A critical examination of the legislative response in banking and financial regulation to issues related to misconduct in the context of the crisis of 2007‐2009
| Pages | 237-252 |
| Date | 03 May 2013 |
| DOI | https://doi.org/10.1108/13590791311322391 |
| Published date | 03 May 2013 |
| Author | Graeme Baber |
| Subject Matter | Accounting & finance |
A critical examination of the
legislative response in banking
and financial regulation to issues
related to misconduct in the
context of the crisis of 2007-2009
Graeme Baber
BPP University College of Professional Studies, London, UK
Abstract
Purpose – The purpose of this paper is to summarise and critically assess the legislative response in
banking and securities regulation to the determinants of the financial crisis.
Design/methodology/approach – The paper identifies these determinants and evaluates different
categories of regulatory response, drawing from the United Kingdom, United States, European Union
and international approaches.
Findings – The crisis had both economic and financial causes. The responses have been quick,
original in part, and complex. Issues are still emerging from the collapse which are yet to be fully
addressed.
Research limitations/implications – This is a transition period between the crisis and the
establishment of the regulatory regimes that will follow it. Conclusions drawn at this point are therefore
tentative.
Originality/value – The paper brings together several sources of legislative response, and is
therefore of value as a discussion point.
Keywords Crisis, Collapse,Regulatory response, Misconduct,Banking, Securities
Paper type General review
1. Introduction
Plenty has been written about the causes of the financial crisis of 2007-2009. The
collapse may be of a severity that resembles the great depression of the 1930s[1].
Furthermore, many remedies have been put forward, and some of these implemented.
This paper considers the legislative response to the issues of alleged misconduct that
arose during this event. It concentrates, in particular, on the rules that concern the
regulation of banking and securities.
2. Determinants of the crisis of 2007-2009
Lastra and Wood (2010) describe ten factors that may have contributed to the crisis:
(1) macro-economic imbalances;
(2) lax monetary policy, especially in the USA;
(3) regulatory and supervisory failures;
(4) distorted incentives causing problems of moral hazard;
(5) excesses of securitisation;
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-0790.htm
Journal of Financial Crime
Vol. 20 No. 2, 2013
pp. 237-252
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590791311322391
The crisis of
2007-2009
237
(6) unregulated and lightly regulated companies;
(7) failures in corporate governance;
(8) bad lending and excessive leverage;
(9) poorly structured incentive systems in financial institutions; and
(10) unquestioning belief in the efficient market theory.
The majority of these determinants are economic, rather than financial. National and
global economic policies may have created the conditions under which the crisis took
place.
For instance, the USA has had a deficit on its current account, importing products
from countries with current account surpluses, such as China. Some of these net
imports were purchased through credit, which contributed to a boom in the USA prior
to the crisis[2].
Given the large economic input to the financial collapse, there is a risk that the
regulatory responses to it are necessary but not sufficient. Issues such as failures in
corporate governance and excessive leverage can be addressed through international
standards and regional and national legislation. However, well-meaning these may be,
they are unlikely to have the desired effect on financial stability, unless there are
steady national macro-economic policies, and co-ordinated international co-operation
in supply and demand with careful monitoring of balance of payments accounts by the
International Monetary Fund (IMF)[3].
3. The regulatory responses to the crisis
The regulatory responses to the crisis can be classified into the following groups:
.the substance of regulation;
.the structure of regulation and supervision;
.the behaviour of the banking industry;
.fiscal measures; and
.bank structure proposals (Lastra and Wood, 2010, 2011).
Each of these will be considered in turn.
4. Regulatory responses (1): the substance of regulation
The Basel III Framework (Basel III) comprises one document that considers the bank
capital requirements, capital buffers and a leverage ratio (Basel Committee on
International Banking Supervision (BCBS, 2010a)) and another that introduces a
liquidity ratio and a net stable funding ratio to ensure that sufficient cash is available
to banks in the short-term and long-term, respectively, (BCBS, 2010b).
The BCBS introduced the first document in order to increase the banks’ ability to
absorb losses, and to safeguard against the excess leverage that contributed to the
financial crisis (Munroe, 2010). The BCBS published the second document in order to
maintain sufficient liquidity buffers and manage liquidity risk (Wellink, 2011).
Basel III fits into the Basel II Framework (Basel II) for the minimum capital
requirements for credit, operational and market risks. Tier 3 Capital is abolishe d. The
definition of Tier 1 and Tier 2 Capital are tightened up. Tier 1 Capital is split into two
JFC
20,2
238
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