Global Banking Crisis Research Articles

Bank Corporate Governance, Beyond the Global Banking Crisis

Following up on the publication of the Walker Report (2009) in the United Kingdom, international organizations such as the Basel Committee (2010), the OECD (2010), and the European Union (2010) have proposed guidelines to improve bank corporate governance and, more specifically, risk governance. These international reports vary widely on what the prime objective of bank corporate governance should be, with one group recommending a shareholder-based approach, and the other a stakeholder-based one. Moreover, the focus of these reports is exclusively on risk avoidance, with little guidance as to how an acceptable level of risk should be defined. Drawing on insights from economics and finance, this paper is intended to contribute to the debate on bank corporate governance.

Placing the run on northern rock

The collapse of Northern Rock in 2007 was the first major run on a UK retail bank since 1866. The Northern Rock case is exemplary on two fronts. First, described at the time of its collapse as an example of an aggressive business model employed by naïve management, it is now clear that Northern Rock marked the beginning of and provides insights into the credit crunch and wider global banking crisis. Second, Northern Rock provides a distinct context—geographically and institutionally—to explore the banking crisis. The article utilizes management interviews, secondary literatures and an investigation of the wider impacts of the restructuring of Northern Rock to produce a reading from the perspective of a peripheral financial region. It contributes to attempts to understand financial geographies that range beyond the major international financial centres that often dominate debates in Economic Geography.

Fund Transfer Pricing for Deposits and Loans, Foundation and Advanced

Fund transfer pricing (FTP) is fundamental to evaluate the profitability of deposits and loans. Following the global banking crisis, this paper seeks to draw attention to five issues that have been previously ignored: rationing on the interbank market, the creation of a Basel III contingency liquidity buffer, the necessity to adjust fund transfer pricing to the credit riskiness of specific assets of the bank, the need to include a liquidity premium in the case of long-term funding, and finally the choice of a consistent methodology to incorporate the credit spread on the bank’s own debt due to the perceived risk of bank default.

Bank Corporate Governance, Beyond the Global Banking Crisis

Bank Corporate Governance, Beyond the Global Banking Crisis

An Impending Oil Crunch by 2015?

An analysis of the global oil market fundamentals indicates that a severe oil crunch could be in the offing probably by 2015 or thereabouts. By 2012, global oil production surplus capacity could entirely disappear if the global economy continues to grow and by 2015 the shortfall in oil output could reach nearly 10 million barrels a day (mbd) causing a severe oil crunch and pushing the oil price to levels matching if not exceeding the price levels reached in July 2008, namely $147/barrel. And while it is difficult to predict precisely what economic, political and strategic effects such a shortfall might produce, it would surely, at best, lead to periods of harsh economic adjustment in the global economy and, at worst, to conflict and even war should one of the major oil consumer nations choose to intervene forcefully. The war on Iraq was a foretaste of what’s to come. This war was instrumental in precipitating the recent global banking crisis and the recession from which the global economy is still suffering.

Creating order out of chaos: Does the new market landscape created by the banking crisis strengthen the case for SEPA?

The global banking crisis has diverted attention from the Single Euro Payments Area (SEPA). So, is SEPA still relevant? The original SEPA vision of building a prosperous Europe, based on efficiency and competition is more valid than ever. The turmoil within financial services has created an uneven playing field, and there are winners and losers throughout European banking. Banks that invested early in SEPA have moved ahead and gained competitive advantage; late starters have fallen behind in SEPA readiness. But the arrival of SEPA provides the opportunity for all banks to rethink their business models; it offers a new dawn for the role that payments can play in European banking. On the face of it, the move to SEPA has been slow and uptake modest. But the legal framework is in place, and infrastructures have been built, though many remain underused. A detailed look at progress to date, however, suggests that the SEPA processing market is more advanced than many people realise. In this regard, payments processing is pre-empting the arrival of SEPA. What is urgently needed is an end date to force the pace. The worst-case scen­ario is a prolonged period of expensive dual running where both SEPA and legacy payment instruments must be supported. The implementation of SEPA is not a panacea for all Europe’s banking ills, but it does present an opportunity for banks to do things differently. SEPA has the potential to transform all aspects of the European payments infrastructure, including its speed, se­curity and service. Banks can adopt a fresh approach that includes new business models, partnerships and marketing channels.

The Real Lessons of the Global Banking Crisis

This article examines the causes of the Global Banking Crisis (GBC) and finds a number of important issues that still need to be addressed, some of which have not been discussed in the previous major studies of the GBC. We offer solutions for dealing with these issues. These include: a proper definition of risk that clearly differentiates between idiosyncratic, systematic and systemic risks; proper measurement of risk; better corporate governance of risk appetite and risk profile in individual banks; better risk management capabilities within the banking system and a greater understanding of risk management by the regulator; a proper definition of capital, i.e., economic rather than regulatory capital, and a proper assessment of economic capital adequacy; and simpler products!

Financial innovation and social welfare

PurposeThe purpose of this paper is to consider the case for regulating financial innovation in light of the recent global financial crisis.Design/methodology/approachResponsibility for assuring the bank customers are “treated fairly” in the UK currents belongs to the Financial Services Authority (FSA), whilst the Office of Fair Trading (OFT) oversees the Consumer Credit Act. The paper argues for the regulation of retail banking and financial service provision as a utility, leaving the FSA to concentrate on prudential supervision and the OFT to concentrate on its other responsibilities. Financial innovation in wholesale and investment banking should be regulated by the prudential authorities.FindingsNew financial instruments are frequently underpriced, which may be in part to encourage rapid and widespread adoption.Practical implicationsGood, transactions cost and risk reducing, retail financial innovation should be encouraged. New wholesale financial products should be thoroughly “stress tested” prior to being licensed, analogous to the testing of new medical “drugs” by the pharmaceutical industry.Originality/valueThe global banking crisis led to calls for banks to maintain lending to small‐ and medium‐sized enterprises and households (especially mortgages). This implies that access to finance, like access to water and electricity, should be assured and that customers should be protected against the “monopoly” powers of large suppliers. Hence, retail banks are utilities and should be regulated as such.

The Financial Market Impact of Quantitative Easing

As part of its response to the global banking crisis and a sharp downturn in domestic economic prospects, the Bank of England’s Monetary Policy Committee (MPC) began a programme of large-scale asset purchases (commonly referred to as quantitative easing or QE) in March 2009, with the aim of injecting additional money into the economy and so increasing nominal spending growth to a rate consistent with meeting the CPI inflation target in the medium term. By February 2010, the MPC had made £200 billion of purchases, most of which had been of UK government securities (gilts). Based on analysis of the reaction of financial market prices and econometric estimates, this paper attempts to assess the impact of the Bank’s QE policy on asset prices. Our estimates of the reaction of gilt prices to the programme suggest that QE may have depressed gilt yields by about 100 basis points. On balance the evidence seems to suggest that the largest part of the impact of QE came through a portfolio rebalancing channel. The wider impact on other asset prices is more difficult to disentangle from other influences: the initial impact was muted but the overall effects were potentially much larger, though subject to considerable uncertainty.

CONTROLLING BANKERS' BONUSES: EFFICIENT REGULATION OR POLITICS OF ENVY?

The positive relationship between bank CEO compensation and risk‐taking is a well‐established empirical fact. The global banking crisis has resulted in a chorus of demands to control bankers' bonuses and thereby curtail their risk‐taking activities in the hope that the world can avoid a repeat in the future. However, the positive relationship is not a causative one. In this paper we argue that an implicit too‐big‐to‐fail policy provides the incentive for banks to take excessive risks and design compensation packages to deliver high returns. A credible no‐bailout policy will have a better chance of curbing excess risk‐taking than controlling bankers' compensation.

Indian financial institutions: healthy amid global crises

What began as a sub-prime crisis in the US housing mortgage sector in the second half of 2007 has turned successively into a global banking crisis, global financial crisis and now a global economic crisis. With the spread of the contagion from the financial to the real sector, it is now expected that global recession will be more protracted and the recovery path fairly long. As the global crisis persists with no turnaround in sight, banks around the world, including those in India, are taking earnest measures with a view to crisis resolution. As the much touted decoupling theory has failed the test in today's globalized world, India too is weathering the negative impact of the crisis. There is, however, an important difference between the crisis in the advanced countries and the developments in India. While in the advanced countries the contagion traversed from the financial to the real sector, in India the slowdown in the real sector is affecting the financial sector, which in turn, has a second-order impact on the real sector.

The Turner Review: A Verbose Attempt at Curbing the Cycle

This article explores the 28 recommendations posed by the Turner Review to ensure that the current economic crisis does not occur again. It sets them within the context of the debate on economic procyclicality, noting that, in economic history, financial crises are the main method of promulgating financial regulation and, furthermore, that economic history is shaped by the economic ‘boom and bust’ of the procyclicality of industry. The Review is largely criticized by the author because of manner in which it aims to curb the economic cycle and, in turn, capitalism. This paper then explores the FSA Discussion Paper 09/2 which was published on the same day as the Turner Review and is to be read in conjunction with the Review. It deals with the ‘Regulatory Response to the Global Banking Crisis’. Finally the author evaluates reaction to the Review.

Foreign Bank Entry and Bank Performance in Poland: Questions of Efficiency and Stability

Using Poland as an example, the paper analyses the impact of foreign capital inflow on banking sector with regard to bank efficiency. The main research question is whether ownership structure plays a significant role for bank strategies, profitability and long-term stability of the banking market. The paper concentrates on analysing bank operational efficiency using ratio analysis and DEA models: balance sheet based and revenue based. Analysing performance of banks operating in Poland, the Authors use balance-sheet data of 50 largest Polish banks, comprising app. 90% of total banking assets for the period 1998-2007. The aim is to compare the recent Polish data with those of other countries, identifying factors which determine the efficiency of foreign and domestic banks. At the end, the paper tries to address the long-term challenges posed by the global banking crisis.

The Janus-Headed Salvation: Sovereign and Bank Credit Risk Premia during 2008-09

As the global banking crisis intensified in the fall of 2008, governments announced comprehensive rescue packages for financial institutions. In this paper, we put the joint response of euro area bank and sovereign CDS premia under the microscope. We find that the bank rescue packages led to a clear structural break in these premia's comovement, which had been rather tight and stable in the weeks preceding the intensification of the crisis. Firstly, the packages induced a decrease in risk spreads for banks at the expense of a marked increase in risk spreads for governments. Secondly, we show that in addition to this one-off jump in the levels of CDS spreads, the packages strongly increased the sensitivity of sovereign risk spreads to any further aggravation of the crisis. At the same time, the sensitivity of bank credit risk premia declined and became more sovereign-like, reflecting the extensive government guarantees of banking sector liabilities.