Regulation Of Financial Firms Research Articles

Systemic-systematic risk in financial system: A dynamic ranking based on expectiles

We provide an international comparison of rankings for systematic and systemic risk in the financial system and examine whether both types of risk co-exist. The rankings are based on the information provided by a coherent downside risk measure, the expected shortfall (ES), which we compute from expectiles. Using rolling windows, we obtain dynamic rankings for different banks as well as for financial services and insurance firms from different international regions using principal components analysis (PCA). The main evidence for ES5% indicates that banks from Asia are the most systematic and insurance groups from Europe are the most systemic during a crisis period. Our results have implications for supervisors regarding the regulation of financial firms, as well as for investors regarding the incorporation of diversifiable and non-diversifiable risks in their portfolios.

Macroprudential Supervision of Financial Institutions: Lessons from the SCAP

A fundamental conclusion drawn from the recent financial crisis is that the supervision and regulation of financial firms in isolation - a purely microprudential perspective - are not sufficient to maintain financial stability. Rather, a macroprudential perspective, which evaluates and responds to the financial system as a whole, seems necessary, and the ongoing discussions of regulatory reform in the United States underscore this view. The recently concluded Supervisory Capital Assessment Program (SCAP), better known as the bank “stress test,” is one example of how the macro- and microprudential perspectives can be joined to create a stronger supervisory framework that addresses a wider range of supervisory objectives. This paper reviews the key features of the SCAP and discusses how they can be leveraged to improve bank supervision in the future.

AFA/ASE Panel: Implications of the Credit Crisis for the Regulation of Non-Bank Financial Firms

This panel session, prompted by the financial crisis of 2007-2008, focuses on issues related to the soundness and regulation of financial firms that are not necessarily traditional banks, at times of crises in financial stability. An example is the demise of Bear Stearns. The focus of the panel is not only what happened, but also what should have happened, or could have happened under other market and regulatory circumstances. Among the important changes that have already occurred are as the new liquidity and credit facilities of the Fed, and congressional action allowing direct and significant federal support to Fannie Mae and Freddie Mac. Additional changes have been suggested by Treasury blueprint for new financial regulation, and in statements by Fed officials, particularly Ben Bernanke and Tim Geithner. Discussion among the panel and audience.

What is Equity? New Financial Instruments in the Interstices between the Law, Accounting and Economics

The numbers reported in corporate financial statements are attributed particular meanings that have evolved to become 'generally accepted,' perhaps to the extent of having been further legitimised by the development of an underpinning conceptual framework, as in the USA. Whether they have received the support of a formal conceptual framework or not, we can observe pervasive evidence that accounting numbers are perceived to have sufficient credibility to be suitable to act as a basis for economic contracting between corporate entities and related interest groups. Thus, for example, widespread use is made of accounting numbers in debt covenants, structuring management compensation plans, collective wage negotiations and in the calculation of corporate tax liabilities. Regulatory bodies also rely heavily on accounting numbers as controls over regulatees, for example, the regulation of financial firms' capital adequacy requirements. The UK Stock Exchange also imposes various constraints on listed firms such as requiring the disclosure in the directors' report of contracts of significance (Class 1 transactions), defined as contracts which represent in value a sum equal to one per cent or more of a company's net assets for a capital transaction. Again accounting numbers, in this case the total assets minus total liabilities or net worth (ie the equity of a firm), assume a pivotal role. Apart from regulatory controls of various statutory bodies, companies are constituted within the framework of company law. At one level the law can be thought of as effectively serving as an alternative, more fundamental, control over the activities of business enterprises, providing a broad framework of 'generally acceptable and unacceptable actions which, in the absence of the law, would be extremely costly and hence inefficient to permit or restrict through private contracting arrangements. Accounting numbers play an important role in company law, not just because their disclosure and audit is usually mandated, but also because of their function in the protection of creditors. Of particular importance are the definitions of equity, creditors (debt) and distributable reserves. In the UK, companies are in general restricted to distributing realised profits (less accumulated losses) only. Additional restrictions are imposed on investment companies (that require assets to be at least 150% of liabilities) and on insurance companies. The law of insolvency also hinges crucially on accounting numbers to define the insolvency event and hence the situations under which directors face penal sanctions. Elsewhere creditor protection provisions vary in detail but still relate to accounting statements. For example, in the USA the Revised Model Business Corporation Act 1984 permits distributions as long as a corporation is able to pay its debts as they fall due and as long as its total assets exceed total liabilities, where valuations might be based on generally accepted accounting principles or fair valuation or some other method that is reasonable in the circumstances. State law adoption of these restrictions on distributions varies, with some states having more restrictions consisting of, for example, constraints on dividends being paid out of retained earnings and other