Emerald | Journal of Financial Regulation and Compliance

The Insufficiency of Traditional Safety Nets: What Bank Resolution Fund for Europe?

Maria J. Nieto, Gillian G.H. Garcia — 2012-05-04 00:00:00.0

Abstract

Purpose - This paper analyzes the rationale for Bank Recovery and Resolution Funds (BRRFs) in the context of the present European Union’s (EU) decentralized safety net. Design/methodology/approach - The paper makes some reflections on the governance aspects of BRRFs that would require minimum harmonization in the EU, emphasizing that BRRFs are only one institutional component of financial institutions´ effective and credible resolution regime. This paper focuses on depository institutions, but the rationale of BRRFs could be extended to other credit institutions. Findings - BRRFs contribute to shifting the government’s tradeoff between bailing out and restructuring in favor of restructuring, to the extent that there is also an effective bank resolution legal framework. In turn, banks´ contributions to BRRFs aim at discouraging their excess systemic risk creation particularly through financial system leverage. Originality/value - Input in the current regulatory debate to develop new measures for the reform of the regulatory farmework of financial services in the EU.

Towards a practical approach to responsible innovation in finance: New Product Committees revisited

2012-02-07 00:00:00.0

Abstract

Purpose - To highlight the potentials offered by New Product Committees for the development of responsible innovation in the financial services industry; and to provide grounds for policy recommendations.Design/methodology/approach - Collective, interdisciplinary reflection and experience within the industry.Findings - New Product Committees can serve a practical approach to responsible innovation in finance.Originality/value - Fills a gap in the empirical consideration of New Product Committees in the financial services industry and proposes original directions for policy orientations within organizations and at a regulatory level.

The Effects of Corporate Governance on Performance and Financial Distress: The Experience of UAE National Banks

Hassan Al-Tamimi — 2012-05-04 00:00:00.0

Abstract

Purpose - The purpose of this paper is to investigate the UAE national banks’ practices of corporate governance (CG) and the perception of the UAE national banks of the effects of CG on performance and financial distress. Design/methodology/approach - A modified questionnaire has been developed, divided into two parts. The first part covers disclosure and transparency, executive compensation, relationship with shareholders, governance structure, policies and complience, relationship with stakeholders, and board of directors. The second part deals with performance and financial distress.Findings - The results indicate that UAE banks are aware of the importance of disclosure transparancy, executive compensation, the relationship with shareholders and stakeholders, and the role of the board of directors. The results also indicate that the corporate governance practices of UAE national banks are acceptable. In addition, the results reveal that there is a significant positive relationship between corporate governance practices of UAE national banks and the six characterstics of corporate governance. Furthermore, the results indicate that there is an insignificant positive relationship between corporate governance practices of UAE national banks and performane level, and that there is a significant postive relationship between financial distress and corporate governance practices of UAE national banks. Finally, the study found that there is no significant difference in the level of corporate governance practices between the UAE’s national conventional banks and its Islamic banks.Practical implications - Regarding the implication of the results of this research, as the UAE national banks are aware of the vital role of corporate governance according to the findings reached, therefore,it is important to concentrate more on corporate governance practices. However, the results indicate that the role of corporate governance practices is not good enough in the case of financial distress or financial crisis, which means that there is still a space for improvement in corporate governance practices. Originality/value - The current study is considered the first of its kind conducted on the UAE. To the best of our knowledge, no such studies have been conducted regarding the effect of corporate governance on performance and financial distress of UAE national conventional and Islamic banks.

Liquidity Risk and Performance of Banking System

Ahmed Arif, Ahmed Nauman Anees — 2012-05-04 00:00:00.0

Abstract

Purpose - This study examines liquidity risk in Pakistani banks and evaluates the effect on banks’ profitability. Design/methodology/approach - Data are retrieved from the balance sheets, income statements and notes of 22 Pakistani banks during 2004-2009. Multiple regressions are applied to assess the impact of liquidity risk on banks’ profitability. Findings - The results of multiple regressions show that liquidity risk affects bank profitability significantly, with liquidity gap and non-performing as the two factors exacerbating the liquidity risk. They have a negative relationship with profitability.Research limitations/implications - The period studied in this paper is 2004-2009, due to availability of the data. However, the sample period does not impair the findings since the sample includes 22 banks, which constitute the main part of the Pakistani banking system. Moreover, only profitability is used as the measure of performance. Economic factors contributing to liquidity risk are not covered in this paper. Practical implications - Originality/value - This is the first study addressing the liquidity risk faced by the Pakistani banking system. The past researchers and practitioners have not given the proper attention to liquidity risk. This paper helps in understanding the factors of liquidity risk and their impact on the profitability of the banking system. The authors emphasise contemporary risk managers to mitigate liquidity risk by having sufficient cash resources. This will reduce the liquidity gap thereby reducing the dependence on repo market.

Effective Delays in Portfolio Disclosure

SEUNG HEE CHOI, Maneesh Chhabria — 2012-05-04 00:00:00.0

Abstract

Purpose - The timeliness of portfolio holdings information disclosure has been of interest among regulators, academics and practitioners since the Investment Company Act of 1940. The Securities Exchange Commission has been trying to strike a balance between investors’ interest in timely disclosure and the potential costs associated with revealing the strategies of investment managers. This paper investigates whether current rules regarding the delay in disclosure adequately protect investors, and prevent the formation of copycat portfolios that can profit from the research of the original portfolio manager. Design/methodology/approach - We examine the effectiveness of different delays (30, 60 or 90 days) in disclosure of holdings for a sample of large-cap, actively-managed mutual funds. We construct copycat portfolios based on the holdings of the original portfolios, and compare their returns against the returns (net of expenses) of the original portfolios over the corresponding time frames. Findings - Our results indicate that the current delay of sixty days is sufficient to prevent such free-riding; however, shortening the delay to thirty days would adversely affect mutual fund investors. Originality/value - This study aims to provide an answer to those debates on the effective delays in portfolio disclosure among academics and practitioners based on quantitative evidence. It also contributes to leave a guideline for regulators since the patterns of over- or under-performance of the original portfolio returns vis-à-vis the copycat portfolio returns over varying delays provide important insights about possible effects of changes in disclosure regulations.

CENTRAL CLEARING FOR CREDIT DEFAULT SWAPS - A legal analysis of the new central clearing regulations in Europe and the US

Stan Cerulus — 2012-05-04 00:00:00.0

Abstract

Purpose - The answer to a specific research question is sought: "How have EU and US regulators translated the idea of central clearing into law?". Design/methodology/approach - A meticulous legal research is carried out. First, the pre-crisis regulatory regime for CDS is reviewed, from a securities law angle as well as from a comparative Euro-American perspective. Next, the regulatory processes leading to the adoption of the central clearing regulations are discussed. Thereafter, a material comparative analysis is made of the provisions related to central clearing in the EU and US regulatory initiatives. Finally, the article is concluded with an evaluation of both legislations in the light of all previous analyses.Findings - The research first shows that central clearing regulations rely on a series of presumptions, both concerning the gravity of counterparty risk threats and the necessity of central clearing. Additionally, the EU and US clearing regulations are similar with regard to the broad innovations they introduce, i.e. the mandatory central clearing of a variety of over-the-counter derivatives and counterparty risk management requirements for central clearing institutions and for non-cleared swaps. However, the specific content of the provisions often differs. Furthermore, both legislations are limited to enouncing broad principles. This is also the case for the crucial provisions related to counterparty risk management. Therefore, these provisions in se do not guarantee the proper regulation of counterparty risk management practices. Consequently, much is to be expected from the implementing measures adopted by regulatory institutions.Originality/value - This article provides an overview of those provisions in the European and US regulations that specifically concern central clearing for CDS. It is one of the first articles which does this in a very well-structured and clearly written manner. Also it is one of the first to provide a clear comparison between the provisions in the EU and the US regulations.