The “day after” Basel 2: do regulators comply with banking culture?
| Published date | 16 November 2010 |
| Date | 16 November 2010 |
| DOI | https://doi.org/10.1108/13581981011093659 |
| Pages | 316-332 |
| Author | Alessandro Carretta,Vincenzo Farina,Paola Schwizer |
The “day after” Basel 2:
do regulators comply
with banking culture?
Alessandro Carretta and Vincenzo Farina
University of Rome “Tor Vergata”, Rome, Italy, and
Paola Schwizer
University of Parma, Parma, Italy
Abstract
Purpose – The purpose of this paper is to measure the cultural fit between supervisory authorities and
banks, considering cultural gaps as possible stumbling blocks for effective supervision.
Design/methodology/approach – The paper uses a text-analysis approach. The methodological
assumption is that the analysis of culture is closely connected to the analysis of the type of language used
by the members of an organization. To this aim, a cultural survey was developed in order to compare
cultures of Bank of Italy, Italian banks, and Basel Committee during the years 1999 and 2004.
Findings – The results highlight several significant, but decreasing, cultural gaps relating to
important issues for banks, such as risk, disclosure, change, and innovation.
Practical implications – The evidence and the measurementof cultural gaps are useful elements for
the identificationof change actionsby supervisors and banks.In fact, identified gaps couldbe detrimental
for an effective supervision and could be a sourceof regulatory risk for regulated banks.
Originality/value – This paper focuses on an evolutionary aspect of text analysis, concerning
standardizationin the treatment of data, combinedwith the use of standard vocabularies.This allows a
greater comparability of the outputof the various studies, enabling us to furtherrefine the methodology.
The analysismodel includes the definitionof several concepts – such as “risk” and “disclosure” – at the
base of the development of banking cultureand representing basic goals of prudential regulation.
Keywords Financial risk,Banking, Regulation, Compliancecosts, Risk management
Paper type Research paper
1. Introduction
The issue of banking regulation is at the centre of an important international debate,
with respect to its role and the modalities in which the supervisory functions are
exercised (Barth et al., 2001). In the last few years, the regulation of banks and financial
intermediaries has changed radically, becoming increasingly indirect (from structural
regulation to prudential regulation and self-regulation) (Benston, 1998; Gualandri, 2001;
Goodhart, 2000; Carretta et al., 2003).
According to Barth et al. (1999, 2001), the most effective supervisory policies in
ensuring improved conditions of stability and enhanced performance are those aimed at
promoting self-regulation by enhancing disclosure requirements, governance practices
and sound and prudent management behaviours.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
The paper draws from and further develops the considerations on the issue presented and
discussed at numerous conferences and seminars, in particular by the Rosselli Foundation, the
Italian Academy of Corporate Economics (AIDEA), the Bank of Italy and the European Academy
of Management (EURAM).
JFRC
18,4
316
Journal of Financial Regulation and
Compliance
Vol. 18 No. 4, 2010
pp. 316-332
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581981011093659
Moreover, self-regulation is able to reduce regulatory costs only if supervisory action
is effective in promoting and encouraging the adoption of internal control systems for
banks (Elliehausen, 1998; Goodhart et al., 1998).
The effectivenessof this arrangement primarilydepends on the level of competition in
the financialmarket. In presence of high competition,operators become more sensitive to
the judgment of the market, and are, therefore, encouraged to adopt a “virtuous”
management approach, within a self-regulatory framework. Moreover, this approach
encourages thedevelopment of a supervisory culture,which can then become a powerful
tool for guiding individual actions towards the achievement of sound and prudent
management. The latter is also determined by the supervisors’ actual capacity to get to
know and guide the management behaviourof the supervised entities, taking account of
the differencesexisting amongthem, in terms of shareholdingstructure, size, and business
activities (Carretta, 1998). This is notan easy task and requires a certain re-orientation of
supervisory activities towards the production and organizational processes of the
supervised entities; the use, for this purpose, of all the available information; and the
development, by the supervisory bodies, of a banking culture (which unquestionably
differs from the traditional regulatory culture), which can be achieved also by means of
further efforts in collecting information and broadening its knowledge base.
This paper identifies cultural gaps as a possible stumbling block in the efficient
exchangeof information and the sharingof problems and goals among regulatorsand the
industry, with respectto the recent innovations introduced in the financial sector, which
are orientingthe supervisory authoritiestowards the adoption of new relationshipmodels
with banks. In fact cultural gap between supervisors and banks hinders the sharing of
objectives and exposes banks to a risk arising from the failure in the application or the
misapplication of supervisory rules.
In greater detail, in this paper we propose a measure of the cultural fit between
supervisory authorities and banks and develop a text-analysis approach, based on the
assumption that the analysis of culture is closely connected to the analysis of the type of
language used by the members of an organization. At this aim, we develop a cultural
survey in order to compare cultures of Bank of Italy, Italian banks, and Basel Committee
during the years 1999 and 2004.
Paper is organized as follows. Section 2 describes the new role of supervisory
authorities, and the organizational tools that could be used for communicating and
exchanging information with banks. Section 3 presents our methodology based on the
application of a text-analysis model to corpus of reference texts produced by Basel
Committee,Bank of Italy and Italian banks.Section 4 describes results, whileconclusions
are presented in Section 5.
2. New roles for supervisory authorities
The implementation of new supervisory arrangements, based on self-regulation and the
coordination of external and internal supervision, determines an evolution in the role
played by the supervisory authorities and in the manner in which they interact with
banks.
Self-regulation entails the capacity of banks to define the minimum objective
compliancerequirements for the internalcontrol systems (Bank of Italy,1998, 2002), while
at the same time encourages decision-making attitudes compatible with the supervision
objectives.
The “day after”
Basel 2
317
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