial observations in relation to comparable financial market regulatory agencies in other jurisdictions by reference to various criteria, including funding models. Part VII concludes the working paper.

The Regulation of Financial Derivatives: An Agent-Based Model Approach.

In 2007-08, the world experienced the greatest financial crisis since 1929, which turned – in the following years – in one of the deepest and most prolonged periods of economic stagnation of modern history. While there were multiple conditions that originated the so-called Great Financial Crisis, a general consensus emerged that financial derivatives played an important role in the outbreak of the crisis and in posing a credible threat that the entire global financial system could melt down. As a reaction, several countries in the world and international organizations agreed on a policy response to reformulate the global architecture for the regulation of the financial system, including the financial derivatives industry. Yet, the fundamental question of whether the contemporary system of derivatives regulation can effectively shield the financial system from sources of systemic risk is still undecided, for reasons that especially relate to the complexity of the networked structure of the financial derivatives industry. As a way to contribute to tackle this issue, this work aims to investigate whether an important component part of the present system of financial derivatives regulation – namely, Central Counterparts (CCPs) Clearing Houses – provide a more resilient financial system. The research question is addressed through a simulation approach based on an agent-based modeling of the financial derivatives industry. The results of the simulation show that the introduction of a CCP improves the resilience of the simulated financial derivatives industry, although it does not completely shield the financial system from disruptions that may especially depend from the degree of interconnectedness of financial operators and the magnitude of defaults. In sum, this work offers some methodological guidance for enriching the repertoire of tools at disposal of financial regulatory authorities in anticipating the consequences of interventions in the financial industry.

JPMorgan Chase London Whale G: Hedging versus Proprietary Trading

In December 2013, the primary United States financial regulatory agencies jointly adopted final rules to implement Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is often referred to as the “Volcker Rule”. Section 619 prohibits banks from engaging in activities considered to be particularly risky, including proprietary trading and owning hedge funds or private equity funds. Banking regulators designed the final rule against proprietary trading in part to prevent losses like the $6 billion London Whale loss that took place in 2012 at JPMorgan Chase. Given the controversial nature of the Volcker Rule, it is not surprising that the regulatory agencies received 18,000 comment letters, including a 67-page letter from JPMorgan Chase.

Prediction and simulation using simple models characterized by nonstationarity and seasonality

In this paper, we provide new evidence on the empirical usefulness of various simple seasonal models, and underscore the importance of carefully designing criteria by which one judges alternative models. In particular, we underscore the importance of both choice of forecast or simulation horizon and choice between minimizing point or distribution based loss measures. Our empirical analysis centers around the implementation of a series of simulation and prediction experiments, as well as a discussion of the stochastic properties of seasonal unit root models. Our prediction experiments are based on an analysis of a group of 14 variables which have been chosen to closely mimic the set of indicators used by the Federal Reserve to help in setting U.S. monetary policy, and our simulation experiments are based on a comparison of simulated and historical distributions of said variables using the testing approach of Corradi and Swanson (2007a). A key impetus for this paper stems from the fact that various financial service companies routinely create “economic scenarios”, whereby seasonal and nonstationary financial and economic variables such as those examined here are simulated (and predicted) using relatively simple time series models. These “economic scenarios” are subsequently used in risk management and asset allocation, as is often mandated by various world financial regulatory authorities. Our findings suggest that a simple version of the seasonal unit root (SUROOT) model performs very well in predicting 8 of 14 variables, when the forecast horizon is 1-step ahead. However, for horizons greater than one-step ahead, our SUROOT model performs poorly when used for prediction, suggesting that parameter estimation error is crucial to understanding the empirical performance of such models. This “parameter estimation error” result is confirmed via a series of Monte Carlo experiments. Simulation experiments yield similar conclusions, although SUROOT models in this case are useful for constructing “forward” conditional distributions at 1- and 3-step ahead horizons. Interestingly, simple periodic autoregressions do not have this property, and are found to perform very well in both prediction and simulation experiments, at all horizons up to 60months ahead.

Willingness to Pay to Reduce White-Collar and Corporate Crime

Consumer protection and financial regulatory agencies such as the Federal Trade Commission (FTC), the Securities and Exchange Commission (SEC), and the Consumer Financial Protection Bureau (CFPB) regulate various types of consumer, investor and financial frauds. Whether required or not, rulemaking proceedings oftentimes include some form of benefit-cost analysis. Thus, the benefits of proposed regulations – whether fully quantified or not – are an increasingly important component of rulemaking decisions. Anecdotal evidence suggests that the impact on victims in some cases includes significant time and financial hardships and even pain, suffering, and reduced quality of life. Further, the existence of these offenses causes nonvictims to take costly precautionary behavior and might even inhibit legitimate business activities. Yet, little is known about the true costs of consumer and financial crimes other than the out-of-pocket monetary losses incurred by victims. To the extent society wishes to optimally deter such crimes, without better data on nonmonetary costs, any benefit-cost analyses of criminal justice or prevention programs designed to reduce these crimes will inevitably underestimate program benefits. This paper provides an initial framework and empirical estimates of the willingness to pay (WTP) to reduce four types of white-collar and corporate offenses – consumer fraud, financial fraud, corporate crime, and corporate financial crime. Utilizing a contingent valuation survey approach that has been used to estimate the cost of street crimes, the average WTP for a 10% reduction in each of these four offenses is estimated to range between $35 and $85 per household. In the case of consumer fraud and financial fraud, where estimates of prevalence are available, this translates into a WTP of $1200 per consumer fraud and $12,000 for financial fraud. In contrast, the out-of-pocket costs to victims of consumer fraud have been estimated to average about $100, and about $200 to $250 for various types of financial frauds. These figures also compare favorably to the WTP for a reduced household burglary of $19,000.

Do High Customer Bank Deposits Incite Management Fraud? Examining Causes of Management Fraud in the Nigerian Banking Sector

The study investigates factors that incite fraud in the banking sector in Nigeria, using times series data for fraud obtained from CBN data from 1998 to 2010. It was found that high bank deposit were primarily responsible for a high rise fraudulent occurrences in the Nigerian banking sector particularly management fraud, some other factors that were also jointly responsible for these occurrences include high interest rates, low commercial bank lending and poor oversight function by the Central Bank and other financial regulatory agencies. The method of estimation used in the study is the quantile regression estimation method which is a non parametric estimation method based on the premise that the sample median will tend to that of the distributional median, it presents some obvious advantages over OLS (ordinary least squares) estimates, since the results are robust in the presence of outliers and heteroscedastic errors in the response measurement and allows for the exploration of other central tendencies and statistical dispersion properties of the dataset Machando and Silva (2013). The results are robust even after controlling for presence of heterscedastic error in the response measurement as well re-sampling the dataset (conducted by the bootstrapped quantile regression technique). Further explanation is also provided for the implication of variables identified to drive fraud occurrences using kernel density estimation. DOI: 10.5901/jesr.2014.v4n6p331

Willingness to Pay to Reduce White Collar and Corporate Crime

Consumer protection and financial regulatory agencies such as the Federal Trade Commission (FTC), the Securities and Exchange Commission (SEC), and the Consumer Financial Protection Bureau (CFPB) regulate various types of consumer, investor and financial frauds. Whether required or not, rulemaking proceedings oftentimes include some form of cost-benefit analysis. Thus, the benefits of proposed regulations – whether fully quantified or not – are an increasingly important component of rulemaking decisions. Anecdotal evidence suggests that the impact on victims in some cases include significant time and financial hardships and even pain, suffering and reduced quality of life. Further, the existence of these offenses causes non-victims to take costly precautionary behavior and might even inhibit legitimate business activities. Yet, little is known about the true costs of consumer and financial crimes other than the out-of-pocket monetary losses incurred by victims. To the extent society wishes to optimally deter such crimes, without better data on nonmonetary costs, any cost-benefit analyses of criminal justice or prevention programs designed to reduce these crimes will inevitably underestimate program benefits. This paper provides an initial framework and empirical estimates of the willingness-to-pay to reduce four types of white collar and corporate offenses – consumer fraud, financial fraud, corporate crime and corporate financial crime. Utilizing a contingent valuation survey approached that has been used to estimate the cost of street crimes, the average willingness to pay for a 10% reduction in each of these four offenses is estimated to range between $35 and $85 per household. In the case of consumer fraud and financial fraud – where estimates of prevalence are available, this translates into a willingness to pay of $1,200 per consumer fraud and $12,000 for financial fraud. In contrast, the out-of-pocket costs to victims of consumer fraud have been estimated to average about $100, and about $200 to $250 for various types of financial frauds. These figures also compare favorably to the willingness to pay for a reduced household burglary of $19,000.

Avoiding the Next Global Financial Crisis: A Canadian Perspective, Focusing on the 'Boundedly Rational Consumer'

The collapse of the American subprime mortgage market and the global financial crisis and recession essentially came to an end in 2009 and yet these events continue to haunt the global economy. They raise difficult to answer challenges and questions regarding whether enough has been done to prevent another global financial crisis in the near to medium term future, to compensate for the substantial harm incurred by consumers, smaller businesses and other market participants, and to re-instill confidence in the global financial regulatory system. The major argument of this paper is that changes in national and global financial sector markets and regulatory regimes since the collapse of the American subprime mortgage market and global financial crisis provide the boundedly rational but willing to learn financial consumer with somewhat better protection. However, these changes by themselves are not sufficient to prevent another regulatory debacle that would cause as much or even more harm to the financial consumer in the future – including in countries like Canada and Australia that were less affected by the last calamity. The monetary and psychic payoffs from gaming the financial regulatory system are still too attractive, and the culture of high risk, reckless, irresponsible, myopic, and pushing the envelope conduct is too entrenched, to respond to traditional top-down laws, regulations and enforcement practices of governments and their financial regulatory authorities. Moreover, the further globalization of financial markets; the growing complexity of financial products, transactions and contracts; and the integration of emerging market economies into global financial markets; pose new and unfamiliar dangers to national and international financial markets and financial consumers. These trends suggest that countries like Canada and Australia that were less influenced by the 2007 crisis may be less fortunate in the future. The paper’s major conclusion is that the likelihood of another financial crisis of similar magnitude can be diminished if there is concerted systematic action under a sustainable governance mode which involves inter-governmental and governmental bodies, the private sector, civil society, and individual consumers. Each actor has unique capabilities and energies. In some respects, the polycentric and distributed governance approach proposed here involves enhanced collaboration among all actors. In others, it involves recognition of the need for enhanced mechanisms to provide “checks and balances” on the powers and capabilities of any one actor or instrument. Harnessing the insights, capabilities and energies of all actors, including those of the financial consumer, will better ensure that: (i) the corporate culture of gaming the regulatory system will be reduced, (ii) the global contagion that characterized the last financial crisis will be mitigated and stopped at more national borders, and (iii) over time the current too big to fail approach to large international banks and other financial service providers will be recognized as unnecessary and a false hypothesis. This approach is referred to in this paper as “sustainable governance” because of our conclusion that both top-down and more organic bottom-up approaches will be needed, given the complexity and magnitude of the governance task. We recommend that more research should be focused on the self-actualization governance capabilities of individual consumers to protect themselves, and on the ability of civil society organizations to provide independent research, consumer information, “checks and balances” oversight functions, and strong advocacy on behalf of consumers. These two aspects appear to be under-studied in the financial reform research and literature conducted to date.

The probability of default in Russian banking

We compare several models for estimating the default probabilities of Russian banks using national statistics from 1998 to 2011, and find that a binary logit regression with a quasi-panel data structure works best. The results indicate that there is a quadratic U-shaped relationship between a bank’s capital adequacy ratio and its probability of default. In addition, macroeconomic, institutional, and time factors significantly improve model accuracy. These results are useful for national financial regulatory authorities, as well as for risk-managers in commercial banks.

Asset Management Company of Nigeria: Matters Arising

The main thrust of this study is to critically analyze the issues, challenges and prospects that the Asset Management Company of Nigeria (AMCON) faces in resolving the unwarranted critical liquidity challenges the Nigerian Banking Sector found itself and matters arising thereof. There is no gainsaying the fact that in Nigeria like several countries of the world, the effects of the global economic downturn permeated and negatively affected both the Nigerian Stock Exchange and the Banking sector where toxic assets worth approximately $10 billion of toxic assets were held by banks whose assets suffered serious capital erosion due to market failures and poor quality lending decisions.This study examines the intervention of the Central Bank of Nigeria through the Assets Management Corporation of Nigeria Act 2010 (AMCON Act) and employs as a deliberate strategy, an analytical exposition of the Act.The study observed the partial or complete non- adherence to the codes of corporate governance, poor and faulty credit processing, management and control caused the ‘global’, Nigeria banking sector crisis. It opines that though the provisions of the AMCON Act are aimed at compelling the observance of codes of corporate governance and international best practices, to correct the inherent weaknesses in capital structure and the resulting liquidity quagmire, which the financial system strongman forcefully enabled with superior legislations., but there are still big question marks on its applicability and effectiveness. All these are issues reviewed in the first part of the study. The second part of the study expressed a measure of faith in the capability and potency of the AMCON institution to resolve the issue of financial distress and undercapitalization, if properly applied, it therefore looked at AMCON, issues related to its effective application and functioning; the seemingly compelling need for its invocation this time around, by the financial regulatory authorities. The third part of the article analyzed the anxieties, doubts, lack of trust and suspected double standards that tends to make AMCON as presently constituted seem as being used as a smokescreen by the financial regulators to achieve some hidden agenda, in the banking system.The study recommends among other things, administrative and operational autonomy for AMCON, strict and full compliance with its codes of corporate governance and that the government should provide a suitable enabling 2 macroeconomic atmosphere for the operations of AMCON, totally devoid of sectoral or individual vested interests and official manipulations amongst many others.

Simulation and Prediction Evidence on the Usefulness of Seasonal Models

In this paper, we provide new evidence on the empirical usefulness of various simple seasonal models, and underscore the importance of carefully designing criteria by which one judges alternative models. In particular, we underscore the importance of both choice of forecast or simulation horizon and choice between minimizing point or distribution based loss measures. Our empirical analysis centers around the implementation of a series of simulation and prediction experiments, as well as a discussion of the stochastic properties of seasonal unit root models. Our prediction experiments are based on analysis of a group of 14 variables have been chosen to closely mimic the set of indicators used by the Federal Reserve to help in setting U.S. monetary policy, and our simulation experiments are based on a comparison of simulated and historical distributions of said variables using the testing approach of Corradi and Swanson (2007a). A key impetus for this paper stems from the fact that various financial service companies routinely create scenarios, whereby seasonal and nonstationary financial and economic variables such as those examined here are simulated (and predicted) using relatively simple time series models. These scenarios are subsequently used in risk management and asset allocation, as is often mandated by various world financial regulatory authorities. Our findings suggest that a simple version of the seasonal unit root (SUR) model performs very well for predicting 8 of 14 variables, when the forecast horizon is 1-step ahead. However, for horizons of greater than one-step ahead, our SUR model perform poorly when used for prediction, suggesting that estimation is crucial to understanding the empirical performance of such models. This parameter estimation error result is confirmed via a series of Monte Carlo experiments. Simulation experiments yield similar conclusions, although SUR models in this case are useful for constructing forward conditional distributions at 1- and 3-step ahead horizons. Interestingly, simple periodic autoregressions do not have this property, and are found to perform very well in both prediction and simulation experiments, at all horizons up to 60 months ahead.

Consolidation or Fragmentation for Financial Regulators? A Story of Information Flow.

Two central discussions regarding regulation of the financial sector have been developing alongside each other: one regards the role of central banks in crisis prevention and mitigation, the other considers the efficiency of consolidating the central bank with the bank supervisory functions. Within these debates, operational problems have been largely ignored. Economists have traditionally approached the optimal structure of financial supervision from a public choice angle, focusing on different types of inefficiencies including agency problems, capture of the financial regulator, problems in monitoring, and self- interested regulators. These valuable perspectives sidestep an equally important public administration problem, namely the problem of information-flow in and between the financial regulatory authorities. This paper aims to fill in this gap by highlighting the operational side of information-flow which needs to be taken into account when a country decides to change its financial supervisory structure. The novelty of this paper is in approaching the issue of the optimal structure for financial regulators from the standpoint of organizational design and information–flow, and in bridging the gap between the literature dealing with organizational design, public policy, and financial regulation. The main conclusion of this paper is that in the field of financial regulation, a fragmented regulatory structure is better equipped to facilitate the kind of information-flow needed in order to prevent and stop a financial crisis from occurring. This conclusion results from two major attributes of the fragmented versus the consolidated model: first, having diversity of regulatory bodies minimizes the chances that market failures will go unnoticed; and second, the structure itself is less hierarchical by at least one layer as compared with the consolidated structure, and thus helps reduce dilution of information and rigidity. As discussed in this paper, the flatter the organization’s pyramid, the easier the flow of information.

A Reexamination of the Relationship between Global Finance and Democracy: Structural Domination or Mutually Constituting?

The outbreak of the global financial crisis and the subsequent Euro crisis provide a good opportunity to reexamine the relationship between global finance and democracy. This is because the crisis period has lay bare the political foundation of the global financial system. Before the crisis, it was often presumed that financial globalization was an inevitable trend, as was the consequential restraint of democratic politics at the national level. Capital mobility hypothesis and financial policy trilemma have supported this view. Under the condition of high international capital mobility, nation states cannot avoid sacrificing their autonomy in pursuing their economic policies. In other words, democratic governments cannot be as responsive to popular demands, so long as they remain adherent to the demands from global financial markets. However, the outbreak of global financial crisis and subsequent developments put an end to the belief in the possibility of self-regulating financial markets and brought about widespread popular protests against the global financial system and strong demands for strengthening financial regulation. Polanyi’s concept of “double movement” provides an appropriate explanation of this turnaround. Comprehensive and strong financial regulatory reforms have been pursued at both the international and national levels since the crisis. Consecutive G20 summits have been providing political legitimacy and dynamics to this financial reform drive. The Financial Stability Board and the Basel Committee on Banking Supervision have been instrumental in designing and developing new regulatory measures. The so-called ‘systematically important financial institutions,’ or SIFIs, and the shadow banking sector have received special attention because they were believed to be the main weak points of the pre-crisis global financial system. Financial regulatory and supervisory agencies have also been strengthened in the countries of all the major economies. If all these reform measures are to be successfully adopted at both the national and international levels, we may live under a completely different global financial order in the years to come. However, there are still important obstacles ahead, which reflect the fundamental nature of the comtemporary global political economy; namely, the coexistence of globally integrated financial markets and nationally divided regulatory authorities. Under these kinds of circumstances we can hardly be sure that financial regulatory measures will be implemented optimally. This means that the shape of a new international financial order will also be determined through national and international political processes. This is why we argue that the relationship between global finance and democracy should be viewed not from an one-way structural perspective, but from that of a mutually constituting political process. When we adopt this perspective, we come to ascertain that we are living in a period of another great transformation through which democracy and global finance can find a new compromise for their stable coexistence.

Comparison of Default Probability Models: Russian Experience

Under the Basel II accord, improving probability of default models is a key risk-management priority. There are four main aspects of this research: suggesting the bank default classification; using a wide time horizon (quarterly Russian banking statistics from 1998 to 2011); investigating the macroeconomic and institutional characteristics of the banking sector environment and finally, testing the accuracy of the models developed. We have employed nonlinearity and automatic classification of the independent variables in our models, paying attention to the structure of the banking market as well as to the reliability of the models developed. We have compared several models for estimating default probabilities. From the results of this comparison, we have chosen the binary logit – regression with quasi panel data structure. Our key findings are: There is a quadratic relationship between bank’s capital adequacy ratio and its probability of default. The “too big to fail” hypothesis does not hold for the Russian banking sector. There is a negative relationship between the Lerner index and bank’s PD. Macroeconomic, institutional and time factors significantly improve the model quality. We believe that these results will be useful for the national financial regulatory authorities as well as for risk-management in commercial banks. Moreover, we think that these models will be valuable for other emerging economies.

Consumer Protection Act: Quis custodiet ipsos custodes?

The Consumer Protection Act 2010 is a federal statute in the USA, which was passed as a response to the subprime crisis. The Act brought the most significant changes to financial regulation in the USA since the regulatory reform that followed the Great Depression, representing a significant change in the financial regulatory environment affecting all Federal financial regulatory agencies and almost every aspect of the financial services industry. As with other major financial reforms, financial scholars have analysed the law, critiquing that the reforms were insufficient to prevent another financial crisis. In this paper it is argued that the Act went too far and would unduly restrict the ability of financial firms to operate efficiently.

The empirical research of banks' capital buffer and risk adjustment decision making

PurposeIn order to improve banks' ability to fight against risks, China's financial regulatory authorities refer to the Basel Accord, and bank capital adequacy ratio is taken as an important means of control. The purpose of this paper is to investigate the internal mechanism between capital buffers and risk adjustment.Design/methodology/approachBased on the dynamic characteristics of a bank's continuing operations, the authors established an unbalanced panel of China's commercial bank balance‐sheet data from 1991 to 2009 and used the Generalized Method of Moments to examine the relationship between short‐term capital buffer and portfolio risk adjustments.FindingsThe authors' estimations show that the relationship between capital and risk adjustments for well capitalized banks is positive, indicating that they maintain their target level of capital by increasing (decreasing) risk when capital increases (decreases). In contrast, for banks with capital buffers approaching the minimum capital requirement, the relationship between adjustments in capital and risk is negative. That is, low capital banks either increase their buffers by reducing their risk, or gamble for resurrection by taking more risk as a means to rebuild the buffer. Moreover, the authors' estimations show that the management of short‐term adjustments in capital and risk is dependent on the size of the capital buffer.Research limitations/implicationsFrom the current research documents, there are few empirical researches on capital buffers and risk adjustment, and the research sample time limits of current papers are a little earlier. The researches did not reflect China's commercial banks' capital buffer and risk adjustment after the new Basel Accord.Practical implicationsBanks' adjustment speed of target level depends on the size of capital buffer, proving that the speed of adjusting capital buffer of banks with smaller capital buffer is significantly faster than their counterparts with larger capital buffers.Originality/valueThe paper uses the dynamic feature of banks' lasting operations as the logical starting point, which is ignored by the current researches, and investigates the internal mechanism between capital buffers and risk adjustment.

Combating terrorist financing in the first decade of the twenty‐first century

Purpose – The purpose of this paper is to investigate the strategic intelligence oversights with regards to the funding of terrorism.Design/methodology/approach – The paper considers the modus operandi of terrorist financing, and how and how speedily or otherwise they were identified, and the international and national anti‐terrorist financing measure implemented post 9/11.Findings – The paper concludes that there were (and still are) strategic oversights, delays and distractions by government law enforcement and financial regulatory agencies in combating terrorist financing.Practical implications – The paper suggests there should be more proactive exchange of intelligence by law enforcement and financial regulatory agencies in combating financing of terrorism.Originality/value – The added value is lessons learned in international efforts against financing of terrorism.