Journal of Financial Regulation and Compliance

Emerald Group Publishing Limited
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  • Editorial
  • Establishing an EU internal market for depositaries

    Purpose: This paper aims to examine the rationale for the establishment of a depositary passport as the next logical step in building an internal market for investment funds in the European Union (EU). It makes the point that the de facto prohibition of depositary passporting poses risks to financial stability and has an adverse impact on investor protection in EU member states, which do not have a fully developed funds industry. Design/methodology/approach: This paper analyses both the arguments in favour and against the adoption of a depositary passport. Moreover, it examines this proposal in the context of different approaches to fostering the internal market such as mutual recognition, harmonisation of regulation, reflexive governance of financial supervision and centralised supervision. Findings: Based on the review of the current EU legal framework, this paper, subsequently, puts forward possible solutions for the establishment of an internal market for depositary business, which solutions have been discussed with various experts in the field to assess their feasibility in practice. Originality/value: The paper contributes to the debate on the EU internal market in the field of asset management, which is topical in view of the upcoming review of the EU’s Alternative Investment Fund Managers Directive.

  • What is good and bad with the regulation supporting the SME’s credit access

    Purpose: This analysis asks whether regulatory capital requirements capture differences in systematic risk for large firms and micro-, small- and medium-sized enterprises (MSMEs). The authors explore whether bank capital regulations intended to support SMEs’ access to borrowing are effective. The purpose of this paper is to find out whether the regulatory design (particularly the estimate of asset correlations) positively affects the lending process to small and medium enterprises, compared to large corporates. Design/methodology/approach: The authors investigate the appropriateness of bank capital requirements considering default risk of loans to MSMEs and distortions in capital charges between MSMEs and large firms under the Basel III framework. The authors compiled firm-level data to capture the proportions of MSMEs and large firms in Italy during 2000–2014. The data set is drawn from financial reports of 708,041 firms over 15 years. Unlike most empirical studies that correlate assets and defaults, this study assesses a firm’s creditworthiness not by agency ratings or by sampling banks but by a specific model to estimate one-year probabilities of default. Findings: The authors found that asset correlations increase with firms’ size and that large firms face considerably greater systematic risk than MSMEs. However, the empirical values are much lower than regulatory values. Moreover, when the authors focused on the MSME segment, systematic risk is rather stable and varies significantly with turnover. This analysis showed that the regulatory supporting factor represents a valuable attempt to treat MSME loans more fairly with respect to banks’ capital requirements. Basel III-internal ratings-based approach results show that when the supporting factor is applied, the Risk-Weighted-Assets (RWA) differences between MSMEs and large firms increase. Research limitations/implications: The implications of this research is that banking regulators to make MSMEs support more effective should review asset correlation estimation criteria, refining the fitting with empirical evidence. Practical implications: The asset correlation parameter stipulated by the Basel framework is invariant with economic cycles, decreases with borrowers’ probability of default and increases with borrowers’ assets. The authors found that those relations do not hold. This way, asset correlations fall below parameters defined by regulatory formula, and SMEs’ credit risk could be overstated, resulting in a capital crunch. Originality/value: The original contribution of this paper is to demonstrate that the gap between empirical and regulatory capital charge remains high. When the authors examined the Basel III-IRBA, results showed that when the supporting factor is applied, the RWA differences between MSMEs and large firms increase. This is particularly strong for loans to small- and medium-sized companies. Correctly calibrating asset correlations associated with the supporting factor eliminates regulatory distortions, reducing the gap in capital charges between loans to large corporate and MSMEs.

  • Does interest rate liberalisation affect the constancy of mean interest rates in China?

    Purpose: This paper aims to examine the impact of interest rate liberalisation on the constancy of mean interest rates in China to test the effect of financial reforms and provide strategies for future practices. Design/methodology/approach: Bai and Perron’s (1998, 2003) methodology is used to test for structural breaks in the mean of different interest rates using Chinese data, and break dates are measured against the exact dates of the interest rate liberalisation. The performance of mean interest rates across the regimes defined by liberalisation dates is also investigated. Findings: The main results show that interest rates generally increase (decrease) after deregulations on lending (deposit) rates, but these changes are not significant to induce a negative impact on the domestic economy. Instead, the infrequent but important shifts (structural breaks) in mean interest rates are caused by factors other than liberalisation such as economic shocks, inflationary expectation and liquidity crunch in China. Originality/value: To the best of the author’s knowledge, this paper provides unprecedented evidence on significant changes in interest rates attributable to the liberalisation within the Chinese context.

  • Money laundering through consulting companies

    Purpose: The purpose of this paper is to illustrate how illegally obtained funds are laundered by employment of consulting companies in Austria, Germany, Liechtenstein and Switzerland. Design/methodology/approach: A qualitative content analysis of 28 semi-standardized expert interviews with both criminals and prevention experts, and a quantitative survey of 200 compliance officers led to the identification of concrete money-laundering techniques involving the employment of consulting companies. Findings: Consulting companies continue to be used for money laundering in European German-speaking countries, especially in the layering and integration stages of the money laundering process, during which the origins of funds are concealed, and the money is integrated into the legal economy. Research limitations/implications: Qualitative findings from the analysis of semi-standardized interviews are limited to the 28 interviewees’ perspectives. Practical implications: Identification of gaps in existing anti-money-laundering mechanisms provides compliance officers, law enforcement agencies and legislators with valuable insights into how criminals operate. Originality/value: The existing literature focuses on organizations that combat money laundering and the improvement of anti-money-laundering measures. This paper outlines how money launderers avoid detection. Both preventative and criminal perspectives are considered.

  • The establishment of the OECD Asia-Pacific academy for tax and financial crime investigation

    Purpose: This viewpoint paper has two purposes: One is to argue that the Academy activities should increasingly be promoted and used for disseminating the practical and useful skills for the related law enforcement people who fight against financial crime, while the other is to contribute to the basis of discussions and further academy research. Design/methodology/approach: This study summarizes and indicates potential usefulness of the new academy, specializing in the related social and political contexts in qualitative and descriptive ways. Findings: This study indicates that the new academy activities in Japan would continue for a long time, thus providing immediately useful skillsets for the investigators and officers at the very frontline who face against various financial crimes. Originality/value: While little research has been done about the series of related academy activities by OECD, this study describes the historical background and usefulness of the academy of the OECD in a specialized manner, thus showing its linkage with FATF.

  • Effective bank regulation: seven guiding principles

    Purpose: This paper is a “viewpoint” article, and as such, the purpose of this paper is to present the author’s opinion and interpretation. Its primary purpose is to propose seven guiding principles for effective bank regulation so that these may be subject to academic criticism. Design/methodology/approach: The principal theme of this paper has its origins in archival research into the nature of bank regulation in the UK in 25 to 30 years after the Second World War. This paper draws upon insights gained into the nature of bank regulation in the UK arising from that research. It focuses on what aspects of bank regulation were effective in that earlier period. It then attempts to convert those insights into underlying principles. Findings: Seven principles are proposed as the starting point for a discussion as to the principles that should underpin effective bank regulation. The seven principles are set out in the introduction to the paper. Originality/value: The framework for the regulation of banks in the UK and in many other countries is a complex one. The general trend in bank regulation in the UK in the past four decades has been technocratic, characterised by a preference for codified rules, which are often detailed and technically complex. It has also been characterised by the establishment, or further development, of intricate regulatory and supervisory structures at national, international and supranational levels. Scholarly attention has understandably been focused on those trends. Rather less attention has been given to the broader principles that might underpin and guide bank regulation. This paper seeks to contribute to that question.

  • Equity market reaction to regulatory reforms: a case study of Indian banks

    Purpose: Non-performing assets (NPAs) have been a cause of concern for the banking sector across the world and have invited a lot research interest, especially for emerging economies. In India, the NPAs grew many folds and reached alarming levels in 2013. The available mechanisms, such as Corporate Debt Restructuring Scheme, were not adequate to address this issue. The Central Reserve Bank of India with the Government of India introduced various guidelines, schemes and regulations like framework for revitalizing distressed assets to tackle NPAs during the period 2013-2017. Taking the case of India, the purpose of this paper is to examine policy initiatives and analyse the impact of regulatory shocks on the equity market returns and the systematic risk of individual banking stocks using an extended version of the market model. Design/methodology/approach: In this study, the authors design the experiment to explore the reaction of banking stocks to the various regulatory measures and also measure the change in systematic risk for these stocks as a result of the regulatory changes. Following the approach suggested by Soraokina and Thornton (2015), the authors use the extended market model to test the reaction of banking company stocks to the regulatory measures. Findings: The study finds that banking stocks did not earn significant abnormal returns on the announcement of these measures. However, the systematic risk of the banking index reduced significantly on the introduction of regulatory measures, and this risk reduction has been primarily in the stocks of private sector banks. Research limitations/implications: This paper provides insights on the equity market's short-term reaction to the reform initiatives introduced by the government. The scope of the paper is with respect to one emerging economy, India, which underwent a series of regulatory reforms to tackle the banking NPA problem. Originality/value: The paper fills an important research gap where the impact of schemes and regulations is captured for an emerging economy like India. It tries to bring forth the importance of these reforms and how an investor perceives the same. This paper tests for changes in systematic risk as measured by market beta as well as measures cumulative abnormal returns associated with important events in the process of regulatory reforms happening in India from 2013 to 2017.

  • An empirical investigation into market risk disclosure: is there room to improve for Italian banks?

    Purpose: This paper aims to examine the market risk disclosure practices of large Italian banks. The contribution provides insights on the way banks should provide information about market risk. The problem related to the asymmetric information between banks from one side, and investors and stakeholders on the other, represents a crucial issue that requires further considerations by scholars and regulators. Design/methodology/approach: This contribution adopts a mixed methodological approach to analyse both qualitative and quantitative profiles of market risk disclosure in banking. This paper analyses the most important documents Italian banks are required to prepare for risk disclosure purposes, namely the management commentary, the Basel Pillar 3 disclosure report and the notes. Findings: The results show that banks do not fully exploit the potentialities of management commentary and Pillar 3 disclosure report. Various areas of information overlapping between the different financial reports worsen the overall comprehensibility and relevance of bank risk reporting. Practical implications: The reduction of the information overlapping, the careful choice of the location of the information and more appropriate use of the management commentary to provide qualitative information about market risk strategies represent crucial areas of improvement banks and regulators should take into account. Originality/value: Providing an in-depth analysis of the market risk disclosure practices of a sample of large Italian banks, this paper detects the main drawbacks of their market risk reporting and provides useful recommendations to improve it.

  • Mandatory adoption of IFRS and its effect on international stock listings in Canada

    Purpose: The purpose of this study is to investigate if non-US/non-Canada (international) equity listings in the Canadian stock exchanges increased with the adoption of International Financial Reporting Standards (IFRS) in Canada. A question of interest is whether the adoption of common global accounting standards (IFRS) was beneficial in attracting international firms to the Canadian exchanges. Design/methodology/approach: The authors use difference-in-difference ordinary least square methodology to conduct inter-country (between Canada and the USA) and intra-country (between the Toronto Stock Exchange [TSX] and the TSX Venture Exchange [TSXV]) tests to investigate whether there is increased listings of international firms on Canada’s exchanges associated with mandatory adoption of IFRS in Canada compared to such listings in the American exchanges. Findings: The authors did not find evidence of a relative increase in listings by international firms on the TSX and the TSXV after Canadian adoption of IFRS, but they did find that listings by international firms on the TSX, Canada’s primary exchange, increased when the authors include the year before mandatory Canadian adoption as part of the IFRS adoption period. The authors also find that international listings from outside the North American, European and Australasian regions increased on the TSXV, consistent with IFRS adoption making the smaller Canadian exchange more attractive to listers from these regions. Originality/value: With the increasing use of IFRS throughout the world, US regulators, the US Congress and other capital market participants seek to understand the costs and benefits of potential IFRS adoption in the USA. The authors contribute to this debate by examining the effect of Canada’s adoption of IFRS on growth in international stock listings in the Canadian stock exchanges.

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