Journal of Banking Regulation最新文献

Abstract

The belief that bank capital helps improve stability takes for granted the idea that increases in capital are an incentive to reduce risk-taking because bank owners would have more to lose (skin-in-the-game) if their banks fail. Nevertheless, given the higher cost of capital as compared to debt, it is also possible that increases in capital would lead to higher risk-taking due to the need for banks to boost their returns. In light of these contradictory possibilities, we exploit exogenous variations of capital to empirically investigate the actual effects of capital on risk-taking. Our analyses based on a sample of nearly 1900 US Banking Holding Companies in the 1990–2020 period indicate that increasing capital actually leads to higher risk-taking, which contradicts the skin-in-the-game hypothesis. We show evidence that this relationship could be explained by the consequent increase in funding costs that creates pressure for better returns, which is normally achieved by means of taking higher risk. Our main findings are robust to a number of alternative model and sample specifications.

Abstract

Distributed Ledger Technologies enable the decentralised delivery of traditional financial services. They also allow the development of disruptive proposals, such as the issuance of stablecoins managed by the governance system of an autonomous decentralised organisation or DAO. One such project, MakerDAO, stands out in the current DeFi landscape. The initiative claims its proposal provides money that facilitates financial inclusion by dispensing with intermediaries through a decentralised infrastructure. However, the claim must be contrasted with the reality of the operation of the stablecoin, the vulnerabilities that can affect the project, and the interaction with the different elements of the legal system.

The most recent financial crisis exposed to the auditors the risk associated with the audit engagement of their banking clients. Because many banking clients failed and investors suffered trillions of dollars in losses, auditors are now defendants in numerous shareholder and regulatory lawsuits. There is consensus that the financial crisis was created by an abundance of credit, excessive risk taking through complex financial instruments, weak corporate structures, and ineffective regulatory mechanisms. In this study, we examine how the financial crisis has affected the audit engagements of banking clients. We examine audit fees, audit report lag, and auditor changes before and after the financial crisis with respect to specific bank risks like credit risk, interest rate risk, and liquidity. Overall, we find that auditors are more responsive to bank risks in the post-financial crisis period compared to the pre-financial crisis period.

The fast-paced advances of technology, including artificial intelligence (AI) and machine learning (ML), continue to create new opportunities for banks and other financial institutions. This study reveals the barriers to trust in AI by prudential banking supervisors (compliance with regulations). We conducted a qualitative study on the drivers for adoption of explainability technologies that increase transparency and understanding of complex algorithms (some of the underpinning legal principles in the proposed EU AI Act). By using human-centred and ethics-by-design methods coupled with interviews of the key stakeholders from Eastern European private and public banks and IT AI/ML developers, this research has identified the key challenges concerning the employment of AI algorithms. The results indicate a conflicting view of AI barriers whilst revealing the importance of AI/ML systems in banks, the growing willingness of banks to use such systems more widely, and the problematic aspects of implementing AI/ML systems related to their cost and economic efficiency. Keeping up with the complex regulation requirements comes at a significant cost to banks and financial firms. The focus of the empirical study, stakeholders in Ukraine, Estonia and Poland, was chosen because of the fact that there has been a sharp increase in the adoption of AI/ML models in this jurisdiction in the context of its war with Russia and the ensuing sanctions regime. While the “leapfrogging” AI/ML paths in each bank surveyed had its own drivers and challenges, these insights provide lessons for banks in other European jurisdictions. The analysis of four criminal cases brought against top banks and conclusions of the study indicate that the increase in predicate crimes for money laundering, constantly evolving sanctions regime along with the enhanced scrutiny and enforcement action against banks are hindering technology innovation and legal implications of using AI driven tools for compliance.

This paper empirically examines the moderating role of country-level governance indicators (CGIs) in the relationship between macro-prudential policy instruments (MPI) and systemic risk. Results from 68 countries, during the period 2000–2017, show that CGIs in terms of corruption controls, government effectiveness, regulatory quality, and rule of law play a negative moderating role in the MPI-systemic risk nexus. Countries scoring high (low) on these CGIs experience stability benefits (instability costs) from MPIs. These findings suggest that the mere implementation of macro-prudential regulations may not perform the intended function of systemic stability. Overall, institutional development in a country’s governance ecosystem is necessary; hence, a coordinated effort is required from all the stakeholders of the country.