Journal of Financial Regulation and Compliance

Value at risk: a critical overview : Table of Contents

Robert Sollis — Sat Nov 14 08:00:19 GMT 2009

Abstract:
Purpose – A misplaced reliance on value at risk (VaR) has been focused on in the media as one of the main reasons for the current financial crisis, and the recently published Turner Review by the UK Financial Services Authority concurs. The purpose of this paper is to present an introductory overview of VaR and its weaknesses which will be easily understood by non-technical readers. Design/methodology/approach – Simple numerical examples utilising real and simulated data are employed to reinforce the main arguments. Findings – This paper explains that some of the main approaches employed by banks for computing VaR have serious weaknesses. These weaknesses have contributed to the current financial crisis. Research limitations/implications – Consistent with the introductory nature of this paper, the empirical research is limited to simple examples. Practical implications – The evidence here suggest that if VaR is to play a major role under future financial regulation then research is required to develop improved estimation techniques and backtesting procedures. Originality/value – This paper differs from many academic papers on VaR by assuming only a very basic knowledge of mathematics and statistics.

The sub-prime crisis, the credit crunch and bank “failure”: An assessment of the UK authorities' response : Table of Contents

Maximilian J.B. Hall — Sat Nov 14 08:00:19 GMT 2009

Abstract:
Purpose – The purpose of the paper is to explain how UK bank failure resolution policy has evolved since the nationalisation of Northern Rock in February 2008 in the light of the fallout from the sub-prime crisis and the subsequent credit crunch. Design/methodology/approach – The evolution of the UK authorities' approach, from a piecemeal approach to a comprehensive, system-wide approach, is traced through analysis of the treatment accorded the troubled entities Alliance and Leicester, HBOS (both the subject of separate officially brokered takeover-rescues) and Bradford and Bingley (eventually nationalised, like Northern Rock) prior to consideration of the two industry-wide bailout schemes introduced in October 2008 and January 2009. Findings – Confounding initial hopes, Northern Rock proves to be just the first of a series of major institutional casualties of the fallout from the sub-prime crisis, eventually necessitating a comprehensive and system-wide solution. While this successfully prevents the system from literally collapsing in the Autumn of 2008, in the wake of the decision not to rescue Lehman Brothers in the USA, it fails to stimulate lending, as intended. Accordingly, a second industry bailout package was introduced in January 2009, but even this may fail to secure the main goals of intervention-financial stability and a resuscitation of bank lending to support the ailing economy-heralding possible further state inroads into domestic bank ownership. Originality/value – The paper clearly identifies the need for, and nature of, both the ad hoc and system-wide solutions adopts to deal with individual cases of institutional “failure” and the wider stability concerns, respectively. The authorities' actions are subject to critical analysis, while a personal assessment of both the House of Commons Treasury Committee's report on Northern Rock and the tripartite authorities' reform proposals, which culminate in the Banking Act of 2009, is also provided.

The future of regulation : Table of Contents

Joanne Hindle — Sat Nov 14 08:00:19 GMT 2009

Abstract:
Purpose – The purpose of this paper is to analyse the regulatory and other responses to the recent credit crisis with particular emphasis upon likely regulatory reform. Design/methodology/approach – The paper is based upon an analysis of recent papers, speeches and articles to draw together common themes for regulatory reform across the European Union (EU). It pays particular attention to two key papers, that from the Chairman of the UK Financial Services Authority (The Turner Report) and from the senior EU Group, the de Larosiere Report. Findings – It is suggested that some nine or ten common themes emerge for regulatory reform from the many authoritative writings on the subject and that the timeframe for change is very likely to be much shorter that is the norm for international action. However, some areas of debate are noted, for example, how the role of national vs international regulators is to be resolved. Practical implications – All regulated financial services firms, whether banks or not, should expect a far higher level of regulatory intervention and with change occurring more quickly that would normally be expected. Originality/value – In pulling together and analysing most of what has been written to date on the topic of regulatory reform the paper gives a unique overview of likely future developments. By identifying common themes it shows regulated firms the areas where more intervention is most likely to occur and highlights the timescale for that.

The regulation of British retail banking utilities : Table of Contents

Andy Mullineux — Sat Nov 14 08:00:19 GMT 2009

Abstract:
Purpose – The purpose of this paper is to consider in the light of the post August 2007 banking crises, how “fair” access to retail banking services for British households and small- and medium-sized enterprises (SMEs) can be assured. Design/methodology/approach – The current responsibility for assuring the bank customers are “treated fairly” belongs to the Financial Services Authority (FSA). The paper argues for the establishment of a banking commission to regulate retail banks as utilities, leaving the FSA to concentrate on prudential (“risk based”) supervision of bank and non-bank financial institutions. Findings – If access to payments services is infrastructural and access to finance is regarded as essential in a modern society, then retail banks should be regulated as utilities. Originality/value – The banking crisis led to calls for banks to maintain lending to SMEs 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.

Actuarial insights into the global banking catastrophe : Table of Contents

Robert S. Clarkson — Sat Nov 14 08:00:19 GMT 2009

Abstract:
Purpose – The purpose of this paper is to investigate the underlying causes of the series of banking disasters that unfolded from July 2007 onwards and to suggest what action should be taken to avoid a repetition. Design/methodology/approach – The practices and culture that have evolved in banking over recent decades are compared and contrasted with general principles of actuarial science and with Adam Smith's blueprint for a well-functioning market economy as set out in his Wealth of Nations. Recent instances of financial turmoil such as the Northern Rock debacle and the global “credit crunch” are then viewed from a longer term perspective. Findings – The serious weaknesses identified by comparisons with actuarial science and the wisdom of Adam Smith, amplified by perverse methodologies of finance theory and “fair value” accounting and unchecked by the lax regulatory framework, take not only the global banking industry, but also the entire global economy to the point where the self-stabilising properties of Western capitalism are destroyed. To avoid a repetition, banking practices and culture must be completely rebuilt along actuarial and “Adam Smith” lines, the destabilising methodologies of finance theory and “fair value” accounting must be abandoned, and the new and more prudent approach must be rigorously enforced by a strong regulatory regime. Originality/value – By adopting a longer term actuarial perspective, the paper identifies deeper problems and suggests more fundamental solutions than have generally been the case in the continuing debate as to the best way forward in rebuilding a robust financial system.

The financial crisis in Europe: evolution, policy responses and lessons for the future : Table of Contents

John Goddard, Phil Molyneux, John O.S. Wilson — Sat Nov 14 08:00:19 GMT 2009

Abstract:
Purpose – The purpose of this paper is to provide an account of the financial crisis in Western Europe, primarily from a country-level and banking sector perspective, from 2007 to the spring of 2009. It aims to detail measures enacted by governments and central banks to deal with impaired bank assets, recapitalize or otherwise resolve troubled banks, and inject liquidity into the banking system. It also aims to examine reform proposals aimed at creating a more secure and stable financial system. Design/methodology/approach – The paper draws on factual material and analysis that is presented in central bank reports, other banking sector surveys and reports, media reports, and analysis by leading academics and practitioners sourced from published articles and books, working papers and blogs. Findings – Recent firefighting measures to purchase impaired assets, recapitalize troubled banks, and inject liquidity have commanded widespread support, despite moral hazard concerns surrounding publicly funded bank bailouts. However, the roadmap to recovery remains uncertain. There is concern that significant volumes of impaired assets have been retained on many Western European bank balance sheets. Under the regulatory framework that is being shaped in response to the crisis, banks are expected to become leaner, more strongly capitalized and less highly leveraged, and to develop improved risk management practices. Originality/value – This paper is written for a broad audience to provide a descriptive summary of the financial crisis in Western Europe, a survey of the debate concerning the implications for bank regulation and an extensive bibliography that will serve as a valuable resource for banking academics and practitioners.

Northern Rock shareholders' challenge to basis of compensation in nationalisation considered in high court and court of appeal : Table of Contents

Joanna Gray — Sat Nov 14 08:00:19 GMT 2009

Abstract:
Purpose – The purpose of this paper is to report and comment on Northern Rock shareholders' challenge to basis of compensation in nationalisation considered in the High Court and Court of Appeal. Design/methodology/approach – The paper outlines the facts surrounding the case and comments on the decisions. Findings – The High Court, in a carefully reasoned judgement which reviewed relevant UK and European Court of Human Rights case law, rejected all the claimants' arguments for judicial review and the claimants appealed to the Court of Appeal. Originality/value – Both the High Court and the Court of Appeal judgment provide a rare glimpse of the legal process examining the “lender of last resort” function of a central bank – a key technique of macro-economic policy, the very delicacy and subtlety of which appear to defy ready legal definition.